FREQUENTLY ASKED QUESTIONS CONCERNING
ASSET PROTECTION
WHAT DO WEALTHY INDIVIDUALS AND BUSINESSES WORRY ABOUT MORE THAN ANYTHING ELSE?
Uncertainty. Inability to make plans and know the outcome. That worry is fueled by over reaching governments, litigation risks, judges wanting to make laws or reach a result instead of enforce the laws as they are written, family members that lack appreciation or understanding of wealth and hard work, etc.
WHY DO LAWYERS SUE SOME PEOPLE AND NOT OTHERS?
Nothing personal, its just business. The legal profession has lost most of its civility and professionalism. Like any one else, lawyers have families to feed, mortgages to pay, and regulations to comply with. All of which costs money. Due to the Great Recession, many lawyers lost jobs. Most plaintiff cases will pay the lawyer 33% to 50% of what is actually collects. So, (1) if the case looks good and (2) if the lawyer can get paid (from his client or by collecting a judgment on you), or if the lawyer is hunger enough, he will likely file the suit. But, be clear, if the lawyer won’t get paid, there is no case. Proper asset protection planning reduces or eliminates the litigator’s ability to collect a judgment from you. Making you an unattractive target for the litigator is the goal.
WHAT LEGAL SOLUTION EXISTS TO HELP?
There are a number of solutions. Each one has various degrees of success depending on the particular worries. Potential solutions range from Asset Protection Trusts, Family Limited Partnership, LLCs, non-profit entities, insurance, etc. Asset Protection planning can protect assets from potential litigants, predators, and creditors. Asset protection planning permits individuals, partnerships, LLCs, corporations, etc. to protect assets against unexpected claims. Properly structured, the planning permits a great degree of flexibility.
WHAT IS ASSET PROTECTION PLANNING?
Asset protection planning is not hiding assets or relying on secrets or fraudulent transfers. Instead, asset protection planning, simply stated, is legally putting assets beyond the reach of potential creditors and predators – including wayward family members. Planning based on years of proven outcomes and stability, while addressing future uncertainty.
DOESN’T A LIVING REVOCABLE TRUST PROTECT MY ASSETS?
No. A “living trust”, revocable trust, “loving trust” can accomplish disability and estate planning goals. It can help avoid probate. However, it affords no protection from the creditors of the person creating those types of Trusts. All states have laws designed to prevent you from avoiding a creditor. If you have one of these Trusts, a judge simply orders you to revoke the trust and pay the creditor.
CAN I JUST PUT MY ASSETS IN MY SPOUSE’S OR CHILDREN’S NAMES?
Yes. However, that is not asset protection. Once you put it in their name, you loose control. We have had several clients ignore our advise only to later come back to complain that their children refuse to return the property. Some states say that a “gift” to a spouse is just that. Therfore, the gift is not a”marital asset” and not subject to equitable division. Meaning, you do not get it back upon divorce. The lesson: If you give it away, do not count on it coming back. You will also lose the income from the property. And, you may incur gift taxes. Further, the property is now exposed to the new owner’s spouse and other creditors. The transfer can be set aside by a court if you waited too late. This planning is the most often type done. It is also the least effective.
CAN I JUST HIDE MY MONEY IN A SWISS ACCOUNT?
No. Planning that depends of secrecy or hiding assets will fail – either because the creditor will eventually find out or because the risks and costs to keeping the secret is simply too high. There is absolutely nothing wrong with having a bank account in Liechtenstein, Switzerland, or other countries. Those may offer good investment options. Offshore life insurance and annuities are often better than those purchased in the U.S. As an U.S. taxpayer, the Treasury Department requires you to report your ownership or signature authority over any foreign bank account, securities account, or other financial account. If a creditor gets a judgment against you, the creditor will find the source of your income and then assets. Then, a judge will force you to use that to pay the judgment. If you do not disclose foreign accounts to the Treasury Department, you are committing a serious crime (5 years in federal prison) and up to $500,000 fine. The Obama administration has made this a priority. The IRS has the ability to enforce this reporting. Consider the UBS case for an example! Also, the lawyer for your creditor will conduct post-judgement discovery. Lying under oath is also a crime! There is not reason to take those risks.
HOW ABOUT SETTING UP AN OFFSHORE CORPORATION?
An offshore corporation or an LLC can be helpful. However, it is rarely the sole answer. First, you will incur a taxable gain by transferring assets to the offshore entity. Transferring assets which have a gain to a foreign entity is a gain recognition event – just like selling the assets. Second, you will incur additional federal tax reporting requirements. A U.S. judge can order you to bring the assets back to the U.S. as the owner (or, director for non-profits) of the offshore corporation – which may create another taxable gain.
IS LIABILITY INSURANCE COVERAGE ENOUGH?
No. Insurance is needed. But, generally, it is over sold and not understood. Look at your policy. You will see that it does not cover gross negligence, punitive damages, fraud, intentional wrongdoing, environmental actions, damages caused by a criminal act, etc. Many will not cover the up front legal fees. More and more companies are finding ways to limit their coverage. These insurance companies are not the federal government with a money printing press. Their financial stability is certainly questionable. Finally, a jury may enter judgment that exceeds your coverage. Insurance is needed. It is not the sole answer.
CAN I SAVE MONEY ON LIABILITY INSURANCE WITH ASSET PROTECTION PLANNING?
