Asset Protection Basics
Here you will find simple answers to common questions related to protecting assets.
What is the single greatest financial concern plaguing wealthy individuals and businesses today?
Litigation. We live in a society where litigation has become a popular tool for the accumulation of wealth – not only by plaintiffs, but by their attorneys as well. Lawyers are now earning from 33% to over 50% of the assets they recover!
Is there an effective solution to this concern?
Yes. Properly structured, asset protection planning can effectively protect your assets from potential litigants and creditors. Because it allows an individual, partnership, LLC, trust, or corporation to protect assets against unanticipated claims, yet maintain a great degree of flexibility.
How do lawyers decide whether to sue someone?
When a potential client consults a litigator, the attorney will analyze the merits of the client’s case, and, if the case looks strong, make a determination regarding whether a judgment, if won, can be collected. If the lawyer does not believe he can collect the judgment – the source of his fee – he will not take the case. Sophisticated asset protection planning reduces or eliminates the ability of a creditor to collect a judgment from you, making you an unattractive target for the litigator.
Offshore Asset Protection Planning
What is an offshore trust?
By definition, an “offshore trust” is simply any trust formed under the laws of a jurisdiction outside of the United States. The property settled upon the offshore trust is held “in trust” by an offshore trustee. The offshore trust is the core of effective asset protection planning.
How does the offshore trust work?
Properly structured, the offshore trust eliminates the power of the U.S. judicial system to “get at” trust assets.
What is asset protection planning?
Asset protection planning is the adoption of advance planning techniques which place one’s assets beyond the reach of future potential creditors. In our practice, it does not involve hiding assets, nor is it based upon secret agreements or fraudulent transfers. It is based upon proven sophisticated combinations of business and estate planning techniques.
Who should consider asset protection planning?
There is no formula for determining whether an individual or business should engage in asset protection. As a preventative measure, asset protection should be considered by all high-net worth individuals. Certain factors increase the need for asset protection planning, such as connections with high-risk professions (doctors, lawyers, real estate developers, etc.), owning investment real estate, operating a business, having children, or guaranteeing loans. If there is any chance that you or your business may be sued in the future, consider asset protection planning.
What is your approach to asset protection planning?
In a typical case, our core approach to asset protection planning involves implementing an offshore asset protection trust. Sometimes, depending upon the circumstances, the trust will be combined with a limited liability company (LLC). If the LLC is combined with the trust, you contribute those assets which are to be protected to the LLC we have formed for you. You are appointed as the manager of the LLC, and the LLC member (owner) is the offshore asset protection trust you have also created. As the manager, you retain direct 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!
How does an offshore trust affect my estate planning?
In most cases, an offshore trust (combined with a properly drafted will) will constitute the core of your estate plan. A properly drafted offshore trust will take advantage of all the estate planning tools typically incorporated into a domestic trust, such as a credit shelter and marital deduction trust.
Where would my trust be located?
While the protected property itself may be located anywhere, including your local bank, the trust itself will be domiciled in the Cook Islands. In the case of a litigation threat, the trustee can relocate the assets outside the jurisdiction of a U.S. court. In most cases where trust financial accounts are to be located offshore such accounts will be placed with one or more Swiss and / or Liechtenstein financial institutions.
What criteria do you use when selecting a suitable jurisdiction for the location of a the trust?
Selecting the jurisdiction in which the trust will be located is a very important step. Consideration must be given to a number of factors at that location, including:
- Healthy economic environment,
- Stable political and social system,
- Favorable trust protection and tax laws,
- Compatible verbal communication,
- Quality professional services,
- Modern telecommunications,
- Procedural and legal advantages, and
- A tried and proven track record.
The Cook Islands currently satisfies all these criteria.
I already have a living trust. Doesn’t this protect my assets?
The typical “living trust” is a useful estate planning tool, which, properly structured, may result in the avoidance of the probate process for the assets transferred to it in some states, and provide some degree of privacy, but it affords virtually no protection from your creditors. If you get sued and lose, a court can order you to revoke the trust and pay the creditor.
Why can’t I just make outright gifts to my spouse or children?
Of course you can make gifts to anyone. But if you truly give it away, you can no longer enjoy control over the asset, and if you give it to someone other than your spouse, you will also lose the income from the property and possibly incur gift tax consequences. Moreover, the property will then be exposed to the new owner’s spouse and other creditors. Finally, if you make the gift when a creditor is nipping at your heals, the transfer can be set aside by a court, unless you (and/or the donee of your gift) commit perjury, which is a crime.
Why can’t I hide my money in a Swiss account?
