Asset protection planning should re-emerge as a high priority for wealthy individuals. Its importance has been dramatically underscored by the recent financial crisis. A closer look at asset protection will show that there is no time like the present—before threats to one's wealth arise—to focus on the protection of wealth.
Many legal threats to an individual's wealth, such as those related to consumer and bank debt or resulting from the breach of an obligation, are usually easy to anticipate. Others, such as those arising from personal guarantees, contingent liabilities, and partnership obligations, can be unexpected. In addition to these contract creditors, business claimants and tort creditors can give rise to personal liability judgments. Finally, asset protection serves to protect one's wealth not only from legal threats, but also from economic and political threats.
Needless to say, many Americans experienced financial turmoil during the recent recession. Individuals' substantial net worths were depleted in wild market swings and threatened by restricted liquidity. For example, many real estate developers found themselves in a difficult position because of personal guarantees. In a recent case in Bankruptcy Court [In re Hymas, 2010 WL 3932042 (Bkrtcy.D.Idaho 9/30/2010)], a couple made personal guarantees in connection with their real estate projects. When the projects started to falter, they created several Nevada LLCs and LPs and funded them with proceeds from the liquidation of their remaining assets. Because the Court found the transfers to be fraudulent, the couple was denied a bankruptcy discharge, meaning that creditors can pursue the debts until paid in full.
The sources and extent of an individual's wealth can dictate the nature and scope of asset protective safeguards. In addition, a multiple-entity approach allows for not only tax planning and the transfer of wealth, but also facilitates asset protection planning. Multiple-entity planning entails the segregation of wealth into isolated protected compartments, making use of limited partnerships, corporations, trusts, foundations, and the like.
In the U.S. domestic context, there are many opportunities for asset protection planning. Arrangements that have historically been driven by tax considerations can provide a shield from creditors. These arrangements include life insurance, annuities, marital property planning, retirement plans, inheritances, foundations, corporations, limited partnerships, limited liability companies, limited liability partnerships, trusts for the benefit of third parties, and foundations.
Texas and Florida are relatively "debtor friendly" and provide the most statutory protection from the claims of creditors, especially related to homesteads and life insurance and annuities. Also, the states of Alaska, Delaware, and Nevada have favorable corporate, partnership, LLC, and trust law.
In cases where domestic strategies do not provide adequate asset protection, a foreign trust can serve that role. Since a foreign trust is jurisdictionally severed from the U.S., it is a more difficult target for a potential creditor than a domestic structure.
A foreign trust can facilitate economic diversification. For example, a foreign money manager operating on behalf of a foreign trustee can direct investments in assets not normally open to or considered by U.S. investors. Also, a foreign trust is conducive to new financial and legal relationships that facilitate the relocation of a client's wealth in the event of expatriation.
Asset protection and economic diversification are the leading reasons for establishing a foreign trust but are not the only reasons. Others include:
- Financial privacy or anonymity;
- avoiding forced dispositions (for citizens of certain civil law countries);
- premarital or marital property planning;
- tax planning (for example, with private placement life insurance); and
- planning strategies in the framework of an active trade or business abroad.
Going "offshore" to protect one's assets is an endeavor that has (unjustly) received a reputation as unscrupulous behavior in some circles. Some believe that a transfer to a foreign trust could have no other goal than to thwart creditors' claims. Undoubtedly, known and reasonably knowable creditors should be protected from fraudulent transfers to foreign trusts or other asset protective structures, and, historically, courts have focused on these creditors. However, the courts have not protected unknown, future creditors who are removed in years and in events from a transfer, and the law simply does not require retaining assets unprotected for their potential benefit.
It is important to understand that rules against fraudulent transfers may preclude clients from protecting assets after a claim has arisen. The time to engage in asset protection planning is now—before threats exist.
GSRP lawyers have extensive knowledge of, and 20 years of practical experience implementing, various techniques to protect assets and preserve wealth. Please let us know how we can assist with your asset protection planning.
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