Howard Fisher and William Norman provide a comprehensive array of foreign-based asset protection techniques, as well as the counter-techniques that estate planners and wealth managers should be aware of.
Asset protection is the lawful transfer of assets or the establishment of a structure principally for estate planning or business purposes, and not principally for creditor protection reasons. Asset protection, as the phrase implies, is the practice of using a variety of techniques and strategies to conserve accumulated wealth from involuntary transfers to ‘others’. This article will explore some of the fundamentals of the subject.
Asset protection is not an art, but a science built around a thorough knowledge of multiple aspects of the law (eg, litigation, contracting, corporate and taxation), as well as an understanding of rules of multiple jurisdictions, both foreign and domestic.
The Asset Protection Process in a Nutshell
Planners need carefully to qualify a client who intends to restructure the ownership of assets or the transfer of assets. There are two reasons the practitioner needs to take care in advising a client: the numerous civil and criminal violations that could occur in advising a client in the wrong situation; and the potential liability to the client incurred by not meeting their expectations. These are not the only details a practitioner should be aware of, though. The following is what amounts to a checklist for the astute:
Taking on a client – deciding which clients not to represent is often the most important decision the advisor has to make:
The advisor should obtain a ‘declaration of solvency’ and other representations from the client, in writing, so that if necessary the advisor has the requisite information to defend themselves if the client’s information about their financial affairs later turns out to be ‘inaccurate.’
Potential Candidates for Asset Protection
In a sense, asset protection is designed to insulate the client from the claims of ‘others.’ These ‘others’ may include:
The Planning Process
An often overlooked aspect of asset protection is ‘risk management.’ The client should evaluate the sources of potential liability in their personal and business life. The attorney should advise as to actions to limit liability. This could be as simple as carefully crafting agreements between the client and their customers (eg agreement between physician/patient, or landlord/tenant), or it may require restructuring of business operations.
The second consideration is to be sure the client obtains and maintains adequate insurance against as many risks as are foreseeable. In today’s litigious society the cost of defending a claim can sometimes be worse than the ultimate liability. Hence the need for insurance that provides both defense and indemnification.
When it comes to the actual planning, most asset protection strategies involve one or more of the following concepts:
A short list of techniques often employed for asset protection includes the following:
Basic Estate Planning Techniques with Asset Protection Benefits
Outright Gifts; Gifts to Irrevocable Spendthrift Trust; Charitable Trusts (Lead or Remainder); Qualified Personal Residence Trust (QPRTs); Intervivos Irrevocable Trusts with Spendthrift Clauses; Bypass (Exemption) and Marital (QTIP) Trusts with Spendthrift Clauses; Disclaimers; Limited Powers of Appointment; Qualified Retirement Plans and Individual Retirement Accounts (IRAs)
Core Domestic Asset Protection Techniques
Adequate Insurance Umbrella; Fictitious Name Holding Vehicles; Lease Not Buy;
Leveraging Down of Values; Prenuptial Agreement; Corporate Holding of Assets; Community Property Division; Multiple Legal Entities; Homestead for Family Residence; Exemption for Wages; Exemption for Annuity Contracts; Exemption for Private Retirement Plans
Major Financial Planning Techniques with Asset Protection Benefits
Tenancies by the Entirety for Property in a Qualified Jurisdiction; Family Limited Partnership; LLC; Alaska, Delaware, Nevada, Wyoming or South Dakota Domestic Asset Protection Trust (see attached chart comparing domestic jurisdictions); Redomiciliation to a Major Exemption State; Foreign Irrevocable Trust; Civil Law Foundation; Nevis Single Member LLC.
