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Protect Your Assets Legally by Using an Offshore Trust

October 29, 1999 0 Comments

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South Florida Business Journal

Rick Garr, Copy Editor / Law Writer, South Florida Business Journal


Patricia Donlevy-Rosen is a partner in the Coral Gables law firm of Donlevy-Rosen & Rosen. An author and frequent lecturer, she is a recognized authority on asset protection and business planning. She received her undergraduate degree in economics from Vassar College and her law degree from New York Law School. She recently answered these questions from the South Florida Business Journal. Readers seeking more information can visit her Web site at

Q:     Many of our readers make $150,000 to $250,000 a year and have a net worth of around $1 million. They feel pretty good about the investments they’ve made in the past few years. What is the greatest threat to their wealth, and what should they do about it?

A:     Litigation. It has become a popular tool for the accumulation of wealth – not only by plaintiffs but by their attorneys as well. Your readers should ask themselves: Am I sure I’ll never be sued? And if I am sued, am I sure I’ll be treated fairly by our legal system? This will show them they need asset protection.

Think about it. When an attorney considers taking on a case, she will do two things – analyze the merits of the client’s case and then ascertain whether a judgment, if won, can be collected. If the lawyer does not believe she can collect the judgment – which usually is the source of her fee – she will not take the case.

Sound asset protection planning reduces or eliminates the ability of a creditor to collect a judgment, which makes you an unattractive target for a litigator.

Q:    What is your definition of asset protection planning?

A:     The adoption of advanced planning techniques that put one’s assets beyond the reach of [a] future potential creditor. In my practice, it does not involve hiding assets, nor is it based upon secret agreements or fraudulent transfers. Rather, it is based upon proven, sophisticated combinations of business and estate planning techniques.

Q:    What is your basic concept, your basic approach?

A:    Our approach involves an offshore asset protection trust, often in combination with a U.S. family limited partnership. The client forms a limited partnership and contributes to it those assets that are to be protected. The client becomes the general partner, and the limited partner is the offshore trust.

As the general partner, the client retains control over the management, investment and distribution of the protected assets. No third-party consent is required for the purchase, sale, pledge or in connection with any other transaction in regard to these assets!

Q:    Can’t you accomplish essentially the same thing with a plain old limited partnership?

A:    It may work, but no plan without a properly structured offshore trust can be effective against all attacks. We can never predict how a local court or jury will act. Sometimes, a “results-oriented” judge or jury will ignore the statute limiting the creditor’s rights against a partner in a limited partnership and somehow pierce the partnership protection. This happened recently in New York and California.

Under our approach, if a threat develops in the U.S., rather than rely on state law, we suggest the dissolution of the limited partnership. The trust, as the limited partner, will cause a liquidation of the partnership and move the assets offshore, beyond the jurisdiction of American courts.

When the trust is subject to the laws of an appropriate foreign jurisdiction, the creditor’s U.S. judgment will be worthless. But your readers should not think that all offshore jurisdictions are equal. Some will provide far superior protection through their laws, as well as on account of their infrastructure.

Q:    How could I feel comfortable with my assets under the control of a foreign trustee? Wouldn’t I have some protection?

A:    With regard to the assets held in your limited partnership, you, as the general partner, will have direct and absolute control. You will write the checks. You will make all the decisions. The foreign trust will be the limited partner and, as such, will have no voice in the operation of the partnership.

With respect to assets held by the trust, a designated person, say a friend or relative, or entity, called the “trust protector,” will have the power to veto any action of the trustee and remove the trustee without cause.

Q:    No offense, but is all of this legal?

A:    Entirely. As long as this type of planning is undertaken in advance of a creditor appearing on the horizon, it is 100 percent legal to protect yourself. Unfortunately, many people first seek to protect their assets after they have been sued or otherwise get in a jam. Then the planning options are significantly narrowed because of state laws on fraudulent transfers, which permit courts to set aside transfers of assets made at the 11th hour.

