Source: https://www.ifcreview.com/articles/2010/march/practical-guide-to-domestic-and-foreign-based-asset-protection-techniques/
Timestamp: 2019-12-15 15:32:05
Document Index: 619071298

Matched Legal Cases: ['§ 7201', '§ 371', '§ 1956', '§ 3301', '§ 7201', '§ 7212', '§ 371', '§ 1956', '§ 531', '§ 531']

Practical Guide to Domestic and Foreign-Based Asset ...
Current: Practical Guide to Domestic and Foreign-Based Asset Protection Techniques
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.
OFCs and Clients of the Future…
the client should be proceeding with the transfer or restructure primarily for reasons unrelated to creditor protection – the so called ‘business purpose’. Specifically, the transferor should not have the specific intent to hinder the collection of debts by any foreseeable creditor.
the client should not have present creditors including persons with unliquidated claims that will be hindered or disadvantaged by the transfer or restructure;
the client needs to be fully informed as to the limitations, risks and financial burdens of asset protection planning. This is must be done in writing; and
the client needs to be psychologically and financially prepared, if the need should arise, to engage in litigation over the propriety of transfers and restructures. They may well need to meet heavy evidentiary burdens to avoid being held in contempt of court should they refuse to make available funds transferred outside the jurisdiction.
spouse: to minimise claims by a spouse raised by a future marital dissolution proceeding (consider ‘premarital’ or ‘post marital’ agreements which have the effect of minimising the impact of otherwise applicable marital rights laws, such as the community property regime). Spouses often have extraordinary right to discovery/information which other creditors do not have access to, and courts often craft extraordinary remedies to protect a spouse;
creditor of a child: to minimise risk of claims by a creditor of a child to whom a gift is to be made (consider making gifts to trust with spendthrift and/or discretionary features), or from the errant actions of the child themselves;
clients of a professional: to minimise risk of claims of future clients and patients (consider a marital property division, establishment of a private retirement plan and/or a so-called domestic asset protection trust, and employ liability limiting contractual provisions in the engagement process);
future creditors of a new business owner: to minimise risk of claims of future creditors (consider use of a limited liability company(LLC), marital property division, establishment of a private retirement plan and/or a domestic asset protection trust or foundation, and have adequate insurance);
tort claimants of an owner of high-risk business: to minimise risk from future tort claimants (consider a marital property division, holding assets in multiple entities, establishment of a private retirement plan and/or a domestic asset protection trust or foundation);
buyer of a business: to minimise risk of claims against a buyer of a business for breaches of warranties and representations of the seller (consider establishment of a private retirement plan and/or a domestic asset protection trust);
tort claimants: to minimise the risk of future tort claimants (consider marital property division, establishment of a private retirement plan and/or a domestic asset protection trust);
contractually based claimants: to minimise the risk of contractual claims (consider including special protection clauses in contracts); and
governmental agencies: to protect against future claims by governmental agencies, eg, the Internal Revenue Service (IRS), Resolution Trust, the state tax authorities and environment-based claims (use extreme care before even considering planning to protect assets against governmental claims – such action can result in criminal liability, eg hindering or money laundering). It is not appropriate to employ asset protection techniques to defeat existing or reasonably anticipated governmental claims. It is a crime to inhibit collection of obligations to the US government – see discussion below, eg: IRC §§ 7201 and 7212, 18 U.S.C. § 371, 18 U.S.C. §§ 1956 and 1957, 28 U.S.C. § 3301 et seq.
maximisation of the value of exempt assets under the law of the jurisdiction of residency;
change of non-exempt assets to exempt assets as permitted under applicable law;
transfer of outright ownership of assets to another person as permitted under applicable law;
transfer of assets to a trust for benefit of another person with limited exposure to the creditors of beneficiaries;
change of the legal form of ownership without significant loss of economic benefits;
change of ownership of assets so as to require any future claimants to proceed under another legal regime (import foreign law); and
change of situs of assets so as to subject the assets to another legal regime (export assets).
the use of federal and state ‘exemptions’ from creditor claims (eg pension plans and homesteads);
contractual provisions to limit liability (eg waivers, limitation on damages and choice of law);
use of legal entities to provide a shield from claims and to limit direct access to assets held in a legal entity (eg LLC's);
use of the common law trust as both an estate planning and asset protection vehicle (‘integrated estate and asset protection planning’); and
domestic ‘self-settled’ spendthrift trusts, (eg asset protection trusts typically established and administered under the laws of Alaska or Delaware).
