Asset Protection

Strategies to Protect Your Family, Protect Your Business and Preserve the Value of Your Estate

Introduction

Modern Threats

Fraudulent Transfers

Attorney Ethics

Domestic Asset Protection

Offshore Asset Protection

Conclusion

DISCLOSURE STATEMENT

This material is intended to provide a general summary of the subjects covered. However, the application of the strategies discussed requires an independent analysis of your individual circumstances. Always seek the assistance of your Tax Planning Professional or Estate Attorney when making Financial Planning decisions.

INTRODUCTION

In today’s highly litigious society, capricious legislative bodies, and the volatilities of markets and economies have evoked a powerful response. The buzz word in the 1990's among lawyers representing clients at risk is “Asset Protection.” More than at any time in our legal history, attorneys are scrambling to find ways to protect the wealth of potential defendants. New and devastating threats to wealth are now perceived, and creative lawyers conceive and render new solutions, from simplistic homestead, retirement account planning to sophisticated estate tax planning, family limited partnerships and exotic offshore trusts.

This booklet has been developed to provide you with an informative overview of the forces that trigger the preoccupation with the protection of wealth, as well as proposed responses and solutions.

MODERN THREATS

Contract Liability

In modern society, threats to individual wealth through litigation arise across the full range of contract and tort law. Some causes of action stem from legitimate and expected contract creditors, such as those occasioned by consumer and bank debt or breach of an obligation to perform. Less easily anticipated claims arise from guarantees, contingent liabilities, joint and several partnership obligations and liability for acts of agents and independent contractors. Additionally, the extension of corporate liability to officers and directors also results in unpleasant surprises and economic losses.

Tort Liability

Beyond the contract claimant is the tort creditor. Much has been written about the unrestrained growth in tort litigation. Headlines abound with reports of new theories of liability and astronomical damage awards. While liability insurance once was the trusted shield from potential economic devastation resulting from a civil judgment, individuals with “deep pockets” are increasingly accessible, irrespective of their insurance coverage.

Regulatory Liability

In addition to the potentially disastrous effect of tort and contract liability, there is increasing concern about what might be called regulatory (or legislative) liability, evidenced in recent years primarily in the form of the environmental statutes. Landowners, whether individuals or businesses, may be liability under federal law (e.g., CERCLA, the Comprehensive Environmental Response, Compensation and Liability Act) or state law for environmental hazards on land that they own. This liability can attach regardless of whether, as present owners, they created the hazard or whether they bought the land with knowledge of the hazard. Furthermore, liability can be imposed under such laws on former land owners or, in the instance of corporate landowners, on directors or shareholders if they had substantial “control” over the land. Business owners perceive other legislative liability in the form of the Americans with Disabilities Act and the Family Medical Leave Act. While motivated by praiseworthy aspirations, these acts have an economic impact on business and create additional causes of action

Personal Liability

Other than personal liability under tort, contract and legislative liability, another contemporary concern in the realm of claims on wealth comes from the divorce court. Judges and legislators are understandably anxious to protect a non-working spouse, but even carefully planned premarital arrangements are often judicially overturned. Moreover, the possibility of inter-spousal tort liability claims (e.g., intentional infliction of emotional distress) in some cases effectively renders premarital agreements meaningless. Planning in this area includes not only consideration for protecting the wealth the respective spouses but also protecting the future inheritance of their respective children.

Economic Threats

In a different, but no less serious vein, exist what might be classified as economic threats. Despite its current strength, concerns about the United States economy remain. Troubling issues include weakness in the social security and health care systems, the interest on the federal debt, and the U.S. government’s propensity, albeit high-minded, for throwing money at current crises, whether national defense (e.g., the Gulf War) or internal calamity (e.g., Hurricane Andrew and the Mississippi River floods of 1993). All within the context of a global market where, despite efforts of reform, the imbalance in trade continues to haunt the economy.

PRACTICAL CONCERNS

Regardless of how safe and secure you now feel, it is a daunting proposition to imagine your hard earned wealth ending up in someone else's pocket. Everyone flirts with liability and financial disaster, regardless of lifestyle, occupation or caution. Although modern threats can be minimized, they can never be entirely avoided. There are simply too many ways in our over litigious, over regulated and overly hostile society to encounter financial troubles. Consider a few of the more obvious practical concerns:

These only exemplify the many minefields that can cause unexpected financial disaster. And until it happens, you seldom realize how vulnerable your assets and your family's financial security really are. And until you do understand your vulnerability, you will probably take your financial stability for granted.