Q:    Couldn’t a court here order that the trust assets be brought back to this country or the appointment of a creditor as the trustee?

A:    Sure, but it would be an order without power. No U.S. court has power over the offshore trustee. If the trust protector. were a U.S. resident, the court could order him or her to do something, but the protector only has the power to veto trustee actions, not to order them.

Although the trust protector has 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, the guy who put the assets in, responsible for not bringing the trust assets back to the United States because you won’t have the power to do so.

As a practical matter, of course, if your trust protector is not under a court order, the trustee will take whatever action the protector suggests, or the trustee will be replaced with a more cooperative one.

Q:    Does asset protection planning save on taxes?

A:    No, the entire structure is tax-neutral. Your income tax, estate tax and gift tax picture does not change after establishing the structure.

Your readers probably have heard claims that using offshore trusts, offshore corporations or offshore accounts can save them taxes. However, if they are American citizens or U.S. residents, the government taxes them on their world-wide income. There are plenty of hucksters and disguised tax protesters promising that their schemes will give you freedom from future taxes, but they won’t be there to save your hide when the IRS comes after you.

There are some legitimate ways to defer income taxes, such as with certain offshore annuities. There also are ways to freeze the value of your estate at today’s valuation so all future appreciation goes to your beneficiaries free of estate tax, but there are gift tax consequences, and none of this should be done without the guidance of a qualified attorney.

Q:    What is the meaning of “offshore”?

A:    An “offshore asset protection trust” is an offshore trust governed by the laws of a foreign country which has adopted legislation favorable to the client, the settlor of the trust, who is seeking – among other things – planning advantages not available under U.S, law. My use of the term “offshore trust” is important for property law purposes, that is, who owns the trust for purposes of creditor claims against a client; it does not define the U.S. tax status of the trust.

Q:    Where do you set up these trusts?

A:    We set up these trusts under the laws of the Cook Islands, South Pacific. We chose the Cook Islands, and continue to use them, after researching the laws of dozens countries who claim to have adopted asset protection legislation, and investigating the track record of those with attractive laws.

Q:    Is the place stable?

A:    The Cook Islands, absolutely. Besides, if a trust is properly drafted, the governing jurisdiction can be changed. I must mention that, just because the trust is governed by the laws of the Cook Islands doesn’t mean that the assets are there, as is required by the U.S. states with alleged asset protection legislation. The trust assets can be anywhere in the world. Most of our clients’ trusts keep them in financial institutions with no U.S. branches.

Q:    Can asset protection work if a person already is in litigation?

A:    Possibly, but it’s like buying fire insurance after the fire has started. At best, the planning options are narrowed under such circumstances. Asset protection is best viewed as preventive medicine. It’s a vaccine, not a cure. Sometimes, though, it can be very helpful during and after litigation.

Q:    Many of our readers probably carry significant amounts of liability insurance. Why should they be interested in asset protection?

A:    If your readers review their personal as well as professional insurance policies, they’ll find that they are not covered for intentional torts, such as sexual harassment or fraud. These policies do not cover you for actions outside the scope of coverage.

Q:    Why can’t I be like Fidel Castro and hide my money in secret Swiss bank accounts?

A:    Any asset protection plan that depends upon hiding assets or secrecy is doomed to failure. If you are 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. If you lose the suit, the court can order you to bring the funds back to the United States to satisfy the judgment. If you intentionally don’t comply, you will be committing a serious crime, and believe me, the IRS does have the means to uncover non-reporters.

Q:    OK, then why can’t I just make outright gifts to my spouse, children or trusted friends?

A:    You can make gifts to anyone, but if you truly give an asset away you no longer, enjoy control over it. If you give something to your wife and she dies, then most likely the asset ends up back in your name, and exposed. If she lives, there’s that thing called divorce. What happens when the spouse with the assets takes off?

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