use of a foreign entity, such as a trust or civil law foundation, often established in a jurisdiction with ‘designer legislation’ created specifically for asset protection (recently the Antilles and Panama enacted asset protection ‘foundation’ laws);
annuity contracts; and
elimination or restrictions on flatulent transfer principals;
short statutes of limitation;
requirement of a bond as a condition of any litigation against a trust;
presumption of validity of the structure.
lack of knowledge of foreign law and different legal system;
greater costs;
the client’s feeling of total lack of control;
enhanced IRS and other reporting required; and
uncertainty of how the structure will be treated by a US court.
typically, there is no local deposit or investment requirement under foreign law;
typically, there are no exceptions from protection for claims of creditors based on events or circumstances occurring after the transfer;
typically, there are no statutory exceptions to the fixed period of the statute of limitations applicable to actions against the transfer;
typically, full protection is available under foreign law until actual distribution is received, even if the settlor is entitled to a fixed benefit;
typically, the settlor may have a power to revoke subject to an anti-duress clause without loss of protection under the laws of the governing jurisdiction.
federal criminal statutes (eg, Acts to Evade or Defeat Collection of Federal Taxes (IRC § 7201); Obstruction or Impeding Federal Tax Administration (IRC § 7212); Conspiracy to Defraud The United States (18 U.S.C. § 371); Hindering of the Collection of Debts by the Federal Government; Money Laundering (18 U.S.C. §§ 1956 and 1957); and Criminal Violations of the Federal Bankruptcy Act);
state criminal statutes (state criminal laws may apply to acts that hinder the collection of a private or state’s debts (eg California Penal Code § 531 – fraudulent transfers). The crime of participating in a scheme to defraud creditors (Cal. Pen. Code,§ 531) or the unprofessional conduct involved in an intentional and successful deception of a bank officer is grounds for disciplining an attorney. Allen v The State Bar (1977) 20 Cal 3d 172. Note that many state statutes have extraterritorial application.);
often state substantive laws such as those relating to marital property and rights, trust and creditor rights, also have an impact;
fraudulent conveyance (transfer) statutes which generally prohibit the ‘transfer’ of assets if the principal reason is to prevent present or future creditors from gaining access to the debtor’s assets[i].
US constitutional principles (eg full faith and credit) available to creditors;
conflicts of law principles; and
laws and rules regulating professional conduct.
trustee should not hold assets physically located in the United States (US) in accounts with persons subject to the jurisdiction of US courts, in domestic legal entities;
at the time the trust is established, the drafting attorney should require the settlor to acknowledge in writing addressed to the trustee the extent of his or her retained powers, if any;
at the time the trust is established, the drafting attorney should require the settlor to confirm in writing the reasons for establishing the trust and the selection of the trustee including any motive to protect assets held in the trust against the claims of future, currently unforeseen, remote creditors;
at the time the trust is established, settlor should execute a statement of financial position and attach an accurate financial statement with full disclosure of any contingent liabilities;
neither settlor nor any person under his or her control should be appointed as co-trustee or protector with power to remove a trustee;
neither the settlor nor any US resident should have the power to determine in his or her own discretion whether an event of duress under the trust instrument has occurred;
under the trust instrument, the trustee should be authorised (but not required) to seek an order of a court sitting in the forum of the administration of the trust confirming the validity of any refusal to act because of the duress of a power holder;
settlor should retain copies of all trust documents and financial reports, eg, brokerage statements, and provide them if an appropriate request is made;
settlor should cooperate in discovery or creditor’s exams and not conceal information concerning the trust during a bankruptcy proceeding or even during settlement negotiations with a creditor;
settlor should disclose his or her contingent interest in the trust in any bankruptcy petition;
at the time the trust is established, settlor’s counsel should prepare a brief supported by credible evidence and law of impossibility including legal opinions concerning rights of settlor and beneficiaries;
settlor should hire litigation or bankruptcy counsel who understands foreign trusts, who is willing to listen to the advice of experts including lawyers qualified in the jurisdiction whose laws are designed as the proper law, and who is willing personally to read the relevant court cases including but not limited to those cited herein and the pertinent parts of major journal articles and treatises in the area; and
under the trust instrument, the trustee should be specifically authorised to defend (directly or with financial support) against any lawsuit brought (i) to invalidate any transfer of assets to the trustee, (ii) to impose a constructive trust over any assets held in trust for the benefit of anyone other than a person named (or designated) as a beneficiary in the trust instrument, (iii) to invalidate the terms and conditions of the trust as set forth in the trust instrument itself, or (iv) to cause a distribution to any person other than an individual named (or designated by class) as a beneficiary.
William Norman 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.