While investing funds in a Swiss or other foreign account may prove to be a worthwhile investment, any asset protection planning which depends upon hiding assets or secrecy is doomed to failure. As a U.S. taxpayer, the law requires you to report your financial interest in, or signature or other authority over, any foreign bank account, securities account, or other financial account. If you comply with this requirement, as you must, a creditor can obtain this information in a lawsuit, and if you lose the suit, the court can order you to bring the funds back to the U.S. to satisfy the judgment. If you intentionally fail to comply with the foreign account reporting rule, you will be committing a serious crime – and the Internal Revenue Service does have the means to uncover non-reporters.
Why can’t I just set up an offshore corporation?
The use of an offshore corporation (or an LLC by itself) is generally inappropriate for asset protection purposes. First, you will likely incur a taxable gain on transferring assets to the offshore corporation, second, you will be subject to extensive federal tax reporting requirements (with criminal penalties for intentional failure to comply), and finally, a U.S. court can order you, as the owner of the offshore corporation, to bring the assets back to the U.S. (likely resulting in another taxable gain!).
Protecting Business / Entity Assets
All of my assets are in my company / business. Is there something I can do to protect them?
In situations where an entity (corporation, partnership, LLC, trust) holds significant assets and/or where the owner of the entity is involved in personal litigation (and is thus precluded from creating a personal protective trust), it may be possible for the entity itself to implement protective planning rather than the owner. Typically, a trust is created by an individual or individuals, but a trust can also be created by an entity (or by a group of related entities). We developed this type of trust about 20 years ago, and call it an “Entity Trust”.
I carry significant liability insurance coverage – why should I be interested in asset protection?
If you review your insurance policy, you’ll find that it does not cover you for punitive damages or intentional wrongdoing. In addition, with the ongoing crisis in the insurance industry, the financial stability of liability insurance companies is never certain, and the scope of coverage seems to be decreasing all the time. Finally, a claim can always be made which will exceed your coverage. Prudent planning would include a combination of asset protection strategies and liability insurance.
Can I realize a substantial savings on my business or professional liability insurance coverage?
Yes. The insurance savings from our asset protection planning can pay not only for its full cost in most cases, but can sometimes do so in the first year alone. For example, asset protection can significantly reduce or eliminate the umbrella coverage that most business owners and physicians have over and above the minimum liability insurance normally carried. Some of our clients have saved tens of thousands of dollars per year in this manner. The same applies to malpractice and tail insurance.
Offshore Trust – LLC Combination Planning
I often borrow funds from my bank. Will the LLC impede my ability in this regard?
No. The LLC (or your trust), if requested by the bank, can be a co-borrower with you, or provide collateral for you on (or guarantee) any loan. This would expose the LLC (or trust) assets or specific collateral to that bank, but to no other creditor.
Should the limited liability company own all types of assets?
No. An LLC should not own certain types of property. For example, a subchapter S election would be lost if S corporation stock were transferred to certain LLC’s. Similarly, the home mortgage interest deduction could be lost if property eligible for that deduction were owned by the LLC. Protection techniques for these types of assets are discussed below.
Why do I need an offshore trust in view of the protection afforded by the LLC?
As mentioned in the above question, certain assets should not be owned by the LLC; nonetheless, they still need to be protected. These assets can, however, be directly owned by a properly structured offshore trust. In addition, although a significant degree of protection is available through the use of the LLC, we can never predict how a local court or jury will act. Sometimes a “result oriented” judge or jury will ignore the fact that your trust is the owner of the LLC (and not you), and somehow pierce the protection. However, significant additional protection is available through the use of an offshore trust as the member (owner) of the LLC.
If there is concern that an unrelenting creditor may convince a result oriented judge or jury to pierce the LLC, then the trust, as the owner of the LLC, will cause the liquidation of the LLC and move the assets offshore – beyond the jurisdiction of any U.S. court. Where the trust is subject to the laws of an appropriate foreign jurisdiction, the creditor’s U.S. judgment will be worthless, and if he is adamant enough (and has the financial means) to attempt to pursue the trust assets, he would have to begin his lawsuit all over again in the foreign country — with one of its lawyers (who will likely not take the case on a contingency basis). These geographical, financial, and procedural impediments to reaching the offshore trust will impact significantly on a creditor’s decision to chase assets. The United States Federal Trade Commission has tried twice – both times unsuccessfully – to reach assets in a Cook Islands trust.
I had my estate planning done several years ago. How will a LLC/Trust combo fit in with my existing plan?
The LLC/trust combination discussed above can be easily integrated with your existing estate plan or, if you wish, it can form the basis of a new estate plan.
Protecting Real Estate and Other Immovables
Can I transfer real estate and other immovable assets to my offshore trust?
