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Common Client Questions: Retention of Control

July 31, 2017

This article in our “Common Client Questions” series focuses on a re-emerging trend in the asset protection industry: clients retaining control over asset protection structures.

Offshore asset protection planning is effective because of two elements. The first, that the offshore asset protection trust and its assets are beyond the reach of a U.S. court’s jurisdiction. The second, that no person with any control over said trust is within the reach of a U.S. court’s jurisdiction. Quite simply, the assets are not protected if a US court can order the client or any person within the court’s jurisdiction to remove the asset from the “protected” structure.

Over the years, these two elements have been tested in well known cases, many of which we have written about. We’ve discussed, ad nauseam, the dangers of client control retention and the possibility of such retention, or even the appearance of such retention, leading to unfavorable outcomes including incarceration of the client in a contempt finding.

So why then, given the strong reasons against any sort of client control, do many clients AND practitioners ignore this advice?

Cost-savings with domestic structures

The first element (having the trust and assets offshore) is frequently ignored by planners to realize cost-savings for the client. Domestic asset protection solutions can be less expensive, and don’t have the added cost of preparing tax returns for foreign structures. For this reason alone, clients with a smaller net worth and low risk may elect for domestic solutions in the mistaken belief that those solutions will always protect them from litigation.

Practitioners looking to realize these cost savings for clients propose “bridge”, “hybrid” or “spring” trusts, designed to exist as a domestic trust, administered by the client, until an issue arises, at which time the trust relocates to a protective jurisdiction. This arrangement sounds too good to be true, and in many instances, it is. Most reputable financial institutions will not open accounts for offshore trusts under those circumstances.  Additionally, a result-oriented judge may use the client’s 11th hour transfer of control to ignore the law and hold the client in contempt.

Client comfort

The second element (no US-based control) is often violated to make the client comfortable with the planning. Americans place their net worth at risk in domestic institutions every day, but the suggestion of a more secure foreign institution gives some clients pause for concern.

To assuage these concerns, practitioners (ourselves included) have created combination structures with offshore trusts and limited liability companies. In such combination structures, the assets are owned by the foreign trust, but are managed by the client inside the LLC. These structures do serve an important purpose for clients making private investments, buying and selling property, or otherwise making use of their net worth in ways that require day to day management and transactions. But the overwhelming majority of clients with asset protection trusts have cash and securities invested through a brokerage institution. The addition of an LLC adds unnecessary cost, and, more concerning, risk to the structure. Like the bridge or spring trusts, the trust-LLC combo also requires 11th hour changes should an attack to the structure be expected. This leaves open the possibility of not anticipating the attack in time, and being prevented from taking further action by an injunction.

Given the indisputable facts that any client control may weaken the effectiveness of an asset protection structure, the safest course of action is the establishment of an offshore trust with no client control.