CONSIDER THE EYE OPENING ODDS

Ninety million lawsuits will be filed next year in the United States. The odds that you will be the target of a lawsuit next year are one in four (a scarier one in two probability if you earn over $50,000 a year). Statistically, you are virtually guaranteed to be targeted by at least one devastating lawsuit within ten years. Are you under age 30? Prepare to defend against no less than five major lawsuits over your lifetime, and most likely many more. Lawsuits are now the American way of life and our courts are a glorified crap shoot with 700,000 lawyers looking for deep‑pocket defendants.

Divorce? You may be very happily married today. Still, the odds are that you will someday divorce. Depressing? No more so than the likelihood that the divorce will financially cripple you, whether you are husband or wife.

Own a business? Here's more unpleasant news. If your business is under five years old, it has an 80‑percent likelihood of failing. What personal liabilities will this create? What assets will you lose?

Tax problems? Our crazy, unpredictable and unfair tax laws and an increasingly aggressive IRS will make tax troubles more and more common. Four million Americans are audited annually. Most are clobbered by huge tax bills. But there are many other opportunities to get into big trouble with the IRS. And when you owe the IRS you will most likely see how quickly assets can vanish. Twenty million Americans are now on the run from the IRS collection corps. What will they lose? What would you lose if the tax collector suddenly appeared at your door?

And then there are the unexpected bills. Can you afford enormous hospital or medical bills if you or a family member needed uninsured catastrophic care? Or what would happen if you lost your job, bills mounted and creditors came calling? U.S. bankruptcies have skyrocketed to a record 1.25 million annually, and they continue to soar. Two million Americans may soon go bankrupt annually. Will you become another statistic? And what would you then lose?

These and other dismal facts prove one point: Everyone is vulnerable to countless and unforeseeable legal or financial disasters. There is no surefire way to escape liability but the prudent individual will adopt a defensive philosophy that couples a long term financial plan with a commonsense asset protection strategy that is designed to protect your family, protect your business and preserve the value of your estate.

FRAUDULENT TRANSFERS

Asset Protection is commonsense financial planning; a way of deploying assets that reduces exposure to creditors. It cannot be ethically undertaken if transfers violate the fraudulent transfer laws. Although fraudulent transfer law is technical and driven by the facts of each situation, most fraudulent transfer laws provide that a “transfer” of and “asset” made with the “intent” to defraud a “creditor” may be void or voidable at the instance of any person thereby prejudiced.

Transfer: The term “transfer” can be defined as every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.

Intent: Actual fraud is any transfer made with the “actual intent’ to hinder, delay, or defraud. Because it is often difficult to prove someone’s “actual intent,” the court will often imply constructive fraud from circumstantial evidence. Courts have adopted the concept of “badges of fraud” or certain acts which in and of themselves indicate that the an perpetrator had the requisite fraudulent intent when transferring assets

Creditors: In order to establish that a transfer or conveyance is fraudulent, there must be evidence that creditors exist (or creditors who could be reasonably anticipated) who could be defrauded. Accordingly, the distinction between creditors hinges on whether the creditor is a:

Existing v. Unknown Creditors

The distinction between existing creditors and unknown contingent creditors is central to determining whether a transfer was fraudulent. To determine whether a transfer may be considered fraudulent requires the application of an objective test. A practical statement of the most common test relies upon an analysis of the proximity of the proposed implementation of the wealth preservation technique to known, or at least relatively ascertainable, creditors. If, however, the a transfer is only for the purpose of avoiding the distant possibility of a judgment by an unknown creditor against the client, the transfer would probably not be a considered fraudulent. However, the intended transfer must actually deprive the creditors of a source from which to satisfy their respective debts. Thus, a client can establish an implement a wealth preservation technique as long as the client has other assets from which a creditor may satisfy the debt.

Actual v. Constructive Fraud

Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injury public interests. In circumstances where it is difficult to prove “actual intent,” certain transfers may be deemed fraudulent where the intent to defraud creditors can be determined by circumstances that suggest an actual fraudulent intent. Such circumstances are referred to as “Badges of Fraud.”