Unfortunately, as with any benefit, there are often offsetting liabilities. Below is a partial list of some of the countervailing considerations that go into a benefit analysis of any type of asset protection planning:
Fraudulent Transfer Act; Information Disclosures – Creditor Exams and Discovery Orders; Loss of Direct Control; Risk of Civil Contempt by United States (US) Court; Risk of Receivership over US Situs Assets; Anti Money Laundering and Racketeer Influenced and Corrupt Organisations (RICO) Statutes; Regulation of Assisting Professionals; Freeze Orders by Court; Disregard or Sham Treatment; Constructive Trust Over Assets in Trust; Tolling of Statute of Limitations; Reconstruction of Trust Terms by Beneficiary Action; Recognition of California Judgment in Another Jurisdiction; Recognition of Trustee in Bankruptcy; Establishment Costs; Maintenance Costs; Compliance Costs; Future Litigation Defence Costs.
Planning is often divided between ‘onshore’ strategies and ‘offshore’ techniques. Many of the ‘onshore’ or domestic structures are concepts that attorneys have used for decades, sometime centuries, without thinking of them as asset protection vehicles (eg pre- or post-marital agreements). Some of the key domestic strategies that are employed include:
Foreign structures tend to be more exotic, and are typically formed in jurisdictions that have specifically enacted ‘designer’ law specifically tailored for asset protection. The most notable of these is the Cook Islands, which initially created its asset protection trust laws at the request of several attorneys who were seeking the ideal jurisdiction. Over the years, the Cooks have amended their laws to address issues that subsequently arose (eg addressing community property issues).
Foreign strategies include:
Often, foreign structures are combined with domestic techniques, for rarely is there a single action item solution to most problems.
Foreign vs. Domestic
Many practitioners claim that there are distinct advantages of using an offshore structure, such as ‘designer laws’ which are more suited to asset protection. Some of these laws include:
Five of the main reasons to avoid an offshore structure include:
For example, Stephen Lawrence moved assets to an offshore trust, then filed for bankruptcy. The US Bankruptcy Court did not believe that Mr. Lawrence had parted with his assets, and jailed him for several years (In Re: Stephen Jay Lawrence (“Lawrence III”) 279 F.3d 1294 (11th Cir. 2002)).
Classically designed offshore asset protection trust (and now the foundation) remains the ‘top dog’ in many practitioners’ minds because:
Even though a classically designed offshore asset protection trust or foundation may be an effective shield against creditor claims, the risk of imposition of court contempt may be unacceptable to many US settlors. However, a properly presented showing of impossibility is a valid (even constitutionally protected) defence.
Potential Problems – Limitations on Asset Protection Structuring
As many techniques as there are for asset protection, there are multiple limitations on asset protection strategies, each of which need to be explored both by the practitioner and their client. Some of the key limitations include:
The courts have long taken the position that a person cannot create a trust with his assets, retain a beneficial interest and have spendthrift protection against his own creditors, even if no fraudulent conveyance is involved. This principle is known as the prohibition on ‘self-settled trusts.’ Some states have adopted laws allowing such trusts:
Some ‘Do’s and Don’ts’ in Trust Design
Reviewing the various domestic cases that have dealt with asset protection structures, the authors have developed a list of ‘dos’ and ‘don’ts’, as follows:
The timely imposition of a solid asset protection structure can, in many situations, provide a near-impenetrable shield against erstwhile litigation. However, an ‘after the fact’ restructuring, a poor structure or improperly implemented structure is doomed to failure and has the potential for liability on the part of the planner. As the French say – en garde.
1 Sullivan, Future Creditors And Fraudulent Transfers: When A Claimant Doesn’t Have a Claim, When A Transfer Isn’t A Transfer, When Fraud Doesn’t Stay Fraudulent, And Other Important Limits To Fraudulent Transfer Law For The Asset Protection Planner, 22 Del J. Corp. L. 955 (1997).
Mr Fisher is based in Beverly Hills, California. He is a member of the California Bar, and the Honourable Society of Lincoln’s Inn (London [student bencher]). Mr Fisher is a graduate of the University of Southern California (B.A.), Southwestern University (J.D.), and the University of Cambridge (LL.B.with honours).
Mr Norman is based in Los Angeles, California. He a member of the California Bar. He has a J.D. from the University of California (Bolt Hall), and an LL.M. (in Taxation) from New York University. He also attended the Graduate School of Business of University of California at Berkeley, and the Stern Graduate School of Business of New York University.