Real Help Protecting Your Assets
We live in a litigious society. With proper asset protection planning, you can effectively protect your assets from potential litigants and creditors.
How Asset Protection Works
Estate planning attorneys have many tools at their disposal used to protect different types of assets. Some are appropriate for everybody and others are appropriate for wealthy or soon-to-be-wealthy people (such as foreign Asset Protection Trusts or a Family Limited Partnership).
All asset protection techniques have one thing in common: They each make it more difficult for a creditor to find or take assets. By implementing a properly crafted asset protection plan, an individual can legitimately put a significant portion of his or her assets out of the reach of judgment creditors and still retain substantial control over these protected assets. By reducing the size of the financial target, a plaintiff may realize that a judgment will be difficult or impossible to collect. If he is unlikely to be paid for his work, his motivation to bring a lawsuit fades.
The Six Pillars Of Asset Protection
Using our six pillars of asset protection, you can protect and preserve your wealth.
- State Exemptions: It’s important to leverage all existing state exemptions.
- Insurance: Increase your limits and consider an umbrella policy in order to maximize liability insurance to protect your assets.
- Limited Liability Companies: When structured properly, LLCs and other corporate structures can be a shield from creditors. A family limited partnership or family limited liability company can save your family up to 50 percent in estate and gift taxes.
- Asset Protection Trusts: These are ideal vehicles as your net worth and your liabilities increase.
- Offshore Trusts: The king of all asset protection tools is the offshore Trust. However, we do not use offshore Trusts to engage in income tax evasion planning. In fact, in most cases there is no tax advantage.
- Marriage Planning: Transferring assets between spouses is an asset protection tool in almost every state.
Our Approach To Asset Protection Planning
Our approach to asset protection typically includes an offshore Asset Protection Trust combined with an offshore limited liability company (LLC). You form the LLC and contribute assets that are to be protected. The offshore Asset Protection Trust becomes the owner of the LLC and you become the manager of the LLC. As the manager, you retain direct control over the management, investment and distribution of the protected assets. No third-party consent is required for any transaction with these assets.
The Asset Protection Trust
An Asset Protection Trust is used to insulate assets from creditor attack. An Asset Protection Trust is normally established in an offshore jurisdiction, although the assets will more often than not remain in the United States under the indirect control of the person establishing the Trust (the “settlor”).
These Trusts are normally structured so that:
- They are revocable for a term of years and so that the settlor is not a current beneficiary
- They are treated as domestic Grantor Trusts for tax purposes, even though they are “foreign trusts”
- The undistributed assets of the Trust are returned to the settlor upon termination of the Trust, provided there is no current risk of creditor attack
- The ownership of assets is confidential
- They can act as an alternative to traditional prenuptial agreements
- They can act as a hedge against potential exchange controls
- They can protect pension assets
Why Take the Asset Protection Trust Offshore?
Any creditor litigation must start over in the new location: A foreign judgment creditor seeking collection in the courts of foreign “asset haven” nations usually must re-litigate the original claim in local courts with local lawyers. He may be required to post a bond and to pay legal expenses for all parties if he loses. The complexity and cost of collection efforts is likely to promote quick settlement.
Minimal requirements to establish: Creation of the offshore Asset Protection Trust can be done by signing documents and opening a trust account managed by your local trustee in a bank in the foreign country. Respected offshore banks provide trust officers to handle offshore Trust matters. Most international banks have U.S. dollar-denominated accounts, often with better interest rates than American banks offer.
Greater protections: Generally, assets placed in an offshore Asset Protection Trust have far more protection than under domestic U.S. trust law, providing a “safe harbor” that is unavailable in the U.S. and many other nations. Many asset haven nations have short statutes of limitations on initiating a foreign creditor’s suit. Some haven nations, such as the Cook Islands, have a limit of one year for initiation of claims; others impose a two-year filing limit for certain creditors after the formation of the Trust.
Flexibility and confidentiality: The offshore Asset Protection Trust provides greater privacy and confidentiality. It allows easy transfer of asset titles, and avoids domestic currency controls in our home nation.
Estate planning: An offshore Asset Protection Trust can achieve the same estate planning goals achieved by domestic strategies. Bypass Trusts can minimize estate taxes for a husband and wife. A Trust can be used for gift tax exemptions through planned giving and can provide for maintenance and tax-free income for a surviving spouse. An Asset Protection Trust avoids the problems, delays and costs associated with the probate process.
Profitable investments: An offshore Trust allows you to access some of the world’s best investment opportunities without concern for your home nation’s legal restrictions. Offshore foreign stock, bond, and mutual fund trading are not covered by laws such as the U.S. Securities and Exchange Act or its administrative arm, the SEC. An Offshore Asset Protection Trust can also purchase attractive life insurance and annuity products not available in the U.S.
LLCs For Asset Protection
The offshore LLC, by itself, is inappropriate for asset protection purposes. First, you would incur a taxable gain on transferring assets to the offshore corporation. Second, you would be subject to federal tax reporting requirements. Third, a U.S. court can order you, as the owner of the offshore corporation, to bring assets back to the U.S.
The offshore Trust and LLC combination structure is tax neutral, meaning your income, estate, and gift tax “picture” does not change as a result of establishing this structure. The LLC will elect, under IRS rules, to be “disregarded” as an entity for U.S. tax purposes. This means it will not file a U.S. tax return and that all of its income and transactions will be reported on the Trust’s tax return. Income tax is only paid on your personal tax return — on the same items you would have paid tax on without the LLC/Trust structure.
