ASSET PROTECTION
Barry Engel, a noted asset protection planning attorney, has
defined asset protection planning as "the process of organizing
one's assets and affairs in advance so as to safeguard them from
loss or dissipation by reason of potential threats or risks to which
the assets would otherwise be subject."
The potential threats or risks can take several different forms.
Although the most common fear is being subjected to a lawsuit,
careful planning can also protect one's assets against forced heirship laws and unstable political structures.
The organizational process also varies, depending on one's goals,
concerns and the type of assets. There is a continuum of asset
protection tools ranging from simple joint ownership of real
property to sophisticated offshore trust arrangements.
What is Asset Protection Planning Not?
Hiding Assets. Many people believe that asset protection
planning involves "hiding" one's property from creditors and/or the
taxing authorities. However, legitimate asset protection planning is
not based on this type of secrecy. Hiding assets is often illegal,
as is lying under oath to hide the existence or protect the location
of such property.
Last-minute Creditor Protection. Proper asset protection
planning must be done prior to any lawsuits being filed or
threatened, or any judgments entered. It cannot be used to defraud
present creditors and probable future creditors. Doing so is not
only unethical, but violates state and federal fraudulent conveyance
laws.
Tax Avoidance. The popular view is that offshore planning
can reduce or eliminate taxes. However, U.S. citizens and residents
must pay tax on income generated outside of the United States, and
the taxable estate of a U.S. citizen or resident includes property
owned world-wide. Although certain asset protection tools can also
yield estate, gift and income tax advantages, asset protection
planning is generally tax-neutral.
Why Do Such Planning?
Everyone is aware that today's society is more litigious than
ever before. It is not uncommon to hear of multi-million dollar jury
awards for seemingly frivolous claims. Potential plaintiffs,
utilizing the services of trial lawyers working on a contingent fee
basis, often have little to lose by seeking a "deep pocket."
Lawsuits can arise from many sources, such as professional or
business activities, operation of a motor vehicle, or property
ownership. While insurance coverage can provide some protection,
insurance is not always sufficient and often actually encourages
claims.
Many individuals spend thousands of dollars on traditional estate
planning to ensure that their heirs will receive their property at
minimal cost and maximum ease, but give little thought to
safeguarding the assets during their lifetimes. They do not realize
that without asset protection planning, there very well could be no
estate left for their heirs to enjoy.
Where appropriate, asset protection should be an integral part of
estate planning. Often assets can be adequately protected using a
few simple and inexpensive techniques.
Domestic Asset Protection
Persons concerned about protecting their assets do not
necessarily need to seek out a distant palm-fringed island. There
are plenty of asset protection techniques available that do not
involve going offshore. The simplest plans can involve giving gifts
to family members who do not share the same risk of future lawsuits,
shifting property to assets that are exempt from creditors' claims,
and obtaining adequate insurance coverage.
For those who own a business or real estate, entities such as
corporations, limited partnerships and limited liability companies
can shield personal assets from claims associated with the business
or real estate operations.
Alaska, Delaware, Nevada, Rhode Island and South Dakota have
adopted laws that allow the establishment of a trust that is free
from the claims of creditors yet allows distributions to the trust
grantor as a beneficiary. While some may be more comfortable using a
U.S. based trust, many experts are not convinced that these domestic
trusts will provide the same level of protection as foreign trusts.
Offshore Asset Protection
Foreign situs trusts, although more complex and costly than
domestic trusts, provide the ultimate in asset protection. There are
multiple advantages in going offshore as opposed to using U.S. based
techniques. Offshore jurisdictions often have laws that ensure
privacy and are more favorable to the grantor of a trust with regard
to the amount of access to and control over the trust principal.
These jurisdictions generally do not recognize foreign judgments, so
a creditor must file a new lawsuit in the offshore location. Other
laws require that local counsel be used and prohibit contingency
fees. Statutes in such jurisdictions also make it much more
difficult for a creditor to prove his case or file it in a timely
fashion. Distance and cultural differences can provide financial and
psychological barriers as well.
Each of these factors is yet another hurdle for a creditor to
overcome. When confronted with so many barriers, creditors are often
willing to settle for pennies on the dollar.
Anatomy Of An Asset Protection Trust
Asset protection trusts must have a trustee in the jurisdiction
of the trust situs. Most trusts also have a "trust protector,"
(often the grantor of the trust) who retains the power to remove and
replace trustees and veto certain decisions of the trustees. It is
also possible to have several trustees in different jurisdictions as
a way of providing additional safeguards.
Once the trustees have been chosen and the trust executed, the
grantor transfers his or her property to the trust. Beneficiaries of
the trust can include the grantor, the grantor's spouse, and his or
her children.
Foreign-based trust companies generally offer a variety of
financial services such as private banking, insurance, and
investment opportunities worldwide, including U.S. securities.
What jurisdiction is best? In addition to the five states
mentioned above, there many countries with laws favorable for asset
protection, mostly island nations in the Caribbean and elsewhere.
The Cook Islands in the South Pacific and Nevis in the Eastern
Caribbean are particularly attractive due to advanced trust
legislation, political stability and sophisticated communications
infrastructure. In addition, neither jurisdiction is on the
Organization for Economic Co-operation and Development's (OECD)
"Harmful Tax Practice" list. However, the optimum jurisdiction will
depend on your particular situation.
Conclusion
Sophisticated asset protection trusts are not necessary for many
of us, but almost everyone can benefit from making basic asset
protection planning a part of their overall estate plan. And since
asset protection techniques must be put in place before any
liability arises, the time to do such planning is now. Please contact us today or call us at
800-201-0413
Email:
info@trustcounselpa.com |
