Asset Protection Planning

Asset Protection Planning2018-08-31T13:34:52+00:00

ASSET PROTECTION PLANNING

Put simply, asset protection planning is the process of removing your property from your individual ownership and placing it beyond the reach of potential claimants and creditors. The process involves changing legal ownership of your property from your individual name to a protective entity, such as a limited partnership or trust.

If that sounds like a terrible idea, hold on. A properly designed limited partnership or trust can give you all the benefits of ownership, such as control over an asset’s disposition and the right to its income. The difference is that since you no longer legally own the asset, it cannot be seized to satisfy a judgment against you. It is the savvy planner who realizes that in today’s world legal control over an asset is often more beneficial than directly owning it.

As stated in the preceding chapter, Limited Partnerships offer significant asset protection opportunities. Limited partnerships provide such asset protection because of the way the laws that govern partnerships treat partners and partnership assets. As you will recall, limited partnerships have two kinds of partners, each with dramatically different roles and responsibilities. General partners manage the partnership, and thus have full responsibility and control.

Limited partners, on the other hand, have little, if any, input into the running of the partnership; therefore, they are not held responsible for its management or any liability it might create. No one would want to become a limited partner without this protection. The law is designed to encourage the creation of partnerships and the economic benefits they produce for society.

The second important feature of limited partnerships is that assets titled in the name of the partnership are deemed the property of the partnership itself, not that of the individual partners. The legal importance of this arrangement is that partnership assets are shielded from creditor claims against the individual partners. In other words, a creditor cannot force the sale of assets owned by the partnership to satisfy a judgment against one of its members. Instead, such creditors are entitled to attach only the member’s individually owned assets and to receive any distributions made by the partnership to that member.

To achieve asset protection with a Limited Partnership, you would transfer individual assets (real estate, business interests, investments, artwork, etc.) out of your personal name and into the name of the Limited Partnership. A common arrangement would be for you to become a one percent general partner, giving you the right to fully control and manage property just as before. You would also become a ninety-nine percent limited partner, entitling you to receive income from the partnership, but shielding your limited partnership assets from creditor claims. For the greatest asset protection, most individuals who use Limited Partnerships transfer part of their limited partnership shares to others, usually family members. This shows that the partnership has legitimate business purposes other than just defeating creditor claims and makes them more likely to survive a court challenge. Because Limited Partnerships can provide significant tax advantages, as well as asset protection, it is often an ideal strategy to use when an individual wants to pass wealth, especially a business, to other family members.

Sometimes a Limited Partnership alone isn’t enough protection against possible lawsuits or creditor actions. That’s when an Offshore Trust becomes an important tool in the asset protection toolkit.

An Offshore Trust is simply a trust created outside of the legal jurisdiction of the United States. These Offshore Trusts are effective in protecting assets simply because the laws of the nations in which they are drafted provide better creditor protection than the protections provided in the United States of America.

In the United States, generally no asset protection exists for assets that you place in a trust created to benefit yourself and for which you are the trustee. In such cases, the trust’s assets can be seized by your creditors just as if they were owned in your own name.

However, a handful of other nations—such as the Isle of Man, the Cook Islands, and Belize, to name a few—offer Trustmakers greater asset protection. These nations allow you to be the Trustmaker, Trustee, and the Trust Beneficiary and still protect the trust’s assets from creditors.

Furthermore, these countries will not honor a United States Court’s judgment or lien against trust assets in their jurisdiction. Before a creditor can seize trust assets, these nations require that a trial be held on their soil. The creditor must pay the often exorbitant fees associated with litigating a case in a foreign country. The cost of bringing witnesses and other legal evidence to a foreign court can prove prohibitive, as can the legal fees of a local attorney. Legal fees alone can prove a costly and insurmountable burden to bringing a lawsuit, as the trust-favorable nations do not allow for contingency fee lawsuits. Instead, they require that the plaintiff’s attorney be paid without regard to the outcome of the action.
If this were not enough in the way of asset protection, these nations also demand that the plaintiff meet the burden of proof required in United States criminal courts. A creditor plaintiff must prove its case “beyond a reasonable doubt,” not the much more lax “preponderance of evidence” standard used in the United States.

Finally, the countries most favorable to Offshore Trusts greatly limit the amount of time allowed to a plaintiff to bring legal action. In the United States, plaintiffs often have many years to file a lawsuit but in these offshore nations, plaintiffs have only a year or two to bring suit, depending on the circumstances. So for those desiring greater asset protection, Offshore Trusts can provide immeasurable peace of mind.

To obtain the legal protections offered by Offshore Trusts, typically you would have your attorney create both a limited partnership and a trust in the desired offshore nation. You would then transfer your ninety-nine percent limited partnership shares to the Offshore Trust and retain the one-percent general partner share. Doing this would afford you the greatest possible degree of protection for your wealth, while preserving complete control over the assets themselves.

Fortunately, Offshore Trust laws do not require that the assets literally be removed from U.S. soil nor do they require that the Trustmaker relocate to a foreign country. As long as the ownership of the assets and the jurisdiction governing the trust reside in a trust-favorable nation, the Trustmaker receives full asset protection.

The reality is that asset protection planning is more costly to implement than other estate plans. In addition, you’ll spend more each year to maintain it but keep in mind the savings it can also generate. You may be able to reduce considerably the malpractice or business liability insurance premiums you now pay once most of your assets are protected offshore. Furthermore, you can save the enormous cost of defending yourself in a lawsuit, or worse, losing it all in court. With proper asset protection in place, you may never have to experience either. The peace of mind alone afforded by this planning option is often well worth the modest investment.

If an Offshore Trust makes sense to you, the time to implement it is now before it is too late and a legal crisis is already upon you. If you wait until action against you is “pending, threatened, or expected,” the measures you take to remove wealth from your estate will be deemed a fraudulent conveyance and invalidated by a court of law.

Moreover, don’t think that an Offshore Trust will lessen your tax liability. If you remove assets offshore, you are required to notify the IRS.
One final note is also in order. In an attempt to capture some of the Offshore Trust business, a few states recently enacted laws which promise to provide trusts created under their jurisdiction with some of the same protections offered by trusts created in foreign jurisdictions. While it’s possible that these trusts may work for those who live, work, and own all their assets in one of these states, those in other states may be exposed to creditor action just as before because each state’s courts are required to give “full faith and credit” to the judgments of other states’ courts. A judgment against you in one state would be honored by the other states, even if the trust you’ve created seemed to promise you complete protection.

If you think that asset protection may be for you, sit down immediately with your trusted estate planning attorney. It is your attorney who can evaluate your individual situation and determine the most effective strategy to help you meet your asset protection goals.

Despite its promises to “simplify” the tax code, Congress’ never ending changes to our nation’s estate and gift tax code have made it too complicated for most people to understand. Nonetheless, a review of its basic details is essential to understanding how to protect your estate.

Federal estate and gift taxes are what is known as transfer taxes. Simply put, they are taxes on your right to give money or property to others. The gift tax is a tax on your right to give money away while you are alive. The estate tax is a tax on your right to leave your property to others at your death.

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