For over 30 years, our law firm’s approach to the estate planning process begins with solidly protecting the client’s wealth from unforeseen lawsuits and other third party claims before we turn our attention to the client’s desired estate planning objectives.
The recent economic downturn has substantially affected most everyone’s estate plan—both high-net worth and moderate taxpayers alike—making protecting one’s remaining assets critically important. Unfortunately, we still see very few estate planning professionals including asset protection options into their clients’ estate plans.
THE GOAL: ESTATE PLANNING WITH ASSET AND LIFESTYLE PROTECTION
Lawsuits settle for two primary reasons: Doubt as to liability and doubt as to collectability. One goal of asset protection planning is to create doubt as to collectability by reducing the economic incentives to bring the lawsuit. This can be accomplished by changing the manner in which legal title to the assets are held so that if sued, the assets will not be subject to being reached by the legal process by the successful plaintiff. Removing the profit motivation from the lawsuit will often remove the motivation to sue, or if sued, the likelihood of a quicker settlement at terms more favorable to you is increased.
Asset protection planning also lowers the financial profile of our clients by removing them from the “financial radar screen.” Since the passage of the Patriot Act after 9/11, it has become increasingly more difficult to be completely removed, but one may still achieve significant anonymity by intelligently titling their assets with these goals in mind.
While protecting assets is important, protecting lifestyle is no less important but often overlooked, even by professionals who practice in the area of asset protection. Cash flow from the assets which generate them is what is used to support lifestyle. Without protecting cash flow, in the face of a lawsuit, the judgment debtor will not be able to pay their bills and the case will likely settle for significantly greater amount than otherwise would be the case if “lifestyle” protection is accommodated in the planning.
In designing an asset protection strategy, income producing assets must be able to be legally removed from the reach of the court, or their use could severely be restricted. Thus, the offshore asset protection trust will provide the options to have the liquid assets placed beyond the reach of the U.S. court and allow a beneficiary’s lifestyle to be maintained while the lawyers attempt to reach a favorable settlement. Without the offshore trust mechanism, the chances of reaching a quick and favorable settlement would be far less likely.
THE OFFSHORE ASSET PROTECTION TRUST – THE CORNERSTONE OF ASSET PROTECTION
An offshore asset protection trust (“APT”) will typically be the cornerstone of any effective asset and lifestyle protection plan. The APT will be subject to the laws of another country that are far more protective than those of the client’s state. Moreover, the foreign country will not have “comity” with the offshore country, meaning the offshore country will not recognize the judgments from a U.S. judgment creditor. If a U.S. judgment creditor wishes to pursue a legal claim against the offshore trust, it must file the case de novo (from the beginning) in the offshore jurisdiction and litigate the issues anew in the foreign court, where lawyers are not permitted to take a case on a contingency fee basis and where the loser must pay the court costs and attorney fees.
Even if the U.S. creditor elects to go through this process and is successful in obtaining a judgment against the U.S. person, the creditor will not be able to invade the APT to reach assets due to the nature of the trust laws of the offshore country.
As a practical matter, when a U.S. person is threatened with a lawsuit, his or her trustee will move the liquid assets of the APT held in the U.S. bank or brokerage firms to an overseas bank or brokerage firm with no U.S. branches, thereby protecting the trust’s assets against a U.S. court order or judgment. The target of the U.S. lawsuit may send his or her bills and other obligations to the foreign trustee, which will use the liquid assets (safely held in the foreign bank) to provide the “lifestyle” support for the settlor of the APT while the settlor negotiates with his or her creditors. Eventually, the U.S. creditor will settle, on terms more favorable to the debtor (than without the APT), as the creditor determines that it will have no adverse impact on the debtor’s lifestyle despite having obtained a judgment.
SELECTING AN OFFSHORE JURISDICTION
Offshore trusts may be established in any foreign country that has statutory or common law that provides for asset protection trusts. There are many factors that must be carefully considered in selecting an offshore jurisdiction, some of which are listed below, and undertaking careful due diligence and obtaining advice from a recognized expert in the field is essential.
When selecting an offshore jurisdiction there are various considerations, including:
- Does the country use a common law legal system? Common law legal systems are preferable to other law legal systems.
- Are the country’s asset protection laws set by statute?
- Does the country have a solid track record in offshore trusts? There are a number of countries that recently adopted asset protection trust laws, but may not have had any court cases which have tested it. Select one that has a track record of success.
- Is the country stable—politically, economically, and socially?
- Is English the primary language?
- How do the country’s fraudulent transfer laws compare to the U.S.? Are they more favorable?
Of the 60 or so countries that purport to have asset protection laws, there are just a handful of countries that answer these questions affirmatively, making them ideal asset protection jurisdictions.
PROTECTING IMMOVABLE ASSETS
Effectively protecting assets like real estate, accounts receivable, and equipment (immovable assets) requires the implementation of an ancillary strategy. The belief that real estate (for example) can be effectively protected by placing title to it in a structure such as a limited liability company, limited partnership, or corporation does not take into account the reality that a “results-oriented” judge can disregard the entity. The only effective method available to protect an immovable asset is to make the asset unattractive to a creditor by removing its value, thereby making the asset not worth pursuing. Consider: Would you spend your time and money to sue someone if all they had was a piece of real property worth $5 million encumbered by a $4.5 million mortgage? This “equity-stripping” technique is implemented by pledging the immovable asset as collateral for a loan and protecting the loan proceeds by placing the proceeds in the offshore trust.
ENSURING U.S. TAX COMPLIANCE
Many people erroneously believe that participating in offshore activities is illegal and will get them into serious trouble if they do so. They read stories about the USB Swiss account holders who are being prosecuted by the government for not reporting their Swiss accounts, and about other U.S. citizens who attempted to evade taxes by using credit cards issued by an offshore bank.
The IRS would not print forms to report offshore activities if going offshore were illegal. The IRS does not mind if you go offshore, but they certainly do mind if you don’t tell them about your offshore activities to the extent you are required to do so. It is critically important that a client’s offshore planning remain tax compliant with federal reporting requirements. Therefore, anyone choosing to engage in offshore planning should consult with tax professionals who are experienced in offshore compliance.
There are many ways to protect assets, but only one real way to protect both assets and lifestyle—the offshore Asset Protection Trust. If you have assets worth protecting, especially significant liquid assets, the offshore APT is most likely going to be an extremely important and effective estate planning tool to be included as part of your overall estate plan.
© 2009 Jeffrey M. Verdon Law Group, LLP.
About the Author: Jeffrey M. Verdon, Esq. is a Managing Partner of Jeffrey M. Verdon Law Group, LLP, a boutique trusts and estates law firm located in Irvine, CA. The firm, which has specialized in asset and lifestyle protection planning for over 25 years, is rated “AV” by Martindale Hubbell.
For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact Jeffrey M. Verdon Law Group,LLP at firstname.lastname@example.org or (949) 263-1133.