The bad news is: You can’t avoid taxation. I know of only two ways to avoid taxes, both of them too drastic for us to consider: You can renounce your citizenship, or cheat on your taxes. I’m not in favor of either method of avoiding taxes. We have a voluntary system in the U.S. If you cheat, you open yourself up to a lifelong fear of getting caught. There is no statute of limitations on tax fraud.

You can renounce your citizenship, but count the cost first … Legislation has recently been proposed in the House to tax expatriates at the same rate as estate tax – an asset tax starting at estates valued at $600,000 – but it has been shot down. John Templeton’s move to the Bahamas was not tax-motivated. The cost of living is higher there, and there are many local taxes and tariffs there. The United States is still one of the lowest-taxing major nations on earth.

You may be aware that the Money Laundering Act requires you to report any cash transaction over $10,000. If you don’t file a Cash Transaction form, there are hefty fines and even prison sentences. What you may not know is that if you structure three separate $3,500 transactions instead, you could still be in trouble. If the “purpose” for doing that is to evade taxes, that, too, has been deemed a crime.My talk is not about tax avoidance, but about asset protection. I have noticed, over the last 15 years, that more and more clients are more concerned about protection from flagrant and ungrounded lawsuits and asset judgments than they are about taxes.

Why protect your assets? Who knows what outrageous decision some judge or jury in the United States will decide about your wealth in the future? If you have deep pockets, once a lawyer discovers your net worth (which is easy to do these days), you can rest assured that you’re probably going to be named as a target sooner or later. That applied to anyone with a net worth of half a million dollars or more, or anyone who scores high on my Lawsuit Exposure Test.

Why have asset protection? Because you are vulnerable to lawsuits based on your net asset value, not just on what you do. You don’t have to be wrong, or break a law, to be sued. All you need is money. People are routinely winning suits against big corporations on the flimsiest of reasons, and disclaimers don’t often help.

Consider the extreme nature of actual suits awarded, such as the woman who won millions when she spilled McDonald’s coffee on her lap, or the $1,000,000 award to a woman who underwent a CAT-scan and then sued her doctor for loss of her psychic powers? (She won, although she later lost on appeal.) Frivolous suits very often go to the plaintiff, due to the ignorance or envy of the jury, or the judge’s bias. Judges and juries tend to side with the “little guy,” because they have more votes than the single target, or the rich in general. Lawyers who work on a contingency basis have a vested interest in attacking those with deep pockets, not the middle class or poor.
One example I’ve been close to lately is a San Diego – area mobile home park, where a law firm has made a practice of joining the tenants together for a class-action suit against the landlord for “failure to maintain.” If the Jacuzzi doesn’t work, or the pool cues get bent, the law firm will sue, and win, with all the tenants getting thousands of dollars in settlements.

If you read the legal trade magazines, as I do, you’ll see ads for specialties, like “breast implant litigation specialist” or “stockbroker lawsuit specialist.” Obviously, such cases depend on how much money your own, not just on case facts, or else these asset-search firms couldn’t thrive. Thousands of lawyers are pouring out of law school every year, and they’ve got to feed their families like everyone else; so people with wealth become their meal ticket.

To research this subject, I spent a month on jury duty. I got to know the kinds of people who sit in a jury pool! I found that if it’s a complex or time-consuming case, most hard-working, privately employed people get excused from serving. This leaves you life savings in the hands of the unemployed, the retired, civil service workers, or low-level employees in large companies. I’m not saying a modern jury is biased or incapable of sound judgment, but I did discover that they often automatically side with the little guy against “the rich”. Yet, “the rich” seldom protect themselves adequately in advance. Most well-off people are too busy doing that which makes them rich – i.e., running a business, or investing – to take care of all the details of asset protection or wealth transfer.

For instance, you may think you are protected if you hold rental properties in your living trust, which also contains your stocks and bonds. That is a recipe for disaster. Your personal investments then become attachable as part of any suit against you as landlord.

By itself, a domestic trust is no great protection against lawsuits. So what should you do? I suggest a two-stage protective strategy…

Two-Step Asset Protection Strategy

1. First, I recommend the Family Limited Partnership (FLP) for a family where the parents own a business or a large portfolio of securities, or both. In an FLP, Mom and Dad can act as General Partners, with children as Limited Partners. The FLP is a device to protect your assets against exposure to lawsuits, or to make gifts to family members without losing control of the assets.

