What is Asset Protection?
Asset protection is the term used in the field of estate planning for the preparation and preventative planning done to legally protect an estate from loss due to unforeseen lawsuits and/or creditors.
Why should I consider it as part of my Estate Planning Strategy?
We, in the United States, live in a “lawsuit-happy” society that is responsible for 94% of all the lawsuits in the world. One out of eight Americans will be on the receiving end of a lawsuit more than once during their lifetime. Even more disquieting, if you are a working professional, have tenants, or are a business owner, your “lawsuit odds” increase to one out of five. Because of these statistics and the high costs involved in defending even a frivolous lawsuit, it is prudent to be prepared, so that everything you have worked so hard to acquire won’t be lost to a greedy stranger.
What’s the Difference between an Asset Protection Trust and a Living Trust?
A Living Trust is fully susceptible to a lawsuit adversary and is vulnerable to being pierced, whereas an Asset Protection Trust is not. Revocable U.S. Living Trusts are probate-avoidance tools, which are important to your overall estate plan, but they are NOT lawsuit protection tools. A creditor or claimant may easily take the Property of a Living Trust by order of an American Court once judgment in favor of the Plaintiff is granted. However, that is not the case with an Asset Protection Trust. If an American Court orders your Asset Protection Trust pierced, such an order will not be given any legal or practical effect in the country where your Asset Protection Trust is domiciled. This may sound odd, but this protection is approved under U.S. law.
Is there a way to protect certain components or assets within my estate from a lawsuit?
Yes. Although 100% of your estate cannot be protected from a lawsuit, some lawsuit protection can be achieved through careful and thorough estate planning. The definition of lawsuit protection is the structuring of your estate and business affairs in such a way as to be in a better position in relation to a future lawsuit creditor, than had you not done that planning. This might mean that only a small percentage of your estate’s assets are protected, but this is still a successful plan in the world of lawsuit protection. However, the majority of an estate’s assets can be protected depending on the client’s circumstances, the time of events of liability, how long the client’s planning has been in place, the type of planning employed, and the specific intent of the client.
Are asset protection strategies new? Are they recognized?
The term “Asset Protection” may be relatively new, but the concept is not. Trusts and corporations have been around for years, and the concept of asset protection is inherent in these entities, as it is in many other commonly used business entities. Corporations protect your personal assets from your business liabilities. Living trusts, although not lawsuit-proof, can protect your estate’s assets from the costs of probate. Irrevocable trusts, whether domestic or international, have been used for centuries to isolate family wealth and pass it from generation to generation. These are just a few of the Asset Protection entities that have been made available to you through legislation and case law. The use of these entities has been continually recognized as a valid and viable way of protecting assets. We believe that these instruments are available for your use, and that you owe it to yourself and your family to use them as part of your estate and business planning. Whether it is a simple addition to your existing estate plan or a more comprehensive expansion, asset protection should be an integral part of your estate planning.
What is an Asset Protection Trust?
An Asset Protection Trust is an old and traditional estate planning tool which provides totally independent ownership and therefore lawsuit protection from the liabilities of any individual.
An Asset Protection Trust is an irrevocable trust which is recognized, under law, as an independent third party owner. It is independent of the original owner (the “Settlor”) as well as from the ultimate “Beneficiary” of the Trust. This complete independency under the law makes an Asset Protection Trust lawsuit “proof.” Despite an Asset Protection Trust being independent, it is still part of your estate planning. It provides a “closed universe.” You do not need to worry about other people’s legal issues coming into your world.
There are two types of Asset Protection Trusts: domestic and international. Domestic trusts go by many different names, but for our discussion we will call the entire broad area of domestic irrevocable trusts Domestic Asset Protection Trusts. International or Offshore Asset Protection Trusts are simply referred to as Asset Protection Trusts.
How is an Asset Protection Trust formed?
Asset Protection Trusts are settled (created) by a “Settlor” (also known as the “Grantor”) under an arrangement by which a “Trustee” holds legal and equitable title to property made subject to the terms of the Trust. The property is to be held and managed by the Trustee for the sake of the Trust’s “Beneficiaries,” or beneficial owner. Asset Protection Trusts are considered Irrevocable Trusts under United States law. These trusts are typically established outside of the U.S., usually in Offshore Financial Centers, sometimes referred to as “tax havens.”
What are some of the key components of an Asset Protection Trust?
Asset Protection Trusts allow you to control how items are distributed, as well as set conditions such as inheritance age requirements, encouragement of higher education, and gifts to charities. They also avoid the “forced heirship” rules that many jurisdictions have adopted. Asset Protection Trusts can also adopt favorable post-mortem property disposition arrangements to preserve your gift tax exclusions.
Asset Protection Trusts also typically have the Settlor as the initial Beneficiary. Under U.S. law, the settlor would not be lawsuit protected, but with an Asset Protection Trust, the settlor is protected. Asset Protection Trusts also contain provisions that exclude certain categories of persons from receiving any type of benefit. For example, excluded persons might include creditors, claimants, lawsuit adversaries, former spouses, disinherited children, former business partners, etc. With this provision, the Trustee is legally prohibited from distributing anything owned by the Trust of members of the “Excluded Class.” One thing to keep in mind with your Asset Protection Trust is that it needs to coordinate with the rest of your estate planning instruments.