Badges of Fraud

1. The transfer or obligation was to an insider (e.g., a relative of the debtor or a corporation in which the debtor is the “person in control”);

2. The debtor retained possession or control of the property transferred after the transfer;

4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

8. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation incurred;

10. The transfer occurred shortly before or shortly after a substantial debt was incurred;

11. The debtor transferred the essential assets of the business to a lienor, who transferred the assets to an insider of the debtor.

The presence of a badge or badges of fraud does not necessarily create a presumption that the obligor made a fraudulent transfer. There must be sufficient indicia of wrongful behavior to prove the transferor’s actual intent to hinder, delay, or defraud creditors.

Common Elements of Fraudulent Transfers

Pending litigation: If the debtor has an action pending against him or her of a claim that is meritorious and substantial, transferring assets will likely result in a finding of actual fraudulent intent.

Secretive planning: Any asset protection undertaken should not be done secretively, but should be open and, if possible, recorded.

Retained Interests: The debtor-transferor should avoid retaining any interest in the property transferred. Thus, the following all support a finding of actual fraudulent intent: (1) retention of a life estate; (2) continued use of the asset; (3) retaining use of the property for security, negotiating the sale thereof; or (4) retaining all of the benefits and burden of ownership.

ATTORNEY ETHICS

For an attorney counseling a client about wealth preservation techniques, the most critical issue is whether the client is acting in defraud of creditors. If the client succeeds in using a wealth preservation technique to defraud the creditors, the client’s creditors may claim that the attorney conspired with the client, or even that the attorney acted independently, to defraud the client’s creditors.

ABA’s Model Rules of Professional Conduct: A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed cause of conduct with the client, and may counsel or assist the client to make a good faith effort to determine the validity, scope, meaning or application of the law.

When advising a client about a wealth preservation technique, the line between counseling a client to engage in conduct that might be fraudulent versus discussing with, or assisting, the client to understand the applicable law is tenuous at best. Particularly critical is the identification of a client’s reasons for wanting to implement the wealth preservation technique. Reasonable client motivation might include the following:

The federal and state rules of professional conduct point to exactly the same conclusion: before advising a client about wealth preservation techniques, an attorney should first undertake certain due diligence and precautionary measures. It is imperative that an attorney accurately characterize and evaluate the client’s circumstances and motivation. Specifically, due diligence requires an objective investigation of the client’s finances, business, family and other relevant data.

DOMESTIC ASSET PROTECTION

State Exemptions:

All states provide a specific list of assets that are exempt from attack from creditors. Bringing your assets under the protection of the state exemptions is the first level of protecting your assets, and will typically afford the greatest protection from creditors. Although not always available, the following is a list of some of California’s protection from judgment creditors (note: state protection in the context of bankruptcy is not indicated):

Residential Homestead:

California law protects a debtor’s homestead from the claims of creditors, but the amount of the exemption varies depending on the debtor’s status. If the debtor is single, the exemption is $75,000. If the debtor or spouse is at least 65 years old, the exemption is $125,000. The exemption does not apply if the judgment to be enforced is for the foreclosure of a mortgage, deed of trust, or other lien or encumbrance on the property other than an enforcement lien. However, a homestead is exempt from sale to satisfy a judgment if no bid is received that exceeds the amount of the exemption plus an amount to satisfy all liens and encumbrances on the property.

Personal Property:

Life Insurance and Annuities

Under the laws of California, unmatured life insurance, endowment, and annuity policies are generally exempt from judgment liens, except the aggregate loan value of unmatured policies is exempt only to the extent of $8,000. The debtor and the debtor’s spouse are entitled to separate loan value exemptions.

Benefits from matured life insurance, endowment, and annuity policies are exempt to the extent reasonably necessary for the support of the judgment debtor, the spouse, and the dependents. This exemption is available to the judgment debtor whether the debtor was the insured or the beneficiary, and the exemption may be asserted against the creditors of the insured, the insured’s spouse, or the insured’s dependents.

