Asset Protection Planning

Copyright (c) 2009 Selwyn Gerber

Safeguarding your assets from exposure is vital. This is proven by the fact that the 10 largest verdicts in 2008 to individual plaintiffs totaled a record breaking $2.8 billion, including eight awards over $100 million, according to our research. The litigation explosion provides an opportunity for the astute client to benefit from asset protection strategies. Now that costs have dropped and it is affordable and necessary part of overall wealth planning.

It also provides an important professional opportunity for trusted advisors to expand their services and we regularly work with other CPAs and lawyers in this area.

Consider the following:

- Ninety-five percent of the litigation on this planet takes place in the U.S.; In 2009, over 20 million lawsuits will be filed; There are more lawyers in West Los Angeles alone than in all of Japan, the world's second largest economy.

Asset protection structuring involves using multiple strategies from a continuum of planning alternatives to work in concert to protect wealth from "creditors and predators." There is no "one-size-fits-all" product. Rather, an individually-tailored, carefully- designed plan created by skilled, experienced advisors is required for optimal asset protection. More powerfully, selecting a jurisdiction offshore for nominal ownership places the title to assets outside of the reach of the U.S. courts. If, in addition, actual assets are located offshore, they are totally out of the reach of the U.S. Justice system. Powerful domestic asset protection strategies can be integrated with the offshore asset protection trust to provide a reasonable degree of protection, although at a somewhat lower level of protection. Avoiding a fraudulent conveyance means care must be exercised.

Selection of Jurisdiction:

Among the attributes which are incorporated into the choice of an appropriate jurisdiction would be the following:

Non-recognition of U.S. judgments:

The plaintiffs would be required to re-try the case in the foreign jurisdiction and, if appropriate, to be awarded such sums as are customary and reasonable within that legal framework. Needless to say, those rewards are far more modest than they would be locally. In addition, all evidence and witnesses would need to be flown to say, the Cook Islands for the duration of the trial. At the end of that, a judgment may be entered into against the client, who will at that point have no assets in the Cook Islands. Because the trust is a valid structure within their jurisdiction, the assets would be out of reach unless the trust itself could be set aside.

No income taxes imposed:

The preferred jurisdictions are in completely tax-free status so the US tax laws are applicable with no additional foreign taxes payable.

Sophisticated financial services industry:

The jurisdiction will have highly regulated trust companies and financial service institutions.

Migration provision:

The trust can be moved to another jurisdiction by resolution of the trustees. This provides important flexibility either in the event of a legislative change in the jurisdiction or should legal proceedings against the trust be commenced.

Location of the Assets:

Having established an offshore Living Trust Plus� as we refer to the customized trust instrument described herein, typically the assets are held either in the United States, preferably through a limited liability company, or offshore where the funds are then invested in the safest institutions of the world. While the greatest protection is afforded when assets are physically located abroad, trust assets may remain invested locally until such a time that the trustee deems them to be at risk. To provide greater safety, they can be moved offshore at this time.

Anti-Duress Provisions:

Perhaps the heart and soul of the protective powers of the Living Trust Plus� lie in the provision which provides that if a request is made for funds by a beneficiary which is deemed to have been made under duress, then the institutional trustee will decline to comply with that request and ignore it. And so, should all the structural details become apparent to a court of competent jurisdiction, and should a court order that the foreign funds be repatriated by the grantor, the grantor will at law and in reality be totally powerless to effect such a transfer of funds. And because impossibility of performance is a valid defense against the possible charge of contempt, the claimant will have won the battle yet lost the war. "Legitimate asset protection relies on structure, not secrecy."

Tax Implications:

The Living Trust Plus� is essentially tax-neutral, providing no tax savings. The IRS considered the gift to be "Incomplete." However, by integrating the investment program with an IRS-compliant offshore life insurance policy, for the insignificant cost of term life insurance, withdrawals and loans can be arranged, providing tax-free income. Furthermore, utilization of the lifetime exemption provides opportunity for substantial gift and death tax savings.

Domestic Asset Protection Strategies:

Having established the Living Trust Plus� offshore, and having transferred the portion of liquid assets which is earmarked for investment abroad, and thus for more complete protection, the second tier of protection for U.S. assets is available through multiple domestic protective devices. Chief among them is the limited liability company which forms an ideal vehicle for ownership of onshore assets. Carefully select the best state in which to incorporate. Creditors who attach assets will be unable to pierce the veil of the LLC, and will, at best, obtain a charging order. This ensures that all tax consequences will accrue to them, while the underlying management of the LLC's assets will continue undisturbed, as before. Because of the very real risk, therefore, that the creditor may receive phantom income allocations without cash distributions from the LLC, there is a very large deterrent effect, in a creditor taking possession of an interest in an LLC. Other asset-protection strategies include ERISA-compliant retirement funds, which are fully protected from creditors and IRAs which are somewhat protected. (This varies from state to state.) There are also some states which offer the opportunity for establishing an asset protection oriented trust, although nothing domestic can be truly secure because the courts have vast powers over any assets located in the USA.

THE BOTTOM LINE: Wealth Insurance

You are especially at risk if you run a business, own investment real estate, are viewed by others as a "deep-pocket," or serve on the board of a company, just to name a few. Varying degrees of asset protection make sense to protect you and your heirs in event of the unexpected. Even if you are at a low-risk, your heirs may be situated differently. Consider the devastating effects of divorce, business reversals, and lawsuits. The proper use of strategically-planned trusts can ensure that assets remain within the family for many generations to come. Examples of asset protection practiced daily include incorporation, limited liability companies, exemption planning and insurance. These tools can be significantly enhanced by including international planning and the total solution should be viewed as a wealth-insurance program.

Offshore asset protection has emerged from the cloud of quasi-legality and smears of exotic tax havens into the mainstream of today's financial planning arena. For clients who have substantial risk, creation of a Living Trust Plus� provides a powerful and cost-effective form of wealth insurance, safeguarding wealth from attack and attachment. It provides access to money-management opportunities abroad with managers of funds who, ironically, often choose not to do business in the U.S.A. precisely because of the litigation risks. The Living Trust Plus� straddles the fine line between ownership and control. It functions, from a practical standpoint, as a "super living trust," providing all the traditional benefits of a living trust with the enhanced protection of wealth safeguards.


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