The country where the Asset Protection Trust is established (its domicile) will typically provide that after a certain period of time has passed, claims against the Trust will be barred. In some jurisdictions, that can be as long as seven years, but several highly recognized international jurisdictions have statutory provisions that allow all claims against the Trust (by creditors, lawsuit adversaries, etc.) to be barred in only two years from the date the Trust is settled. A lawsuit adversary who wins a judgment against you in the U.S. will find that foreign judgments (i.e. U.S. Courts) are not recognized under the law in the home Court in which the Asset Protection Trust is established. While there are provisions to protect against fraudulent transfer, these too have a statute of limitation, and in some jurisdictions, the plaintiff may face a very high standard of proof when attacking such Trusts. It should be noted that there are jurisdictions that allow for immediate protection of Trust assets as long as the settlor is not causing him or herself to be insolvent by making the disposition into the Trust. These jurisdictions are particularly useful prior to starting a new business venture that may have higher liabilities associated with it.
What kind of assets should be held in an Asset Protection Trust?
There are two viewpoints on this. One point of view would have the Asset Protection Trust directly own bank accounts, investment brokerage accounts, etc. The down side of this is that by having the Asset Protection Trust directly own those accounts, you are not in control of them. This is called an active trust. You would need to go to the trustee to request an action at the trust level.
In most of our clients’ views, the better and more practical formation keeps you in direct control of assets owned by the Trust. Here’s how it is often configured:
The Asset Protection Trust would own an underlying entity, be it a corporation, a limited liability company (LLC), or a family limited partnership (FLP). You can be appointed to act as the Manager, or in the case of the FLP, as a General Partner. Thus, you would have the assets themselves held under your direct management & control inside of the entities, but you would not legally be the owner of the assets. Held in this manner you would also not be deemed to be acting as Trustee, which as we discussed would void the asset protection of any irrevocable trust. Ownership, and not control, is what determines whether something will be taken by a Court to satisfy your personal liabilities.
For example: You could serve as Manager of a Family Limited Partnership, Limited Liability Company or as an officer of a Corporation, with your investment accounts and other assets held inside of those entities. (Real estate has special considerations that may require encumbering the equity with the corporation rather than holding the real estate directly inside the corporation.) You would make the day-to-day decisions regarding management and control, and yet the Asset Protection Trust would be the owner of the Corporation’s stock and the majority Limited Partner in the Family Limited Partnership. You, however, would be controlling the assets as the manager of the entity which the Asset Protection Trust owns.
Call our office for a consultation so we can determine what lawsuit configuration is best suited to protect your assets under your specific circumstances. Whether or not an Asset Protection Trust is appropriate for your needs, we can offer a variety of estate plans that, under your circumstances, will make sure that the most valuable aspects of your estate are controlled by you, but not legally owned by you.
What is the minimum amount I should start with?
There is no set minimum, but you should consider protecting only the amount of monetary value, and those assets you wish to not be taken away from you, in a lawsuit. Certain assets are valuable in a business sense, but have such a high liability that they need to be kept away from the valuable, non-liable assets. There are other strategies that we can employ in conjunction with the planning we have discussed that will give some lawsuit protection over these high liability assets. We would be glad to discuss those alternative strategies.
Why would a Settlor want a non-U.S. protector (or professional protector)?
If the Settlor is a United States resident, the U.S. courts still have “jurisdictional” authority over that person. Although no case law exists on the subject, theoretically the Court could force the U.S. protector to appoint a new Trustee – one who works for the U.S. Court. This is just theoretical, but many clients prefer to remove any doubt of jurisdiction of any kind and will therefore use a non-U.S. protector. These non-U.S. protectors are typically professional Trustees in a jurisdiction other than the situs of the Trust (in a country where the Trust was not settled).
What is the Trustee’s role in an Asset Protection Trust?
The Trustee’s role is to hold legal and equitable title to Property, which has been made subject to the Trust for the sole and exclusive benefit of the Beneficiaries of the Trust. The Trustee’s duty of loyalty as a fiduciary is to the Beneficiaries, not to anyone else. It is important to choose well known, properly licensed fiduciary trustees. Also depending on the particular estate plan configuration, the Trustee should also have deep pockets. Even though our typical planning has safeguards against the Trustee having any direct control over your assets (especially your check books), with larger estates it is important to have the Trustee be of an appropriate financial size to accommodate any emergencies vis-à-vis a major lawsuit that would warrant them taking direct control of your assets.
What is the role of the Protector, and who would make a good Protector?
The Protector’s role, in our planning, is to appoint and/or terminate Trustees. No one else has that power under the Trust. In many cases, the client acts as their own Protector, or you might choose a trusted relative. Sometimes our law firm will act as a Protector. The majority of the time, clients will have us hire a foreign Protector, usually a Trustee in a jurisdiction other than the one they are using for the Trust itself. In this way, the Protector is under the influence of the United States, not the Jurisdiction of the Trust and will be in the best position to implement the full fiduciary effort that is in your best interest. It should noted that our law firm has greatly proscribed or limited the traditional powers of the Protector in a way our clients feel strengthens the checks and balances they have over the Trustee and the Protector.