Income - Garnishment Exemptions for Wages

The California Code of Civil Procedure provides that the earnings of an employee may be withheld to satisfy the debts of that employee. A money judgment entered in California, or a money judgment of a Federal court enforceable in California, may be the basis for a judgment lien on wages and other income. The lien does not attach to the following property:

Retirement Plans

Under California law, retirement, disability and death benefits held by a private plan or paid to a plan member and contributions paid to a plan member are exempt from the enforcement of money judgments. However, self-employed retirement benefits and individual retirement annuities or accounts are exempt only to the extent necessary for the support of the judgment debtor and the debtor’s spouse and dependents, considering all resources available to the debtor on regiment. Funds held or controlled by public retirement systems or distributed to public employees generally are not subject to execution. Including are retirement systems benefitting teachers, legislators, police, fire fighters, and other public employees. Finally, in general, the debtor has the right to receive periodic payments from retirement plans to the same extent as wages.

Marital Property

California is a community property state. Under California law, all property, real or personal, wherever situated, acquired by a married person during the marriage, other than property defined as separate property, is community property. Separate property generally only includes property owned before marriage, property acquired after marriage by gift, bequest, devise, or descent, and the rents, issues and profits from separate property.

Community property is liable for debts incurred by either spouse before or during the marriage, regardless of whether the spouse has management and control of the property and regardless of whether or not the spouse is a party to the debt. Earnings of a married person during the marriage are not liable for a debt incurred by his or her spouse prior to marriage. After the earnings of a married person are paid, they remain not liable for as long as they are held in a deposit account in which the other spouse has no right of withdrawal and are not commingled with other community property.

Separate property of a married person is liable for debts incurred by that person before or during a marriage. However, the separate property of a married person is not liable for debts incurred by his or her spouse before or during marriage.

DOMESTIC TRUSTS

California, unlike most stated, has a statute addressing the ability of creditors to reach trust assets. Some creditor protection is available for Spendthrift and Support Trust.

Spendthrift Trust:

A Spendthrift Trust is a trust that by its terms prohibits a beneficiary from voluntarily or involuntarily alienating beneficial interest in the trust. If a trust instrument provides that a beneficiary’s interest in income is not subject to voluntary or involuntary transfer, the beneficiary’s interest may not be transferred and is not subject to enforcement of a money judgment until paid to the beneficiary. Similarly, if a trust instrument provides that a beneficiary’s interest in principal is not subject to voluntary or involuntary transfer, it is not subject to enforcement of a money judgment until paid to the beneficiary. After principal has become due and payable under the terms of a trust instrument, a court may order the trustee to satisfy the judgment out of that amount.

Support Trust:

A Support Trust is a trust that by its terms provides that the beneficial interest in the trust is for the purpose of health, education, and maintenance of the beneficiary. A Support Trust is not subject to satisfaction of a money judgment until paid to the beneficiary. If the trustee provides that the trustee has sole discretion to make distributions, the trustee cannot be compelled to make distributions to a creditor of a beneficiary. However, if the trust is not a spendthrift trust and the trustee has knowledge of a transfer of a beneficiary’s interest or has been served with process by judgment creditor, the trustee may be liable to the transferee or creditor for making any distributions to the beneficiary.

California Limitations: The protections afforded spendthrift and support trusts are subject to significant limitations under California law. Generally, the court may order a judgment satisfied out of any amounts to which the beneficiary is entitled or that the trustee determines to pay to the beneficiary in its discretion that is in excess of amounts necessary for the beneficiary’s support. Spendthrift provisions also do not protect a beneficiary’s interest in a trust from a claim of the Internal Revenue Service. Creditors holding restitution judgments also have the ability to reach trust assets to the extent the court determines equitable and reasonable under the circumstances.

Special Needs trusts for disabled Child or Parent:

This is an irrevocable intervivos trust for benefit of an elderly or disabled child, argent, or other family member. It is distinguished to meet the beneficiary's "special needs" while at the same term preserving the beneficiary's eligibility for important public benefits, such as Medi-Cal and Supplemental Security Income (SSI). A trust of this kind will typically be established by a parent or parents for the benefit of a disabled child, by an adult child for the benefit of an elderly or disabled parent, or by a family member for he benefit of a disabled relative (for example, an elderly aunt).

This trust gives the trustee absolute discretion to make income payments and principal distributions to or for the benefit of the elderly or disabled beneficiary. It contains provisions that must be included in every special needs trust to preserve the beneficiaries eligibility of public benefits, including a statesmen of the purpose of the trust, a statement that the trust is created for the purpose of supplementing and not replacing other resources available to the beneficiary, a provision restricting the use of the funds for any purpose that would impair the beneficiary's eligibility for public benefits, and a general spendthrift clause. The trustee's discretions to make income payment is buttressed by an additional provision giving the trustee discretion to terminate the trust if the trustee determines that the trust would impair the beneficiary's eligibility for public benefits.