A key to the effectiveness of asset protection planning is to remove the assets from the reach of U.S. Creditors. By placing cash and securities in a Swiss account held by an offshore trust, U.S. creditors (and courts) cannot reach the assets. With immovable assets such as real estate, the asset remains within the reach of the U.S. court system, and potentially subject to a creditor’s claim. Assigning title to an offshore trust or LLC will not protect the asset from aggressive creditors. Instead, we use an ancillary planning technique. Loans made by an unrelated lender are made in exchange for liens against the property. The proceeds of the loans are placed in an offshore trust (protected from creditors) and the real estate or other immovable asset is subject to the lender’s prior lien which must be paid before any creditor can attempt to collect.
What other assets (immovable assets) can be protected through equity reinvestment?
In addition to real estate, some examples of property that can be protected by loans are:
- For individuals
- Ownership interests in closely held businesses
- Art and antiques
- Other high-value personal property
- For businesses
- Subsidiary business interests
- Accounts receivable
- Equipment and machinery
- Intellectual property, including patents, trademarks, and copyright interests
- Promissory notes or other notes of debt
- Other income streams
Common Concerns and Misconceptions
I don’t know if I feel comfortable with my assets under the control of a foreign trustee. What protection is afforded by in this regard?
First, with respect to the assets held in your LLC (all of the protected assets, with the minor exceptions discussed above), you (as the manager) will have direct and absolute control. You will write the checks; you will make all the decisions. The offshore trust will be the LLC member (analogous to a shareholder in a corporation), and, as such, it will have no voice in the day-to-day operation of the LLC. With respect to the assets held by the trust (either initially, as discussed above, or, if the LLC is liquidated), an independent unrelated company — as the “trust protector” — will have the power to veto any action of the trustee, and to remove and replace the trustee with or without cause. As an added security mechanism, the trust protector can also require that all trust accounts and assets must have both the protector’s signature and the trustee’s signature in order for any transfer to take place.
What if a court orders me to bring the trust assets back to the U.S., or to remove the trustee and appoint my creditor as the trustee?
A court can order you to do almost anything, but it can only legally hold you responsible if you fail to do something that is within your power. While your protector does have 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 responsible for failing to bring the trust assets back to the U.S. – you do not have that power. In addition, your trust protector only has the power to veto trustee actions, not to order them. 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 combination?
The entire structure is tax neutral. “Tax neutral” means that your income, estate, and gift tax “picture” does not change as a result of establishing this structure. The offshore trust does include the marital deduction and unified credit provisions necessary to obtain the maximum estate tax savings on death for married persons. The LLC will elect under IRS rules to be “disregarded” as an entity for U.S. tax purposes. This means it will not file a U.S. tax return and that all of its income and transactions will be reported on the trust’s information tax return. Income tax is only paid on your personal tax return – on the same items you would have paid tax on without the LLC/trust structure.
Is this all legal?
Entirely. The key to effective asset protection planning is the word “ADVANCE”. As long as this type of planning is undertaken in advance of a creditor appearing on the horizon, it is 100% legal to protect yourself. Unfortunately, many people first seek to protect their assets after they have been sued or otherwise incurred an obligation. In such circumstances the planning options are significantly narrowed because of fraudulent transfer laws (in all states) which permit a court to set aside transfers made at the”eleventh hour”.
Can asset protection work if I am currently in litigation of have a judgment against me?
In some cases, yes, although our planning options are ordinarily narrowed under such circumstances. Asset Protection is a vaccine, however, not a cure, and it is best viewed as preventive medicine. It is very difficult to purchase fire insurance once the fire has started. It is advisable to have the legal restructuring completed before litigation is even on the horizon. It can, however, be very helpful during and after litigation, as well.
Do you offer a free consultation?
We are pleased to answer general questions about asset protection planning, our firm, and the attorneys’ qualifications and experience, at no charge.
In order to discuss your specific case, assets, liabilities, or seek legal advice, we charge a nominal flat fee for a consultation in our office or over the phone.
Simply call us 305-447-0061 to discuss how we may assist you and schedule your consultation.
Where are you located? Do I need an attorney in my state?
The law firm of Donlevy-Rosen & Rosen, P.A. is located in Coral Gables (Miami), Florida.
Due to the nature of offshore asset protection planning, it is not necessary to hire an attorney local to you. We can represent individuals and businesses in all 50 states, and abroad.
Whom should I contact with my specific concerns and interests?
You are invited to call Howard Rosen, or Patricia Donlevy-Rosen , Attorneys, at (305) 447-0061 for more information. Either Mr. Rosen or Ms. Donlevy-Rosen will discuss with you the legal, tax-neutral and effective plans recommended by accountants, lawyers, and estate planners.
Donlevy-Rosen & Rosen, P.A. is a law firm with a sharp focus on asset protection planning and offshore trusts. Attorneys Howard Rosen and Patricia Donlevy-Rosen co-founded the firm in 1991, and have since become recognized authorities in the field of asset protection planning. Let us explain the significant difference our experience can make when protecting your assets.