What is the role of the Guardian?
The Guardian of the Trust is there as part of the “checks-and-balances.” The Asset Protection Trust requires that the Trustee exercise its “restricted powers” only after first notifying the Guardian of its intent to do so. The notice period is typically 45 to 60 days in advance. The Guardian can then either have a mere notice right or may have a veto right over certain enumerated acts by the Trustee. This is a power usually held by the Protector. However, Case Law has determined that if the settlor has both the veto power and the appointment power, they may be acting as a Trustee. Even though in a very limited fashion, this has allowed courts to unwind the Trust, which is something you do not want to happen. By separating these powers and having different persons hold those powers, we avoid the defect employed by many professionals.
Where the Guardian does not have the power to veto the Trustee if the Trustee acts in contravention of the best interests of the Beneficiaries (of which you are one), the Guardian can indicate his or her concerns to the Protector who can terminate the Trustee without cause and replace them with a new Trustee.
Can I be a Beneficiary of the Asset Protection Trust?
Yes. The laws of the better Asset Protection Trust jurisdictions allow for what is called a self-settled trust. This means that you can be both a Grantor and a Beneficiary of such a Trust. Although there are minor exceptions, the general rule is that you cannot be both a grantor and beneficiary of an irrevocable trust in the United States and maintain lawsuit protection.
Can I be Trustee of the Asset Protection Trust?
No. We want the trust protection to remain intact. If you were to act as the Asset Protection Trust’s Trustee, all that protection would be lost since a U.S. Court could obtain jurisdiction over you. This would defeat the protection available under the Asset Protection Trust. Being the original owner and retaining the trustee position in an irrevocable Trust is deemed retaining sufficient ownership over the assets to frustrate the lawsuit protection aspects of any irrevocable trust. Further, while it is legal (and customary) in the United States to be the Trustee of your own Living Trust or your own Charitable Remainder Trust, it is not allowed in an Asset Protection Trust because a U.S. judge having jurisdiction over you personally could obtain a basis on which to order the Trust assets distributed in accordance with the Court’s wishes.
What happens upon my Death?
Most clients want their Trusts to stay in place after their death to continue providing for the remaining Beneficiaries who are still alive, including the spouse, children, grandchildren, charities, other relatives, etc. Asset Protection Trusts normally have a life that lasts until all the Beneficiaries (including you, your spouse, your children and grandchildren, but alternate terms may be drafted) receive all disbursements to them under the provisions you established in the Trust.
Provisions are drafted in the Trust documents that provide for the disposition of property, which is subject to the terms of the Trust in accordance with the wishes you state when the Trust is first being established. We want the Asset Protection Trust documents to accurately reflect your wishes and of course we want you to take advantage of any U.S. tax advantages (such as the A/B Trust provisions for married couples) that are available in planning your estate. At the second death of a married couple, the usual provisions include separate trusts being automatically established for each secondary beneficiary. That way, each trust can work independently for each of the beneficiaries depending on their particular circumstances at that time.
The Asset Protection Trust normally provides that all the Beneficiaries can enjoy the benefits of the Trust (that includes you) during your lifetime. Following that, normally come your children, your chosen nephews & nieces, your grandchildren, preferred charities, etc. That aspect is no different than any normal Estate Plan you would establish in the United States.
What’s the Difference between a U.S. Irrevocable Trust and an Asset Protection Trust?
Assets held in irrevocable trusts in the United States are not legally beyond the reach of your lawsuit adversary. The U.S. Courts have jurisdiction over the Trust, and it can deem the trust to be void, reverting the assets back to your ownership, by allowing your creditors to take the assets. Additionally, the same assets cannot be enjoyed, or in any way benefit you, since the domestic U.S irrevocable trust cannot have you as its Beneficiary.
By contrast, an International Asset Protection Trust can include you as one of its Beneficiaries, and under its powers, the Trustee can provide for YOUR support, medical needs, education, welfare and enjoyment without being concerned about outsiders who might be Plaintiffs against you. This protection is approved under U.S. law due to our signing of the Haag Convention on Trusts in 1987. It is an irrevocable trust under U.S. law, even though you are the primary Beneficiary. Under U.S Law, the laws of the jurisdiction of the trust should be fully recognized.
What about the domestic Asset Protection Trusts I’ve heard about in Alaska, Nevada Utah & Delaware?
We don’t recommend you utilize a jurisdiction that is subject to enforcement of a “Sister-State Judgment.” Remember that, due to the “Fair Faith and Credit” between the States at the U.S. Constitutional level, the Judgments of one state must be enforced in another. So if you lose an Arizona or Pennsylvania Court case, for example, the lawyer for the Plaintiff there could simply have the Judgment enforced in the State in which you live. As one would recall, Alaska, Nevada, Utah and Delaware are all still members of the United States of America and subject to the Federal Sister State Judgments Act. We do utilize these statutory domestic trusts, but for very specific and limited purposes.