This trust includes a provision designating an alternate income beneficiary to whom the trustee may make income payments if the trustee determines that income payments cannot safely be made to the principal beneficiary and language that the funds distributed to the alternate income beneficiary may but are not required to be used for the benefit of the principal beneficiary.

Further this trust includes a remainder clause providing for the disposition of the remaining trust property on the death of the principal beneficiary.

Benefits of Limited Liability Entities

One method of protecting an individual’s assets from unknown future claimants involves interposing a legal entity between the assets and the individual. The idea is that the individual’s future creditors will only have indirect, if any, access to the individual’s assets, but are generally limited to a “Charging Order.”

Protection from Outside Claims:

In contract to a valid spendthrift trust, an individual’s interest in a limited liability entity can typically be reached by that individual’s creditors (i.e., “outside” creditors who have claims that are unrelated to the assets held by the entity). However, that interest will often by a poor substitute for the underlying assets. For instance, a creditor who attaches a debtor’s interest in a partnership or LLC generally cannot force the liquidation of the entity in order to reach the underlying assets. Rather, the creditor is typically relegated to a “charging order” or similar remedy, pursuant to which the creditor is only entitled to distributions from the entity as (and if) they occur.

Protection from Inside Claims:

The limited liability entity also protects the beneficial owner of the underlying assets from “inside” claims that arise out of the assets held by the entity. Typically the owner of an inte4rest in a limited liability entity is subject to claims against the entity only to the extent of his investment or committed investments therein. This protection is essential when the entity conducts business operations or owns property that can give rise to significant liability exposure.

Types of Limited Liability Entities

The Limited Partnership:

A limited partnership is an entity consisting of two or more owners, at least one of which is a general partner and at least one of which is a limited partner. The general partners exercise management and control over the business and assets of the limited partnership, but they are also jointly and severally liable for the debts of the partnership and for the acts of other general partners with respect to partnership activities. The limited partners are normally liable for partnership debts only to the extent of their investment and their committed investment, but they may not participate in the management and control of the partnership assets.

The Limited Liability Company:

The limited liability company (LLC) is a relatively new form of business entity. Unlike limited partnerships, all members of an LLC are typically protected from the debts and obligations of the company in the absence of a contrary provision in the company regulations or a written promise of contribution.

The Corporation:

The corporate form is a well establish form of limited liability entity. As in the case with the LLC, the liability of each owner of the corporation is generally limited to the amount of his or her investment in the entity.

Piercing the Veil of Limited Liability

The limited liability extended to business entities may be set aside under certain circumstances to permit a tort or contract creditor of the corporation to “pierce the veil” of limited liability, or disregard the entity form and recover from the personal assets of the owners. In most, if not all, instances, the circumstances giving rise to the possibility of corporate disregard are withing the control of the corporation’s controlling shareholders and officers and directors. Attention to corporate formalities, purposes and activities of the corporation, maintenance of capitalization requirements and avoidance of manipulative transactions will protect the owners’ limited liability in most cases. Although the results in each case are largely dependent upon the facts of that case, Application of the doctrine is intensely fact sensitive, the following bright line standards are applicable theories of recovery.

Alter Ego Doctrine:

The alter ego doctrine applies where a corporation is organized and operated as a mere tool or business conduit of another corporation. The focus of this doctrine is on the legal adequacy of the entities existence. The notion of alter ego is simply the failure of the owners of the limited liability entity to maintain it as a distinct legal entity. The well accepted rational of the alter ego doctrine is that if the owners themselves disregard the separateness and formality of the limited liability entity, the law will also disregard it so far as is necessary to protect creditors.

Illegal Purpose Doctrine:

The illegal purpose doctrine occurs when the corporate form is used to avoid legal limitations on natural persons. The law will provide the limited liability protections only if the entity is conducting a proper and legal purpose.

Shame to Perpetrate Fraud:

This arises where the business entity is used to perpetrate fraud, to evade an existing legal obligation, to protect a crime, or to justify a wrong and, in the case of tort claimants and some contract creditors, inadequate capitalization. The focus here is on the injustice or unfairness to the claimant caused by the limited liability entity and its owners.

