Lots of people contact me because they're interested in protecting their assets. Yet, in setting up an "asset protection plans" for clients, I always caution them never to refer to their plan as, well, an "asset protection."
Why it that? It's because "asset protection" has a negative connotation, especially in the United States. The United States has a very "creditor friendly" court system. If you make your assets unavailable to meet the claims of a creditor, many judges will view you as a deadbeat.
Whatever You Say, Don't Say "Asset Protection"
For that reason, when you set up an asset protection plan, there should be other reasons for the plan to exist other than asset protection. If you can prove that these other reasons actually exist, then the asset protection part of the plan has a much better chance of holding up in court.
Here's an example. Let's say that you decide you want to set up an "asset protection trust." You consult with a trust company in, say, the Cook Islands, and the company obligingly sets up a Cook Island international trust.
What have you accomplished? Yes, you now have a trust in the Cook Islands, with one of the world's strongest asset protection laws. Yet, you've also formed a standalone structure that screams "deadbeat" to anyone who finds out about it.
To force "deadbeats" to pay their bills, judges have a variety of tools available, up to and including jailing a debtor. This last remedy isn't common, but it does exist most notably, in situations where a debtor or the debtor's legal advisors have made serious planning errors.
Understanding—and Avoiding—the "Anderson Fiasco"
One of the most famous examples where this scenario unfolded came in a case involving a Mr. and Mrs. Anderson, who allegedly were engaged in a Ponzi scheme. The Federal Trade Commission (FTC) sued the Andersons in federal court and obtained a US$20 million judgment.
When the Andersons claimed that they couldn't pay the judgment, the FTC obtained a court order requiring the couple to repatriate US$8 million in assets from their Cook Islands trust. The Andersons failed to obey this order and the judge jailed the couple for civil contempt. A federal appeals court affirmed this decision.
The judge released the Andersons from jail only after they:
- Appointed a company controlled by the FTC as the new trustee of their trust
- Amended the trust to remove the FTC from the definition of "excluded persons" under the trust deed
- Resigned as protectors of their trust
In many ways, the Anderson case was a worst-case scenario due to serious errors in their trust. Their most important error was that the Andersons were named as both co-trustees and co-protectors of the trust, a position they gave up only when their trial began.
How to Protect Your Assets—and Stay Out of Jail
Fortunately, in the vast majority of situations, you don't need to go to jail to protect your assets. All you have to do is to make sure that asset protection isn't transparently the sole purpose of your plan.
Returning to your example, let's say after consulting with a qualified attorney in the United States, you jointly decide that a Cook Islands trust should be part of your asset protection plan. Only, instead of having the trust be the only element of the plan, it exists as part of a larger structure that accomplishes other goals.
For instance, an integrated structure that includes a Cook Islands trust might also contain your last will and testament, a living trust, and possibly a domestic limited partnership. At your death, your residual assets "pour over" from the will into the living trust.
Properly structured, this configuration serves several purposes that are completely unrelated to asset protection:
- Provides convenient access to non-U.S. investments
- Doubles the estate tax exemptions for a married couple
- Provides the opportunity for valuation discounts for gift tax purposes through gifts of limited partnership interests
- Serves as the primary estate planning device after your death
Depending on your particular needs, many other elements can be brought into this structure. The important point, though, is that asset protection is no longer the only—or even the exclusive—purpose of the plan. It exists as a by-product of the plan, because the assets will be safely tucked away offshore, safe from creditors.
Avoid "Fraudulent Conveyance"
The time to set up this type of plan isn't after you've received notice of a lawsuit. You should form it when there are no pending claims against you, or that you even know about. That way, it's unlikely that a court can later declare your plan was intended to "hinder, delay or defraud" creditors, thus making the transfer of assets a voidable "fraudulent conveyance" in the eyes of the law. This determination is best made after consultation with an experienced asset protection attorney.
Finally, before you create or transfer assets to an offshore structure, be certain to seek out professional advice to insure that these actions won't constitute a fraudulent conveyance—and potentially subject you to the "Anderson fiasco." But, if there are legitimate purposes not related to asset protection, you've gone a long way toward insuring that your planning will hold up in court.
Copyright © 2008 by Mark Nestmann
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