Why does the Asset Protection Trust use a Foreign Jurisdiction?
Because the laws relating to irrevocable trusts of certain offshore jurisdictions are much more favorable than those which apply in the United States. U.S. Courts will have either personal or “in rem” jurisdiction over you, the Plaintiff, and the lawsuit. That means the dispute would be decided in the U.S. Court under U.S. rules, with the Plaintiff having most of the cards and you (the Defendant) reacting to charges and claims in a defensive posture, in what may be a malicious lawsuit with Contingency Fee attorneys where the plaintiffs have nothing to lose. The United States requires that individual states honor one another’s Court Judgments. Therefore, if you lose a lawsuit in the State of Florida, but live in the State of Arizona, your lawsuit adversary could get the Florida judgment honored in Arizona under the Sister State Judgment Act. Moreover, U.S. courts enjoy practicing the reach of their powers under the so-called “Long Arm” statutes. However, due to U.S. international law, U.S. persons can establish trusts in other countries where that trust law governs the trust and the assets within it. Therefore, you are changing the playing field under U.S. law, either to be fully protected from the creditor, or to force them into a more favorable settlement on your part.
Outside of the United States, it is much more difficult for your lawsuit adversary to pursue a lawsuit. Among other things, he or she will be dealing with foreign courts in a foreign legal system – one that applies the “Loser Pays” system. This system requires the “loser” to pay for all costs including legal fees, investigators, Court costs, etc. Moreover, the Plaintiff in some of the preferred jurisdictions will be required to pay a substantial cash bond into the courts of the Asset Protection Trust’s home domicile to cover the expected defense cost – in advance of commencing the suit. Even after this, if there is no legal connection between the claim being presented against you personally and the Asset Protection Trust, the Plaintiff may well be out of luck. In addition, if you have placed your Trust in one of the jurisdictions with a shorter Statute of Limitations, such as a two year, the Plaintiff may not even have the right to sue if the statute has completely run. Thus, you have significantly changed the options available to your adversary who is trying to take an estate that has already been separated from you under the law. Your adversary will find that all claims against the Trust are permanently barred.
Which jurisdictions have the best Laws for Asset Protection?
The leading jurisdictions that have promulgated top trust legislation are the Cook Islands, Isle of Man, Gibraltar, Cyprus, Cayman Islands, Bahamas, St. Vincent and Nevis. We ascertain your circumstances and individual goals, and then match the results you want with a jurisdiction that has favorable statutory protection to assist you in meeting those goals.
Those jurisdictions we prefer to use for Asset Protection Trusts have a relatively short Statute of Limitations (2 years) for barring claims against the Trust, they do not recognize the judgments of foreign Courts, they allow for redomiciliation (the “flee clause”), and they maintain good due diligence standards to protect the integrity of the Trust.
What makes one offshore Jurisdiction better than another?
There are a number of characteristics that we consider in choosing a jurisdiction for a client, including, but not limited to, political stability, technological and financial infrastructure, statutory protections, tax considerations, etc. The proper jurisdiction for you can only be determined by balancing these considerations against your personal and financial circumstances. There are several good jurisdictions that have passed appropriate trust laws for this type of estate planning. As a general rule, we will probably be using the Cook Islands, which are a New Zealand protectorate. The Isle of Man is another superior jurisdiction. We also use Gibraltar, Cyrus, the Bahamas, Cayman Islands, St. Vincent and Nevis. Depending on your circumstances, some of the differences are subtle or merely tactical in nature. Other situations will make the choice of one jurisdiction over another paramount in the success of your plan.
What happens if a Jurisdiction changes its Laws?
The countries that offer Asset Protection Trust legislation have often done so due to the lack of other business resources. So in effect, they have tried intentionally to create the industry. It is more likely that any changes in their laws will be to strengthen their attraction, rather than weaken it. In any event, the Asset Protection Trust has provisions that would allow it to be moved to other jurisdiction or to change Trustees in the event of political instability, change of circumstances, etc.
What is Fraudulent Transfer and why do we need to avoid it in this type of estate planning?
Fraudulent Transfer (also known as Fraudulent Conveyance) has to do with transferring the ownership of assets out of your name into the ownership of another person or entity in order to avoid paying a legitimate creditor. Fraudulent transfer is a remedy available to a judgment creditor. It is rare that the Court will find overt fraud, but the law will apply a concept called “Badges of Fraud” as a way to apply a fraudulent transfer remedy. These Badges of Fraud include transferring assets into other people’s names for exchanges less than Fair Market Value or making a transfer of an asset, out of one’s ownership after one has been given notice that someone is going to sue them. Transferring to a relative, even at fare market value, is sometimes viewed by the Court as a Badge of Fraud. Gifting (with no adequate consideration) to a child, spouse, friend, or business partner, would certainly be one of those badges.
In the United States, when a Plaintiff suspects this is happening, he or she can simply go in to Court and merely claim you are engaging in Fraudulent Transfer in order to avoid paying his or her claim. Under U.S. law, there is all too often an automatic presumption that such is the case (this is just the opposite of our criminal courts, where you are presumed to be innocent until proven guilty). Therefore, under such conditions the “burden of proof” is upon you to prove that such is not the case. The judge can order the assets “frozen,” thus making them available to satisfy the creditor’s claims, whether or not such claims are true.