The General Partner (you) makes all business decisions for the FLP while “owning” as little as 1% of the assets of the partnership. The Limited Partner(s), other family members, have no right to participate in the management of the business. Bottom line, a plaintiff may be able to collect part of your 1% ownership but cannot collect a judgment from assets of a partnership, even after obtaining a court order.

The judgment remains in force, but the plaintiff can’t collect until the defendant receives a distribution from the partnership. The result is a standoff. The protected client will not cash in on any of the partnership’s assets because of the judgment; the plaintiff, knowing he or she has no other choice, settles for a greatly reduced payoff.

It’s expensive to sue. If lawyers know your assets are protected, they’ll move on to another target. If they can’t get at assets, they won’t get paid.

2. Second, I recommend an Overseas Trust. There are basically two types of trust- domestic (which most of you may have already) and an Overseas Trust. Not all nations offer trusts. Switzerland, for instance, one of the world’s greatest banking centers, does not recognize most trusts. As you will find out, if you wanted to set up an account in the name of your trust here, it will be difficult. Werner Merk of Zurich Cantonal Bank (the next speaker) will recognize it, but most Swiss bankers won’t.

The other type of trust, which prefer, is an international trust, in one of the many jurisdictions that recognizes trusts. A foreign grantor trust is different from a U.S. grantor trust. (We’ll only be talking today about international trusts formed outside the U.S., which can also be set up to be a grantor trust at home. Overseas, the grantor is generally called the settlor.)

You can put your residence in the trust, or a limited partnership interest , or S-corporation stock. The international trust has all the advantages of a domestic trust. By use of the proper country, a judgment in your home country will not be recognized in your trust’s country. As a result, you can have a lot more control over your trust assets than you can by operating a trust in the U.S. alone.

What’s the best jurisdiction? Some of the more popular sites are the Isle of Man, the Bahamas, or the Cook Islands. The Isle of Man is the oldest democracy in the world. You want that kind of stability. The average trial case takes about seven years, which represents a roadblock to creditors. The problem is, their law is based on case law, dating back to 1571. I use the Isle of Man, but the best overall place I’ve found is the Cook Islands. (To find the islands, go to Hawaii, then turn south.)

The Cook Islands are a protectorate of New Zealand, carrying their flag. They are a very docile country, an excellent financial center, near the Asian markets. In 1988, the Cook Islanders contacted some U.S. lawyers in order to set up a favorable trust environment for Americans. They asked American lawyers how they would design a trust law. Their resulting 1989 Cook Islands Trust Act gives us the certainty of law, not just case law, as in the Isle of Man.

If you happen to have a living trust that was formed more than two years ago, say in 1990, you can amend your trust, re-domicile it and ten your fund is deemed to have been formed in 1990. As long as you do this before the fact – i.e., before a pending judgment case arises – your assets are safe from seizure. But beware – any attempt to foil a ruling in process can be deemed a “fraudulent conveyance” device.

To file a lawsuit, a creditor or sue-happy lawyer will now have to bring his case before a Cook Island court, flying down his witnesses, etc. In such cases, I show the plaintiff’s lawyer a copy of the trust laws of the Cook Islands, showing how difficult it is to get a judgment there. In most cases, they will drop the suit. It may take five or six years to get a judgment, and even if the case comes out in their favor, how do they enforce it? In most cases, lawyers look for deep pockets who are easy targets, not hard targets. A Cook Island Trust is a very hard target.

If you’re more comfortable having hands-on control in the U.S., then set up your Limited Partnership in the U.S., put your assets in it, set up an international trust in the Cook Islands, put 99% of your LP in that trust, and you will remain the General Partner, in control, with only 1% held in the U.S.

What happens if you get sued? Today, you have the option to move the assets to your overseas trust – before such a suit gets under way. Put some assets in Europe, Switzerland, or elsewhere, and then the U.S. will not have jurisdiction over those assets.

I repeat: We are not doing this to reduce income taxes, but to insulate your assets. All the income of the Overseas trust is taxable in the U.S.