Although not exhaustive, the following is a list of some of the elements commonly examined by courts when the veil of the limited liability entity is pierced and the owners are held personally liable:

1. The existence of common ownership among parent and subsidiary or among several entities

5. Misrepresentation of ownership or holding out a different ownership structure than actually exists

9. Grossly inadequate capitalization for the type of business of the corporation

14. Failure to observe basic corporate formalities such as keeping separate books and records and holding shareholders’ and directors’ meeting.

OFF SHORE ASSET PROTECTION

At risk of being over simplistic, a foreign trust is not so exotic or so unusual. Any United States lawyer familiar with trust law will recognize the trust document prepared as an asset protection trust. There will be a settlor, a trustee, beneficiaries, distribution provisions, investment powers, and the usual trust deed boilerplate.

There are, of course, basic differences. One is that the trust is foreign. Foreign statutes and foreign case law will govern the trustee and the beneficiaries and their respective rights, duties, and powers. Other differences typically will arise from the design features or attributes necessary to achieve the asset protection objectives. The structure of the plan and certain clauses in the trust document will vary and may be new to the United States Practitioner. Examples of these include:

Purposes for Establishing an Offshore Asset Protection Trust

The use of an offshore trust is appropriate in a variety of situations, including but not limited to the following:

Foreign Professionals Involved

Trustee:

The person or entity named as trustee of an offshore trust will likely, but not always, be resident in the jurisdiction in which the trust is established.

Protector:

The office of protector is not standard in the United States, but it is very common in foreign trust arrangements. The protector holds negative or “veto” powers under the terms of the foreign trust instrument. The protector usually has the power to remove and replace the trustee and must consent to major decisions by the trustee (e.g., distributions, addition or removal of beneficiaries, change of trust situs, etc.).

Investment Advisor:

Many foreign trusts consist of assets configured in a portfolio of non-U.S. assets. Clients will obtain assistance from the Investment Advisor when the objective of the foreign trust planning is to achieve international diversification.

Structural Variations

Single Trust:

A single foreign trust for a nest egg of assets will be appropriate for a large number of clients. This involves establishing a foreign trust in a country that has laws specifically designed to protect the trust’s assets. Even through this relatively simple solution is easy to understand and implement, it nevertheless can go a long way toward providing peace of mind as to the assets placed offshore and toward establishing an effective vehicle for international investments.

Multiple Structures:

Many offshore structures will involve at least two entities: a trust and another entity (either a corporation or partnership arrangement). Other structural components are the parties involved besides the settlor; usually the foreign trustee and the protector.

How Offshore Trusts Creditor Proof Trusts

2. Money transferred correctly to such an offshore haven is exceptionally difficult for U.S. creditors or litigants to locate. U.S. creditors are powerless to discover a secretive foreign account in a secrecy haven unless you disclose it.

Of course, a judgment creditor can always compel you to disclose assets under oath. And an offshore secrecy haven should encourage neither perjury nor illegal concealment of assets. You can nevertheless protect your money through intermediaries and truthfully deny the existence of offshore assets ‑ if your offshore accounts are correctly arranged. Nor would you necessarily know where the offshore funds are located once they flow through intermediaries. Thus, it can be virtually impossible for a creditor to link offshore assets to you or your companies. But be guided by your attorney to avoid violating the law.

The offshore haven's chief asset protection advantage then is not through its ability to secrete wealth. Assume you will be compelled to truthfully disclose your offshore wealth, or that your creditor will independently locate it, most probably through your own tax returns. And if you don't report your offshore income and accounts to the IRS, your creditor may prove even more diligent than the IRS.

Secrecy can keep less inquisitive creditors from eye balling offshore assets, but secrecy is never the asset protection strategy. Offshore havens chiefly protect assets because they do not enforce foreign judgments nor court orders. This forces the creditor to start a new lawsuit within the haven. This is usually futile for several reasons: The haven may not recognize the claim upon which the lawsuit is based. Or it may be too late to start a new lawsuit. Offshore havens typically impose very short statutes of limitations, or time periods within which to sue. Most have only a two year statute of limitations, thus requiring the lawsuit to commence within two years from when the claim arose, and not necessarily two years from when the funds were transferred offshore. In practice, most U.S. civil cases can be stalled in litigation for two or more years. This leaves the creditor no recourse offshore.