In some Asset Protection jurisdictions, once a one-calendar-year Statute of Limitations on Fraudulent Transfer Claims has passed, the burden of proof in such a dispute would be shifted from you (as the Defendant) to the Plaintiff, with such proof being required to be “beyond a reasonable doubt” instead of merely by a “preponderance of the evidence.” As you might imagine, this is very difficult indeed, especially when assets are transferred to the Asset Protection Trust as part of an overall Estate Plan.
How do Lawyers decide to sue someone?
There are three factors:
Does the case have merit in terms of an actionable legal claim? Can the Plaintiff afford to pay? If the Plaintiff wins, can the Defendant pay the Plaintiff? Ethical attorneys should, in every case, get a clear picture of whether or not the potential Defendant can afford to pay the Plaintiff’s successful Judgment before ever commencing the legal action. To not do so constitutes malpractice in our view. An additional factor applies to Contingency Fee cases, where the attorney will evaluate a case from the perspective of their own pocketbook since the attorney in such a case is in essence a “Lawsuit Lottery” partner of the Plaintiff and is bearing all the risk of costs and time for nothing if the Plaintiff’s case does not fly.
By engaging in Asset Protection ahead of time, and by acting while your legal seas are calm, you are wisely lowering your profile, letting time work for you instead of against you. You are prudently removing assets from being available as targets by a potential future lawsuit adversary without engaging in any type of activity that could be construed as fraudulent transfer. If you follow our instructions, you can do this without negatively impacting your lifestyle or financial well-being.
Have some of your clients’ Asset Protection Trusts in their estate planning been tested?
Yes. We have many stories from our clients that the Asset Protection planning has worked in such a way that their adversaries entered into settlements without ever becoming aware that the estates were so much larger than perceived.
Our clients have also had situations where the adversary knew absolutely everything about the planning because they were an ex-business partner, or merely because the facts were delivered to the adversary by the clients. But in these cases, despite complete disclosure and full attempts by the adversary, no part of the asset protected components of the estate plan were exposed to the lawsuit claims.
Can a Lawsuit Adversary obtain assets from my Asset Protection Trust?
It depends on the situation, but you are usually protected from lawsuit adversaries. They are among the listed members of the Excluded Class specified in the Trust, and as such, the Trustee has formal instruction not to benefit them. However, a lawsuit adversary can obtain assets if within the first year of the Trust in an in-chambers private proceeding held in the Court of the country in which the Asset Protection Trust is domiciled, it is found “beyond a reasonable doubt” that you established the Asset Protection Trust with the specific intent to hinder, delay, or defraud that specific legitimate creditor (assuming they have a mature and proven claim). Such a claim must be presented to the Court in the country where your Asset Protection Trust is settled within one year or it fails completely. If they can’t meet that basic standard, and if the lawsuit has no “nexus” to either the jurisdiction in which the case is heard, or the specific Trust in which assets are held, then they fail to meet the burden of proof and their claim is denied. As you might imagine, this is extremely difficult on the plaintiff’s part.
On the other hand, if you settle the Asset Protection Trust while your “legal seas are calm” and there are no ongoing disputes which are likely to rise to the level of a lawsuit, your Asset Protection Trust will give you the protection you desire.
Can an American Court order the Trustee to turn over Assets?
No. The Trustee is subject only to the laws of the Asset Protection Trust’s domicile. The Trustee is NOT subject to the laws (and Court orders) of the United States. Any attempt by a United States Court to gain control over assets owned by the Asset Protection Trust is considered to be an “Event of Duress” and the Trustee is legally required to ignore such orders. If a Trustee follows the directives of a U.S. Court’s order, the Trustee will be violating the laws of the Asset Protection Trust’s home domicile and may be subjecting themselves to both criminal and financial penalties. So the answer is that the Trustee will ignore the U.S. Court’s order and follow its prime duty of loyalty, which is to the Beneficiaries (you, your spouse, your heirs)
What if a Court orders the Trust Assets into the control of the Court?
You can tell the Court truthfully that you are a Beneficiary of the Trust and will ask the Trustee to deliver assets. You can even tell the Court that you will draft a telegram for the Judge to sign. However, what you need to know is that if you ask the Trustee to move assets into the Court’s control and indicate that you are doing so in compliance with a U.S. Court Order, the Trustee has instructions within the Trust to ignore such a request. This also applies if the Court directly attempts to order such a move by contacting the Trustee. This is considered, under the terms of the Asset Protection Trust, to be an “Event of Duress,” and the Trustee will legally be required to ignore it.
Is there a Statute of Limitation that stops my Lawsuit Adversary?
Yes. There are typically two different, but related, Statutes of Limitation, which apply to International Asset Protection Trusts domiciled in most jurisdictions. There are also jurisdictions that use Solvency Standard as the standard for fraudulent conveyance.
