International Asset Protection Trusts
Recently another asset protection device in trust
form has gained popularity, the international asset
protection trust ("APT"). This foreign trust often
appears to be attractive to persons wishing to shield
personal assets from possible law suits or other
potential liability.
Protection Against the Unexpected
Medical, legal and professional malpractice suits
as well as legislative and judicial imposition of no-
fault personal liability on corporate officers and
directors have by now become a fact of U.S. business
life. An active business or professional person can
suddenly be held responsible for all sorts of unforseen
events such as a company's environmental pollution, a
bank failure or a dissatisfied client. Premiums for
malpractice insurance have gone through the roof. In
this business climate, astute people must consider the
best way to protect their personal assets against any
eventuality.
One way is to place those assets beyond the reach
of potential litigation plaintiffs, creditors and their
contingent-fee lawyers is creation of an asset
protection trust located in a foreign country where the
law favors such goals. Certain of these foreign
jurisdictions do not recognize U.S. or any non-domestic
court orders, so a creditor must retry completely the
original claim, which gave rise to the U.S. judgment,
in the other country.
The country chosen for such a trust must have
local trust experts who understand fully and are able
to assist you in your objectives. The foreign attorney
who creates your trust unquestionably must know the
applicable law and tax consequences or you will be in
trouble from the start.
Once established, the offshore asset protection
trust in its basic form can consist of as little as a
trust account in an international bank located in the
foreign country. Many well established multi-national
banks can provide trustees for such arrangements and
are experienced in such matters. With today's instant
communications and international banking facilities, it
is as convenient to hold assets and accounts overseas
as it is in another American city. Most international
banks offer U.S. dollar-denominated accounts which
often offer better interest rates than U.S.
institutions.
Pros and Cons
Depending on the country of choice, the settlor of
a foreign asset protection trust can gain many
advantages including the exercise of far greater
control over assets and income from the trust than
permitted under U.S. domestic law. Generally the U.S.
rule which does not permit a settlor to create a trust
for his own benefit does not apply in foreign
countries. Creation of such a trust also means removal
of your assets as a lawsuit target since domestic
creditors are discouraged when faced with enforcement
of a U.S. judgment in another country. However, the
greater degree of control over the assets that the
settlor maintains, the easier it is for a U.S. court,
which has jurisdiction over the settlor, to order the
settlor to return the assets to the jurisdiction of the
court.
The trust can provide privacy, confidentiality,
and reduced domestic reporting requirements in your own
country; avoidance of domestic taxes and probate in
case of death; increased flexibility in conducting
affairs in case of disability, in transferring assets,
international investing, or avoiding domestic currency
controls. A foreign asset protection trust can also
substitute for or supplement costly professional
liability insurance or even a prenuptial agreement as
protection for your heirs and their inheritance.
Trust Creation Abroad
The structure of foreign asset protection trusts
is not very different than that of an Anglo-American
trust. The settlor creates the trust and transfers the
title to his assets to the trust to be administered
according to the trust declaration by the trustees.
Usually the trustee is a bank in the jurisdiction
chosen. Beneficiaries can vary according to the
settlor's estate planning objectives and the settlor
may be a beneficiary but not the primary one.
Many foreign jurisdictions also permit appointment
of a trust "protector" who, as the title indicates,
oversees the operation of the trust to insure its
objectives are being met and the law is followed. A
protector does not manage the trust but can veto
actions in some cases.
Under U.S. tax law, foreign asset protection
trusts are tax-neutral and are usually treated the same
as domestic trusts, meaning income from the trust is
treated as the settlor's personal income and taxed
accordingly. Because the settlor retains some degree
of control over the transfer of his assets to the
foreign trust, U.S. gift taxes can usually be avoided.
(But that degree of control can make the settlor
vulnerable to court orders requiring him to exercise
that control, thus defeating the asset protection he
intended to gain.) Estate taxes are imposed on the
value of trust assets for the settlor's estate but all
existing exemptions such as those for martial assets
can be used. Asset protection trusts are not subject
to the 35% U.S. excise tax imposed on transfers of
property to a "foreign person."
As you will see in our discussion of partnerships
in the next chapter, one device for a settlor to retain
control of assets is to form a limited partnership and
make the foreign asset protection trust a limited
partner. This allows a general managing
partner/settlor to retain control over all assets he
transfers to the asset protection trust/limited partner
abroad at the same time trust assets are theoretically
protected from creditors or other legal attacks.
Some American court decisions recently have
reduced the scope of asset protection of a limited
partner, in cases holding that under certain
circumstances assets can be attached by a judgment
creditor, even though the people selling these programs
often insist that the limited partnership is
unassailable.
The greatest worry about a foreign asset
protection trust often is the distance between you,
your assets and the people who manage them. (While
your assets do not have to be transferred physically to
the foreign country in which the trust exists, some
circumstances may dictate such a precautionary
transfer. Without such a transfer, a court could
decide not to recognize the trust and take possession
of the assets.)