An LLC should not own certain types of property: for example, S corporation stock or property eligible for a home mortgage interest deduction. These assets can be owned by the offshore Trust.
While we can never predict exactly how a local court or jury will act, significant protection is available through the use of an offshore Trust as the member (owner) of the LLC. If there is concern that a creditor may convince a result-oriented judge or jury to pierce the LLC, then the Trust, as the owner, will cause the liquidation of the LLC and move the assets offshore, beyond the jurisdiction of any U.S. court.
Selected Questions Concerning Asset Protection
Q: Is this legal?
A: As long as planning is done in advance of a creditor appearing on the horizon, it is 100 percent legal. (If you try to protect your assets after you have been sued, you have significantly fewer options. Fraudulent transfer laws permit the courts to set aside transfers made at the eleventh hour.)
Q: If I have significant liability insurance coverage, why should I be interested in asset protection?
A: If you review your insurance policy, you’ll find that it does not cover you for punitive damages or intentional wrongdoing. In addition, with the ongoing crisis in the insurance industry, the financial stability of liability insurance companies is never certain, and the scope of coverage seems to be decreasing all the time. Finally, a claim can always be made which will exceed your coverage. Prudent planning would include a combination of asset protection strategies and liability insurance.
Q: Is there any savings on my business or professional liability insurance coverage?
A: Asset protection can significantly reduce or eliminate the umbrella coverage that business owners and physicians have, over and above the minimum liability insurance normally carried. Some of our clients have saved tens of thousands of dollars per year.
Q: Why can’t I just make outright gifts to my spouse or children?
A: You can make gifts to anyone, but if you give it away, you can no longer enjoy control over the asset, will lose income from the property (unless you gift it to your spouse), and could incur gift tax consequences and potential ineligibility for public benefits, such as Medicaid. Moreover, the property will then be exposed to the new owner’s spouse and other creditors. Finally, if you make the gift when a creditor is nipping at your heels, the transfer can be set aside by a court, unless you (and/or the donee of your gift) commit perjury, which is a crime.
Q: Why can’t I just hide my money in a Swiss account?
A: Any asset protection planning that depends upon hiding assets or secrecy is doomed to failure. As a U.S. taxpayer, the law requires you to report your financial interest in, or signature authority over, any foreign bank account, securities account or other financial account. If you comply with this requirement, as you should, a creditor can obtain this information in a lawsuit, and if you lose the suit, the court can order you to bring the funds back to the U.S. to satisfy the judgment. If you intentionally fail to comply with the foreign account reporting rule, you will be committing a serious crime — and the Internal Revenue Service does have the means to uncover non-reporters.
Q: I already have a Living Trust. Doesn’t this protect my assets?
A: NO. A “Living Trust” will avoid the probate process for the assets transferred to it and provide some degree of privacy, but it affords virtually no protection from your creditors. If you get sued and lose, a court can order you to revoke the Trust and pay the creditor.
Q: What if a court orders me to bring the Trust assets back to the U.S., or to remove the trustee and appoint my creditor as trustee?
A: A court can order you to do almost anything, but it can only hold you responsible if you fail to do something that is within your power. With respect to the assets held by the Trust, an independent company — the “Trust protector” — will have the power to veto any action of the trustee and to remove and replace the trustee with or without cause. The Trust protector can also require that all Trust accounts and assets must have both the protector’s signature and the trustee’s
While your protector does have the power to remove and replace the trustee, the Trust provides that the exercise of this power will be ineffective if the protector attempts to exercise it under duress (such as under a court order). Similarly, a court cannot hold you responsible for failing to bring the Trust assets back to the U.S. — you do not have that power. In addition, your Trust protector only has the power to veto trustee actions, not to order them. As a practical matter, of course, if you are not under a court order, the trustee will take whatever action your protector suggests, or the protector will replace him.
Q: What criteria do you use when selecting a suitable jurisdiction for location of the Trust?
A: Consideration must be given to a number of factors at that location, including healthy economic environment, stable political and social system, favorable trust protection and tax laws, compatible verbal communication, quality professional services, modern telecommunications, procedural and legal advantages, and a tried and proven track record. The Cook Islands currently satisfies all these criteria. In the case of a fiscal crisis, the trustee can relocate the assets outside the jurisdiction of a U.S. court.
Frequently Asked Questions About LLCs
Q: I had my estate planning done several years ago. How will the LLC/Trust combination fit in with my existing planning?
A: The LLC/Trust combination discussed above can be easily integrated with your existing estate plan or, if you wish, it can form the basis of a new estate plan.
Q: I often borrow funds from my bank. Will the LLC impede my ability in this regard?
A: No. The LLC, if requested by the bank, can be a co-borrower with you, or provide collateral for you on any loan. This would expose the LLC assets or specific collateral to that bank, but to no other creditor.
Q: I don’t know if I’ll feel comfortable with my assets under the control of a foreign trustee. What protection is afforded me in this regard?
A: First, with respect to the assets held in your LLC, you (as the manager) will have direct and absolute control. You will write the checks; you will make all the decisions. The offshore Trust will be the LLC member (analogous to a shareholder in a corporation), and, as such, it will have no voice in the day-to-day operation of the LLC.
For more information, or assistance, contact our Denver asset protection lawyers at Chayet & Danzo, LLC.