Avoiding creditors is a constant battle for debtors. In fact, the common practice of hiding cash under the mattress has given way to more modern methods such as protecting assets by placing them into trusts. Some states, including Alaska, Delaware, and Nevada, actually allow debtors to intentionally shield assets from the claims of creditors by putting those assets into trusts. By placing assets into a trust and designating themselves as the trust’s beneficiaries, debtors are still able to access the assets and enjoy their use while protecting them from their creditors. In states that permit this practice, the debtors often are immunized from fraud claims by the creditor.
While immunized in some states, this strategy could be considered fraud if done in Illinois. Even worse, the lawyer that assists the debtor by hiding the assets can be disbarred. A claim of fraud requires a creditor to show a “badge of fraud” to indicate that fraud has taken place. Some recognized badges are transfers following a threat of litigation against the defendant; disposing of all the property owned by the debtor; concealing the transfer; or transferring property for inadequate consideration while retaining control of the property. If there are multiple indicators of fraud present, courts conclusively presume an actual intent to defraud. By creating a self-settled trust, a debtor has seemingly created a badge of fraud.
Furthermore, the attorneys that create these trusts also are running a risk of violating the rules of professional responsibility for attorneys. One of the most basic rules governing lawyers is that “a lawyer shall not engage or assist a client, in conduct that the lawyer knows is a criminal or fraudulent.” The rules stress repeatedly that lawyers cannot engage in conduct involving “dishonesty, fraud, deceit, or misrepresentation.” Thus, attorneys advising debtors in how to protect their assets must be careful – a single mistake can lead to the attorney not only be disciplined by the ARDC, but disbarred and added as a potential defendant.
While case law in Illinois on the issue is quiet, other jurisdictions have addressed this issue. The South Carolina Supreme Court held that even when the underlying transfer is not fraudulent, the attorney can still violate their ethical rules. Asset protection may help an attorney’s client, but it still has the grave potential of placing an attorney on the wrong side of his or her ethical obligations. As the primary purpose of asset protection is to frustrate creditors while allowing the debtor to enjoy interest or control in the property, some states have reacted with overt hostility to these plans while others have taken a hands off approach.
Unfortunately, Illinois has yet to decisively rule one way or the other. This uncertainty highlights the need for skilled legal representation to carefully assist and advise scrupulous persons in planning on how to protect their assets, through trusts or otherwise, to minimize the risk of claims of fraud.