If you are considering a foreign asset protection
trust you should find out whether the foreign
jurisdiction's laws are favorable, clear, and truly do
offer the protection you seek. Examine the economic
and political stability of the country, the reputation
of its judicial system, local tax laws, the business
climate, language barriers and available communication
and financial facilities. Unfortunately there are very
few U.S. experts in this field of asset protection law.
Several offshore financial centers have developed
legislation hospitable to foreign-owned asset
protection trusts, among them the Caribbean-area
nations of the Cayman Islands, the Bahamas, Belize, the
Turks and Caicos Islands, and the Cook Islands near New
Zealand, as well as Cyprus and Gibraltar in the
Mediterranean.
Fair Weather Financial Planning
An important consideration about foreign asset
protection trusts; this arrangement will only work if
it is planned and created at a time of financial calm,
not in a personal crisis. If the foreign trust is set
up when you are about to be (or have been) sued or are
forced into bankruptcy, the act of transferring your
assets to a foreign trust is likely to run afoul of
strict fraudulent conveyance laws in the U.S. which
protect creditors. These laws allow a court to declare
a trust or any device used to conceal or remove assets
from creditors as illegal and therefore void. If your
assets are still within the court's jurisdiction, your
having conveyed title to a foreign trustee is not
likely to protect them from domestic attachment in such
a case. If the assets actually are in the foreign
jurisdiction, as in a bank account, the creditor will
have more difficulty in reaching them before you can
act to protect them.
Offshore Corporations
Yet another legal device advocated by some as the
perfect repository for asset protection is the creation
of a corporation in a foreign nation ("offshore
corporation") which you as the instigator will control
through various indirect means. The theory is that
your corporate ownership will be concealed from the
U.S. or other governments allowing you financial
privacy. The offshore corporation can hold legal title
to foreign mutual funds or other valuable assets
outside the U.S. thus sheltering income and profits
from American taxes. Business can be conducted through
a designated nominee thus shielding your secret
participation from the prying eyes of creditors or the
U.S. government.
In theory this sounds grand, but there are many
practical problems associated with an offshore
corporation.
First of all, just as required in establishing any
domestic U.S. corporation, the legal formalities have
to be strictly adhered to when you incorporate abroad
and the cost of setting up the company can be
considerable. You will need foreign local legal
counsel who knows the law and understands your asset
protection objectives. Corporations anywhere are rule-
bound creatures requiring separate books and records,
meetings, minutes and corporate authorizing resolutions
which make it less flexible than many other
arrangements.
Then there are the problems presented by U.S. tax
law and court decisions upholding those laws. There is
a U.S. tax on unrealized gains and income and capital
gains taxes on transfers to foreign corporations. If
the offshore company can be characterized as a "foreign
personal holding company" the U.S. shareholder's
portion of undistributed earnings will be taxed
currently to him as ordinary income. The same I.R.S.
rule applies if the offshore entity qualifies as a
"controlled foreign corporation" but additional taxes
are imposed on gain derived from the sale of corporate
assets. There is an established series of U.S. cases
in which the courts have looked behind the offshore
corporate veil and attributed "constructive ownership"
to the U.S. taxpayer as an individual. Similar actual
control findings have been based on a "chain of
entities" linking the taxpayer to the corporation. The
courts will look to who has substantive control as
opposed to paper nominees who exercise nominal control.
In addition, there are various specific I.R.S.
reporting requirements when an offshore corporation is
created and when you serve as an officer, director or
10% or greater shareholder in a foreign personal
holding company or offshore corporation of any kind.
The U.S. Supreme Court has even ruled that a U.S.
taxpayer can be held guilty of "falsifying a federal
income tax return" by maintaining he did not have
certain foreign holdings and that Fourth Amendment
guarantees regarding searches and seizures do not apply
to documents located abroad pertaining to a U.S.
taxpayer's ownership of foreign interests. And any
unreported foreign corporation ownership is
automatically a felony if it is discovered. When U.S.
courts have concluded offshore corporations are being
used to conceal assets or avoid taxes they have levied
additional penalties and interest and often imposed
criminal convictions.
A properly used foreign corporation can be part of
an overall asset protection plan, but please don't rely
on forming a quick corporation with bearer shares as a
means of protecting your assets. Such shortcuts are
only a pathway to disaster.
A reliable source of help
One of the best sources of help in setting up
offshore trusts and corporations is an American
certified accountant who has a large practice in
Panama. Marc Harris holds a master's degree in
business administration from Columbia University in New
York, and completed the certified public accountancy
examination at the age of 18. He is believed to be the
youngest person in the U.S. to pass the examination.
He opened his Panamanian firm in 1985, after being
a consultant with the accounting firm of Ernst &
Whinney. His services are highly recommended because
he is able to create and administer offshore
corporations and trusts with complete compliance with
U.S. laws. Often an American client uses a tax-haven
based advisor who knows the local laws but is not
familiar with American tax law requirements and
technicalities, and the client eventually gets into
trouble, so Marc Harris has a unique ability to bridge
the two worlds for his clients. Although based in
Panama, he can create and administer corporations and
trusts that are registered in all of the popular tax
havens.
