This article contains our latest comments and opinions about various asset protection issues. Our purpose is to let you know about any important cases, changes in the law and real life examples that we experience with our clients. We will also discuss interesting new strategies which we see and alert you to those techniques, widely promoted, which we consider to be dubious or misleading. If you have questions or topics which you would like us to address please feel free to contact us.
Who needs asset protection?
An individual who is not able to adequately insure against his liability risks might need some form of asset protection planning. The threshold question for each individual is “Do I have any liability risk?”
Many, or most people do not have a serious liability risk. Despite all the talk and the hype, most people are not going to be sued. Those who are employed at a job do not face the same risk that business owners face. Similarly, an individual, not engaged in business, whose primary asset is his home, will generally be protected from liability by home owners insurance.
Some form of business activity is usually what creates liability risk. Ownership of rental real estate and or real estate development is at the highest end of the scale in terms of producing liability and risk to personal assets. Owning almost any type of business creates significant potential liability to customers, lenders, vendors, landlords and employees. Clearly professionals such as, physicians, attorneys and architects–to the extent that insurance is unavailable or inadequate–will usually need some level of asset protection advice.
Are any income tax advantages available from an offshore structure?
In most cases, there are no income tax advantages which can be achieved by using any type of offshore structure.
Unfortunately, many of the tax shelter promoters who blew up client after client in the 1970’s and early 1980’s are now using the lure of asset protection to attract a new group of victims. We now see a variety of outrageous claims on the Web and in books that offshore trusts, International Business Corporations (IBC’s) or your own offshore bank will save you big money in taxes (and make you millions of dollars). The fact is that these techniques will not produce any legitimate tax savings except under very limited circumstances not applicable to most individuals. As a rule, the income of these entities must be reported on your tax returns. Although an offshore trust and sometimes an IBC can be useful for non-tax asset protection purposes, unless you are willing to commit perjury and tax fraud no tax advantages can be achieved with this structure.
What is a “Common Law Trust”?
Many of my clients have been offered a particular trust arrangement, often called a “Pure Trust” or “Common Law Trust” or something similar. The promoters provide a lengthy list of misleading case citations and quotes from the U.S. Constitution and the claim is made that these trusts can be used to eliminate income taxes. Needless to say, if you attempt to avoid taxes with this technique you are likely to end up with serious criminal charges and a bill to the IRS that you won’t be able to pay. In fact, the IRS recently announced that they are specifically targeting these trusts for audit and investigation. Keep out of trouble and stay away from these arrangements.
Do Nevada or other “Domestic Offshore” Corporations provide significant tax or asset protection benefits?
Over the past five years a multimillion dollar business has been created by promoters extolling the asset protection and income tax advantages which can be achieved with a Nevada (or other state’s) corporation. The fact is that all of these supposed benefits are either non-existent or wildly exaggerated.
For example, a Nevada corporation provides no greater asset protection than any other corporation. The supposed secrecy of Nevada law is strictly illusory. The names of the officers and directors of the company must be disclosed on an annual filing with the Secretary of State. It is true that the names of the shareholders are not public record, but the same is true in every other state. If you are ever involved in litigation, the plaintiff’s attorney will certainly subpoena the corporate stock ledger which will disclose your ownership. A plan to have a “friendly” local attorney or agent hold the shares for you will ultimately break down under any degree of scrutiny.
The purported income tax benefits are equally dubious. Income shifted from your home state to Nevada will be subject to the tax allocation rules of your home state which will likely result in a disallowance of the deduction for the amount paid to Nevada Corp. Even if you are not audited, the double tax of the corporate structure will produce a greater overall federal and state tax than would otherwise be payable. Again, the lure of tax savings is nothing more than wishful thinking
What are offshore annuities?
There are several types of offshore annuities and some significant tax and asset protection advantages can be achieved if the annuity is properly structured.
In general, an annuity is a product offered by an insurance company which allows for a deferral of current taxes on the interest accumulated on the policy. These tax deferred annuities are marketed by U.S insurers as an attractive investment vehicle for compounding income without current taxation. The law in several states provides that these annuities cannot be reached by a judgment creditor. That would make these policies a useful asset protection technique.
In most states an annuity can be legally seized by a creditor. In response to the demand for protection of these assets, several offshore insurance companies have created a product which combines the advantage of tax deferral with the asset protection features of a trust. When this arrangement is designed with the necessary safeguards it is a sound and efficient investment and asset protection strategy.
How does the LLC work?
The LLC is an extremely useful device for accomplishing a variety of asset protection objectives. This type of arrangement is so effective because it allows you to maintain control and management over family assets without having an interest that can be seized by a creditor. Assets which have been transferred to the LLC cannot be reached by a creditor unless he can demonstrate that the transfer was a fraudulent conveyance.
If I use an LLC do I still need a living trust?
An LLC can be used in conjunction with a revocable living trust. Although the living trust does not provide any asset protection benefits, it can be useful in accomplishing certain estate planning objectives (e.g. holding out of state property in order to avoid an ancillary probate). A funded living trust will avoid probate on family assets and will provide for the disposition of the property upon the death of a spouse. However, because the assets of the living trust will be exposed to a creditor, upon the death of a spouse, a Living Trust is not an appropriate asset protection tool.
How does the Asset Protection Trust work?
The Asset Protection Trust can be used to hold stocks, bonds, mutual funds, insurance and annuity investments. An APT is established under the laws of a foreign country which provides certain advantages which cannot be achieved with a strictly domestic structure. Certain countries such as the Cook Islands have laws much more favorable to asset protection then the laws in the United States. By creating a trust under the laws of one of these jurisdictions an individual can obtain greater protection and flexibility than is available under United States law.
In using the Asset Protection Trust the individual does not usually sacrifice any degree of immediate control and access to his property. All accounts are transferred into the Trust but can remain at their current financial institution. The individual, as Co-Trustee and Protector of the APT, retains significant authority over his property. However, since legal ownership of the assets has been moved to the trust, a creditor will not be permitted to reach these assets if there is a subsequent judgment.
The tax rules governing this kind of trust are straightforward. Properly structured, there are no gift tax consequences to the arrangement and all income of the trust is reported directly on the return of the Settlor.
Some people prefer a more elaborate plan, utilizing a Family Limited Partnership (FLP) or LLC to hold all domestic assets. The limited partnership interests in the FLP or the membership interests in the LLC are transferred to the APT. The APT holds no property or assets other than these interests. At some point in the future, if the client wishes, liquid assets can be transferred to an Overseas Trust Account for additional protection or to take advantage of investment opportunities not available in the United States.
How can I protect the funds in my IRA account?
You are correct in being concerned about your IRA. If there is a judgment against you, your IRA will be completely exposed.
Fortunately, your IRA can be well protected by using the International LLC to hold IRA funds. This strategy works very well, insuring that your retirement savings are there for you when you need them.