Although all jurisdictions are different, in the Statute of Limitations Jurisdiction, there is a one-year statute that applies to claims in which a Plaintiff might make any allegation of fraudulent transfer on your part. Under the Statute of Limitations, if such a claim is made after one year has passed from the date you established the Asset Protection Trust, the burden of proof shifts from the Defendant (you) to the Plaintiff. Such a claim must be proven not merely by a “preponderance of the evidence” (meaning that legally it is “more likely than not”), but rather by a much higher standard of proof –“beyond a reasonable doubt.” This is the same standard of proof required in criminal law cases in the United States and is very difficult for a Plaintiff in a case where your Asset Protection Trust has been established well beforehand as an integral part of your overall Financial and Estate Planning.
Second, there is a two-year bar on all claims. That means that regardless of the Plaintiff’s claim of merit to his or her case, even under the Trust’s jurisdiction laws, the Court in the Trust’s home jurisdiction will deny any opportunity for a hearing once the two year Statute of Limitations has passed. You’re probably aware of the fact that in many U.S. lawsuits, it takes quite a bit of time to move things through the courts. It could well be two years before all the Discovery Phase is complete and the case in the United States moves to trial. During this phase, the Plaintiff would typically not even know that you have an international component like an Asset Protection Trust already established in a jurisdiction with favorable laws, and will only discover it long after the two years has already passed. Even if he or she wins a Judgment in the United States, it will have no legal effect in the Asset Protection Trust’s home jurisdiction because (1) it is considered there to be an unrecognizable “foreign” Judgment, and (2) because even if a claim is submitted for consideration in the country of the Asset Protection Trust’s domicile, two years will have already passed and all claims will be permanently barred from being heard.
If I get sued, can’t I just make outright gifts to my Spouse or Children?
No. Such a tactic is a classic case of Fraudulent Conveyance. If a lawsuit has not yet been filed, but it is clear to you that the prospective Plaintiff has a claim, the Court would deem this to be an improper transfer. Transfers to family members or to others for less than full fair market value are two of the several indicators that Courts deem to be “Badges of Fraud.”
Can I engage in Asset Protection if I am currently in Litigation?
Yes. While you want to avoid the appearance and the reality of improper Fraudulent Conveyance, you are legally allowed to do Estate Planning while in litigation. In the case of the Asset Protection Trust, you are merely engaging in Estate Planning using the very favorable laws of an offshore jurisdiction. Here is how we normally would handle this kind of situation if a client walked into our office seeking Asset Protection.
First we’d calculate total Net Worth, and then add to that figure the amount of Liability Insurance coverage the client has. This total figure would then be the amount we use in our calculations. We would subtract from this total number the amount of any pending claim and the resultant amount is what can absolutely be protected. We’d urge the client to resolve the lawsuit quickly (perhaps by settling out-of-Court) and then once the claim goes away, we’d have him or her then add the reserved amount into the total number being protected by the Asset Protection Trust.
By way of an example, if a client has a Net Worth of $2,000,000, liability insurance coverage of $1,000,000, and a claim of $500,000, we’d calculate the total Estate at $3,000,000 (treating the Liability Insurance as an asset for this purpose). By reserving $500,000 (even if it later settles out at $5,000), we have set aside coverage to handle the claim and have not rendered our client financially insolvent by engaging in Asset Protection.
If I already have a lawsuit against me, does that mean I cannot do any Asset Protection in my Estate Plan?
Under some circumstances, you can proceed with the Asset Protection component of your Estate plan. At the time of the Affidavit of Solvency, if you are already in a lawsuit or you have known creditors, you would need to identify the case number, the Court having jurisdiction over the case, and the nature and amount of the claim. This is a means to show you have reserved a portion of your assets (which assets will include the upper financial limits of your Liability Insurance Policy) to handle such a claim if you are unable to settle the case out-of-Court.
For example, if you had a $2,000,000 Net Worth plus another $1,000,000 in Liability Insurance Coverage, the insurance coverage would be included in the calculation of your Estate for purposes of Asset Protection with a total of $3,000,000. The claim of a Plaintiff in a lawsuit against you of $200,000 would be well under the $1,000,000 total available under your Liability Insurance Policy and so this “reserve” would be sufficient to handle the claim. Thus, your transfer of Assets under the terms of the Trust would not constitute any sort of Fraudulent Transfer. Even if such a claim was made in the country of the Asset Protection Trust’s domicile within the one-year statutory limitation period, your Affidavit of Solvency would show that you were solvent, had no intent to defraud legitimate creditors, and that you Settled the Asset Protection Trust as its Grantor with full recognition of the legal dispute (or potential dispute) at the time you established the Trust. Thus, the Court in the Asset Protection Trust jurisdiction would have evidence that you did not engage in Fraudulent Transfer and it would deny the claim of the Plaintiff, thus protecting the Assets held under the Asset Protection Trust.
Can’t I just hide my money or other assets?
No. Whenever you are relying on “secrecy” as opposed to “privacy” under the law, it is usually an indicator that you are not doing something right and perhaps even something illegal. You want to maintain as much privacy as possible, but make sure everything that is done is done properly and legally. In short, if you had to explain everything that was done to the judge, the law should still uphold the estate plan that you have employed and the assets, or a great deal of them, should still be protected from your personal creditors.