When the creditor obtains an offshore judgment, he must then prove that the assets were fraudulently transferred offshore, an always difficult task since most havens presume the debtor acted without fraudulent intent. Creditors' claims that assets were fraudulently transferred usually fall on deaf ears. And even when it is possible to sue offshore, it is usually prohibitively expensive and impractical in all but those relatively few cases that involve either huge sums of money or a most tenacious or vindictive creditor.

Creditors who chase offshore money through a foreign lawsuit will still have little chance to recover against an agile debtor who can continuously relocate his funds to still other offshore havens. A creditor will soon tire from the chase. Larger investors deploy their assets in several havens so their creditors cannot conveniently locate or threaten their entire wealth. A well drafted offshore trust contains such a trigger provision that authorizes and directs the trustee to transfer the trust assets to another trust in another asset protection jurisdiction should the trust be attacked. This never ending game will exhaust even the most determined creditor.

Offshore asset protection plans then are deliberately designed so creditors cannot seize offshore funds even should they obtain an offshore judgment. And no protective offshore haven will honor a foreign judgment or levy, subpoena or summons from a foreign litigant or agency, such as the IRS.

However well you design your offshore financial fortress, as with domestic asset protection strategies, no offshore arrangement guarantees complete safety. The possibility always exists that a creditor can find and seize offshore assets. But the right offshore structure will nevertheless insure your assets remain safe from all but the most clever, persistent and luckiest creditor.

Strategies to Safely Control Your Offshore Asset Protection Trust

The trustee, with protector approval, has unlimited control and full discretion to manage the trust assets. The trust allows the trustee to do whatever the trustee may foreseeable need to do to protect or enhance the trust assets. This includes such common powers as are found in an irrevocable domestic trust the rights to sell, buy, lease, encumber or invest the assets; to defend or prosecute claims; to pay debts and taxes; to hire other professionals; and to make loans and/or distribute income or principal to beneficiaries.

A unique protective feature of the offshore trust is the trustee's power to establish a successor trust with an emergency trustee in another asset protection haven should the trust become threatened in its current haven.

The OAPT purposely grants the trustee the broadest powers and the grantor only negligible authority. When the grantor asserts significant control, the trust becomes ineffective as an asset protector. Delegating complete control over your wealth to a foreign trustee can indeed be a frightening experience, but it becomes much less so once you realize how readily a foreign trustee will comply with your wishes on trust matters.

A grantor greatly concerned about controlling the trust assets can nevertheless take several intermediate measures to balance safety and asset protection against this desire to retain control. Of course, your attorney must ultimately decide the control you can safely retain without jeopardizing asset protection; however, this can be achieved only after he thoroughly investigates actual or potential claims against you.

Should delegating complete control of your assets to the trustee still greatly concern you, then consider several options: First, you may appoint a protector you know will faithfully follow your directions. Since the protector can replace the trustee, you gain alter ego control through the protector. Or you can make the trust revocable until some specified event, such as when a creditor lawsuit arises the trust would automatically become irrevocable. Or you may form a limited partnership primarily owned by the OAPT as the limited partner. As the general partner, you retain control over the limited partnership assets here in the U.S. until threatened. The partnership assets would then be distributed to the offshore trust. Or you may be the managing director of the international business corporation owned by the trust. You can also or alternatively control the trusteeship until threatened by creditors. Your spouse or another U.S. designee can serve as co-trustee. Another option is for your protector to be a co-signer with the trustee on trust accounts. Finally, in some jurisdictions that have a short statute of limitations that commences with the trust formation, you can leave your trust lightly funded until expatriation of your wealth becomes necessary for asset protection purposes. Other popular control retention techniques are available.

CONCLUSION

It is important to recognize that Asset Protection is long-term financial planning and must be implemented at a time when you are solvent (e.g., current liabilities do not exceed cash and liquid assets on hand), and the transfer of assets is not subject to fraudulent transfer laws, the prospective bankruptcy courts, federal or state tax liens, etc.). There must be no present plan or intent to embark on a course of fraudulent behavior.

Through the creative use of domestic and (if appropriate) international investment and estate planning strategies, it is possible to maximize the confidentiality of your financial affairs and minimize, or, in some cases eliminate potential adverse financial consequences that may arise from unforeseen creditors and liabilities.

DISCLOSURE STATEMENT