Asset protection is very popular in the estate planning arena right now, hardly surprising given the current state of our economy. Asset protection is a form of wealth protection planning, designed to protect one’s assets from future creditors and financial disaster. Asset protection techniques run the gamut from the relatively simple (such as transfers to a spouse) to the much more complicated (such as domestic or off-shore asset protection trusts). Regardless of the strategy employed, however, when engaging in asset protection planning, it is critical to keep in mind one of its primary tenets: timing is everything. A recent case demonstrates the importance of the timing of such transactions.

Jamie Solow, a resident of Florida, was accused in November 2006 by the Securities and Exchange Commission (“SEC”) of engaging in a fraudulent trading scheme. His case went to trial, and in January 2008, the jury found him liable for violating securities laws. In May 2008, judgment was entered against him for disgorgement of approximately $2.6 million, interest of approximately $800,000 and a penalty of approximately $2.6 million, for a total judgment of approximately $6 million.

In June 2009, the judgment was still unsatisfied. In fact, Mr. Solow had paid only a nominal amount of approximately $2,600 towards the judgment, claiming he had a negative net worth. The SEC brought a motion in federal court for Mr. Solow to be held in contempt, claiming that his depleted net worth resulted from a purposeful campaign to dissipate his assets so that he could avoid paying the judgment against him.

What actions did Mr. Solow take? According to the SEC, Mr. Solow and his wife engaged in a number of fraudulent transfers of property, both prior to and after the judgment was entered against him, for the purpose of rendering him “judgment proof.” The transactions they engaged in included:

1. In early 2004, at a time when Mr. Solow knew or should have known that the SEC would be filing suit against him, he transferred to his wife, for no consideration, 100% of the stock in a corporation that owned title to the Florida condominium in which the Solows resided, worth several million dollars.
2. In 2005, after the SEC had officially notified Mr. Solow of its intent to sue, Mr. Solow transferred $2 million worth of real property located in Utah to his wife, again for no consideration.
3. Shortly before the trial began and in the months following, Mr. Solow liquidated a $1.5 million securities account held jointly with his wife. The bulk of the proceeds were transferred to an account solely in Mrs. Solow’s name.
4. In February 2008, shortly after the jury returned its verdict, Mrs. Solow hired a law firm that specialized in asset protection planning and offshore trusts. As a result, Mrs. Solow engaged in certain mortgage loan transactions that resulted in approximately $6.4 million in mortgages being placed on their Florida residences, in exchange for which certificates of deposit in the same amount were transferred to a Cook Islands trust for the benefit of Mrs. Solow.

Mr. Solow argued that the assets sought by the SEC for satisfaction of its judgment were either owned solely by his wife or held by his wife and him in a special kind of joint ownership called “tenancy by the entirety.” Under Florida law, assets held as tenants by the entirety are reachable only by the joint creditors of both spouses. In this case, the SEC judgment was against Mr. Solow only. Since Mrs. Solow was not subject to the judgment, the SEC could not reach the property held as tenants by the entirety.
The Court did not buy Mr. Solow’s tenancy by the entirety argument, finding that the properties could not have been encumbered by Mrs. Solow without Mr. Solow’s consent. The Court found that Mr. Solow rendered himself unable to pay the judgment by transferring assets to his wife, and his inability to pay was self-created. The Court therefore found Mr. Solow in contempt and ordered him to jail until such time as the judgment is paid.

The Solow decision has been severely criticized by some who practice in the estate planning and asset protection arena. The facts showed that Mr. Solow transferred assets to his wife routinely during their marriage, with many such transfers made prior to the SEC actions. As noted above, this case illustrates, one of the most important concepts in asset protection planning: timing is everything. In the Solow case, many of the actions taken by Mr. and Mrs. Solow, and especially the creation of the off-shore trust in the Cook Islands, occurred after the judgment was rendered. One of the many morals that can be gleaned from this story: the best time to engage in asset protection strategies is well before there are dark clouds on your financial horizon.