Hiding assets is not a good Asset Protection plan. Even though privacy can be an important part of your Estate and Asset Protection plan, secrets are not. When your Estate, Business, and Asset Protection planning is established properly and prior to any unexpected lawsuit, then you should be able to discuss everything that has been done with your adversary or the judge, and it should still be upheld under the law.
Isn’t it illegal to move assets offshore?
No. But first be reminded that we attempt to not move the assets themselves, but merely the ownership over the assets. Again, this comes down to importing foreign law under U.S. regulation and not exporting assets. To the basics of your question, we live in a world without borders. Many of the leading Fortune 500 multinational companies and most of the world’s wealthy families use International Planning as part of their overall estate planning. They use foreign jurisdictions around the world for various aspects of their planning. They provide themselves with the opportunity to take advantage of laws that can benefit their needs. Among them are Dow Chemical, Merrill Lynch, American Express, General Motors, Disney and CNN, just to name a few.
Will I be opening a Foreign Bank Account?
No. In fact we typically discourage our clients from opening foreign bank accounts. Unless you have a “going concern” business abroad, there are more pitfalls then benefits of having an international account. There is a good deal of compliance that your CPA would have to contend with, and your audit rate will go up. We have not seen an increase in audit rate when a client simply has an international Trust that is properly reported and the assets stay here in the United States. A sound and proper plan will typically be “importing foreign law” under U.S. law, not “exporting your assets.” The Asset Protection Trust will typically be the owner of entities here in the U.S. under your control. Most entrepreneurs want their estate plans, including their asset protected portions, to be under their control. You will keep the checkbook and other assets here in the U.S. under your control.
It should be noted that if you already have an existing foreign bank that you wish to place into this type of estate planning, your tax advisor will need to furnish evidence that the account is properly reported and that you are paying all appropriate taxes. Not doing so is tax evasion. If you are tax evading, we would recommend letting us refer you to a good tax attorney who can do your back taxes and perhaps help you in any other defenses you may have under your circumstances.
How can I control my assets? I thought my control destroyed Asset Protection aspects.
Control is not the same as ownership. We want to be able to prove under U.S. Law that you are truly not the legal owner (which an Asset Protection Trust will provide). If we can prove that you are not the legal owner, you can control the assets as long as it is not at the Trust level. As stated above, in most cases you keep the checkbook here in the U.S., in your hands, usually through an underlying company to an Asset Protection Trust.
How does the Asset Protection Trust affect my U.S. Taxes?
An Asset Protection Trust is considered under pertinent provisions of U.S. tax law to be a “Grantor Trust.” Therefore, it is deemed to be a tax-neutral lawsuit-protection and estate planning device, meaning that it neither increases nor reduces your tax burden. Your tax advisor would call this a “disregarded entity” for tax purposes. As with any other Grantor Trust under U.S. tax law, it takes on the same exact tax characterization as you (as its Grantor) currently have under the tax system. Most clients and their CPAs like the fact that the structure is a disregarded entity. This allows countervailing right-offs and profits to be balanced on the client’s tax returns. However, we will work with your tax advisors to configure your estate plan any way your tax advisor suggests, if they see you could have tax advantages utilizing your underlying entities.
Can I use Offshore Planning to reduce my Taxes?
An Asset Protection Trust is established to protect you and your family from losses due to catastrophic lawsuits, not to make you a Tax Evader. The Asset Protection Trust is a disregarded entity in the eyes of the IRS and has no tax advantage or disadvantage in its use. You are obliged to pay any taxes on your tax return, and the IRS has specific forms (namely the 3520 and 3520a) that essentially act as a K-1 for the international trusts. As stated earlier, the IRS has never been your greatest ally than in the circumstances of a suit before the Court in proving that the U.S. government recognizes this type of trust as an irrevocable trust under U.S. law. However, you will be paying taxes on a pass through basis.
Will reporting my international trust to the IRS cause an audit?
We have seen no incident of an increase in audits due to filing your 3020a. We have had several clients that have had audits at a personal or business level that have resulted in inquiries as to the use of the clients’ Asset Protection Trusts and not one was challenged or deemed improper. In any event, if you comply with the requirements set forth in your Asset Protection Trust portfolio, you’ll be fine. The tax authorities do not have a problem with you protecting yourself from frivolous lawsuits. They are seeking out people who don’t report income or engage in tax fraud.
How does the Internal Revenue Service view Asset Protection Trusts?
Asset Protection Trusts and other types of international trusts are legal under U.S. law. The IRS, however, has seen much abuse in this area by those who have failed to comply with the reporting requirements. By complying with U.S. trust-formation-reporting requirements, you are required to pay the taxes on any earnings that trust has. In fact, you enhance its protection and validity in the face of litigation or scrutiny, in that you have fully complied with U.S. law and provided in advance an additional argument against a U.S. Court’s assertion that it does not recognize the Asset Protection Trust. Since the Asset Protection Trust is considered a grantor trust under U.S. tax law, the IRS merely views it as a tax-neutral substitute for its grantor and nothing more, even though it provides full lawsuit protection.