Yes. Once assets are protected and the income from those assets are protected, the need for insurance decreases dramatically. Insurance premium savings will likely pay for the cost of the planning over time, often in the first year. You may be able to eliminate umbrella coverage. This applies to malpractice and tail insurance so that doctors only carry what the hospital requires.
WHAT IS THE BEST APPROACH FOR TRUE TO ASSET PROTECTION PLANNING?
Any plan that provides a predictable outcome is the one that works best. Frankly, this often means that you must remove assets from the reach of U.S. courts. For many people, proper asset protection planning involves an asset protection trust (APT) which is governed by the laws of a favorable jurisdiction. One that is interested in helping you, not the potential creditor. The trust may be combined with a limited liability company (LLC). You form the LLC. Then, transfer assets to it. You become the manager of the LLC. As Manager, you make the day to day decisions. Then, you make the APT the LLC member (owner). While you are the Manager, you and only you, control investments, buying and selling assets, making distributions, etc.
HOW HARD IS IT TO GET A LOAN IF NEEDED?
Easy. If needed, the LLC can be: (1) a co-borrower or (2) a guarantor or (3) provide collateral for the loan. The LLC may have to pay back the loan, but, the exposure is limited to what you decided.
ARE THERE LIMITS TO WHAT ASSETS THE LLC CAN OWN?
Some. A corporation’s subchapter S election MAY be lost if S corporation stock were transferred to certain LLC’s. A home’s “home place” exemption for property taxes MAY be at risk. The home mortgage interest deduction COULD be lost if the home is owned by the LLC (an LLC can not have a “personal” residence). However, these assets can still be protected. Adding certain tax provisions to the APT or carefully considering the LLC ownership can avoid these restrictions.
CAN THE LLC/TRUST STRUCTURE FIT MY EXISTING ESTATE PLANNING?
Yes. We normally duplicate your existing estate planning ideas into the new LLC/Trust structure. Or, we work with clients to help them develop their estate plan as a part of the asset protection.
I MAY NOT BE COMFORTABLE WITH MY ASSETS CONTROLLED BY A FOREIGN TRUSTEE. WHAT PROTECTION IS THERE, REALLY?
Actually, a great deal. Remember that you are the LLC Manager. You have direct control over its assets. You control the accounts and make the decisions. Decisions about spending money actually in the Trust or otherwise dealing with any asset in the Trust must be approved by the Managing Trustee. You name the Managing Trustee and his replacements when you create the Trust. If the APT owns assets other than the LLC (either initially or if the LLC is liquidated), your Trust Protector can veto any action of the trustee and can even remove and replace the trustee with or without cause. Further, all bank accounts can be set up so that all checks, trades, etc. require the Trust Protector’s written consent. The offshore trustees that we work with are all regulated, insured, and audited by their respective governments. Governments that wish to encourage asset protection activity because it gets a filing fee each year. Those trustees are also bonded by top ranked insurance companies. Frankly, there is greater risk that the local banker will steal your money – that has actually happened.
CAN A COURT FORCE ME TO BRING TRUST ASSETS BACK TO THE U.S. OR CHANGE THE TRUSTEE TO MY CREDITOR?
A judge can order you to do nearly anything. However, the judge can not make you responsible for something that you can not do. Can the Judge force the Protector to do so? No. Your Trust Protector only has the power to veto Trustee actions, not to order them. The Trust Protector’s power to remove and replace the Trustees does not work if the Trust Protector is under “duress”. 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.
WHAT ARE THE TAX CONSEQUENCES OF THE OFFSHORE TRUST AND LLC STRUCTURE?
Most clients prefer to have no tax consequences. They ask for a “Tax Neutral” structure – meaning that the income, estate, and gift tax does not change. What ever income tax, gift tax, or estate tax savings you currently have, those can continue. If your current planning does not take advantage of U.S. tax deductions, credits, etc., those can be incorporated into the APT/LLC structure. For example, the offshore trust will include the “marital deduction” and “unified credit” provisions necessary to obtain the maximum estate tax savings on death of the first spouse for married persons. And, maximize “step-up” basis on the first and also the second deaths.
IS THIS ALL LEGAL?
Absolutely. It is perfectly legal. In fact, it is prudent and even expected, for people to arrange their affairs in the way that the law allows. The key is to do the planning in advance. Do not wait. If you act before a creditor’s claim arises, you can protect yourself and it is legal. Procrastination is not your friend. Waiting to see what happens, then trying to get the toothpaste back in the tube is difficult due to fraudulent transfer laws in all states. These laws require the court to set aside transfers made after a claim arises. You must be pro-active to succeed. If the claim already exists the options are limited, but, not hopeless.
WHERE WOULD MY TRUST BE LOCATED?
The actual property may be located anywhere – even a local bank, brokerage company, etc. The trust itself will be registered in the Cook Islands or, perhaps, Nevis if you prefer. If required, the Trustee can move the property outside the reach of a U.S. court.
HOW DO YOU KNOW WHERE TO CREATE THE TRUST?
The right place for the Trust is very, very important. You need to think about:
- A proven track record,
- Stable political and social system,
- Favorable trust protection and tax laws,
- Healthy economic environment,
- Compatible verbal communication,
- Quality professional services,
- Modern telecommunications, and
- Procedural and legal advantages.
The Cook Islands and Nevis currently satisfy all these criteria.
CAN ASSET PROTECTION WORK IF I AM CURRENTLY IN LITIGATION?
Yes, in the right situation. However, the options are clearly reduced and will be more expensive. Depending on the circumstances, asset protection planning can happen after a suit is filed, or even after a judgment is entered.