Should my Asset Protection Trust own an Offshore Corporation?
We usually discourage this approach. Again, the philosophy of “importing foreign law and not exporting your assets” is the best approach for a whole host of reasons. Unless you have compelling active business reason for having such an entity, we would recommend against it. Again, give us a call so we can discuss your circumstances and whether or not this would be an advisable plan of action.
Are Family Limited Partnerships useful in Asset Protection?
Yes. Family Limited Partnerships are very useful. We like to have our clients use them as management and investment-holding tools and assign the majority (perhaps as much as 99%) of the Limited Partnership interests to your Asset Protection Trust. This has the effect of leaving you in effective day-to-day control of the assets (as the managing General Partner of the FLP, having 100% management and decision-making authority), but with your Asset Protection Trust holding a 99% majority interest for your personal protection.
Are assets physically held in the United States or are they held Offshore?
Assets can certainly be held inside or outside of the United States. It is your choice, but we do recommend that if they are in the United States under your control, they be held inside of legal entities that are, in turn, directly owned by the Asset Protection Trust. This is very commonly done. For example, a client might have us establish a Nevada-based Family Limited Partnership (for privacy & control), with the client and the client’s spouse acting as the General Partner and the Asset Protection Trust as the Limited Partner. With the estate over the gift tax exemption leve, and a current one million dollars per individual making the gift, a domestic irrevocable children’s type trust would be used to start gifting valuable capital growth assets to their heirs, free from the estate altogether. However, not wanting to leave assets over the exemption amount exposed to their own creditors, the international Asset Protection Trust, as a tax neutral entity, could be filed with the remaining interest without any negative tax effect.
With an Asset Protection Strategy in place, can I realize savings on my Professional or Business Liability Insurance coverage?
We do not recommend you go “bare” with no coverage at all. That would, in our view, be foolish. In our opinion, you should have liability coverage in an amount that will take care of most common types of claims that you are likely to have. However, the increased protection of your nest egg or “rainy day assets” that comes with your establishing an Asset Protection Trust would probably allow you to change your deductible amounts. If you feel comfortable with it, you can shift the limits or types of your insurance coverage to reduce your insurance costs. This is something we can discuss during your private consultation. In the past 10 years, some insurance premiums have gone so high, that the insurance company is literally earning more than the salary that the professional is left with to bring home to their family. Professionals and business people in certain industries have been forced either leave their profession or move to a state that had variances that lowered their premiums. Many of those professionals have turned to the types of estate planning we provide. Some of our clients have told us that they have no choice but to “go bare.” This is not what we would recommend, but this is a choice that you will have to make if you are so affected.
Why is the Affidavit of Solvency important as a Due Diligence document?
The Affidavit of Solvency is required by the Asset Protection Trust Trustee as means of due diligence as an item of Integrity and ensuring that the Trustee is not dealing with someone who, by the establishment of the Trust, is not making themselves incapable of meeting their financial obligations. You are representing that you are engaging in Asset Protection for proper reasons, without any specific intent to hinder, delay or defraud any legitimate creditor (i.e. the holder of the mortgage lien on your home, or the credit card grantors to whom you owe credit card balances for charges you made).
What type of feedback have you received from your clients after completing Estate Planning and/or Asset Protection, and why should I do it?
The message we consistently receive is that our clients’ stress levels have been greatly reduced. Living in the midst of a society that encourages lawsuits is very stressful, and it makes entrepreneurs unproductive. Maintaining a low profile with some of your more valuable assets is a wise and basic concern. However, that low profile does not need to rely on hiding or secrets, but on an ascertainable, traditional estate plan that provides lawsuit protection for you and your family.
You owe it to yourself and your family to implement planning so you can rest assured that you could assert your full rights if a lawsuit does come your way. One comment that many of our clients have shared with us is that once an asset protection plan has been implemented and suit later occurs, they have found themselves more courageous in standing up for their rights, rather than being intimidated into settling for more, just to avoid the uncertainty of the Court room. Most planning will actually lower a profile in a preemptive way so that a lawsuit will look so unproductive that the suit does not even begin.
Removing yourself as a target is often more than half the job of asset protection planning. Including an Asset Protection Trust as part of your estate plan increases the overall security of your assets from risk of malicious and frivolous lawsuits.
I had my Estate Planning done several years ago. How will an Asset Protection Trust fit in with my existing plan?
Most estate planning done in the United States has to do with probate avoidance, and in some cases, reducing estate taxes. Moreover, most U.S. estate planning does not even begin to deal with the issue of lawsuit protection.
The Asset Protection Trust has the flexibility and power to serve as your primary Estate Planning device, in that it can accommodate U.S. law regarding the A/B Split used in many Living Trusts, as well as the Property laws of most states. The Asset Protection Trust will protect assets inside its coverage from lawsuits and will act to preserve wealth in a manner that protects you, your children, your grandchildren and other Beneficiaries from not only probate costs and taxes, but from greedy outsiders who want what you have worked so hard to acquire.