Barbados: Asset Protection Insurance As An Alternative To Trusts And Foundations

Background

There are many definitions afforded the term "asset protection". As it will be used herein the term is analogous to protecting assets from economic and financial predators. These predators can take many forms from unrelenting litigants, creditors, shareholders, family, partners, government, to other interlopers bent on attaching or acquiring assets in hand. Traditional legal asset protection has included the use of insurance but only in relation to a specific risk to a particular asset (ie. property and casualty, theft). Until recently insurance did not exist in regard to protecting a wide variety or portfolio of assets collectively held in an estate. An insurance innovation now exists that will protect assets by defending them in court against adverse claimants and will replace the assets if successfully attached. Most variations of asset protection historically involved creating a corpus to hold the assets in several formats designed to limit liability including; incorporation, foundations, partnerships and combinations thereof.

We are going to discuss asset protection strategies but not in the sense of schema to avoid taxation. The two concepts are very distinct. You should not naively believe that any offshore structure or product will insulate you from taxation unless you in fact move from your current domestic resident status; and for Americans, change citizenship. I cannot stress with enough teaming invective that for the majority of individuals, you can get asset protection, but taxation relief is not necessarily associated with asset protection planning.

A domestic planning scenario is always a viable choice, but if its asset protection that is being sought, domestic solutions only work on a limited basis. For domestic trusts there is always the issue of the number of years to which a trust can exist. Usually no greater than 21 years depending on regional laws of perpetuity. In addition, the assets are in most cases still subject to negative deemed taxable dispositions. Another factor that negatively affects all domestic structures in general is that the assets are still assailable, if they remain in the same domestic jurisdiction as the owner of those assets. The ability to easily provoke litigation and discovery allows the plaintiff the ability to discover the assets, amend pleadings and obtain leverage in a proceeding even if spurious.

For many years the ultimate in protective folklore was the use of offshore corpus and related nominee suppositions associated with trusts and foundations. Highly complex scenarios and combinations were the lexicon of the "offshore professional" whom could essentially hide assets. Sadly enough, there are many prominent attorneys throughout the US who specialize in this area and are unaware of the reality of the post Patriot Act (http://epic.org/privacy/terrorism/hr3162.html) environment (or choose to minimize or ignore it). These skilled artisans are clever in the art of money hiding and essentially creating nominee structures designed to hide the underlying owner and source of money. The amazing part about this sub-industry is that it is the purview of some very bright and talented attorneys and accountants who blithely still believe that there are ways to either obscure or hide ownership and evade or diminish taxation domestically. This type of attorney propagates the strategy collectively known as the "Hoping and Hiding" scenario for asset protection (hiding money in a far-away place and hoping that no one will find it).

Under this scenario the assets will be lodged in some offshore locale, in a corpus of some sort and the protection is deemed to occur from the fact that they are using some form of nominee to vouch and hold the asset's title. It's designed to obscure the question of who owns the assets or supposedly controls them. The legitimacy is always couched in the supposed real life reality that there are so many offshore or hidden structures that exist and few have been caught. Although this is true becoming less so every day. The basic premise is fallacious in that if the client put money in one of these strategies and the litigation threat is from his own family, or it's an event that takes place in a subsequent generation, litigating the matter in the offshore court system is fraught with uncertainty and the process may unearth former clandestine operations. Not to mention the threat of blackmail or the diminished version whereby the client is powerless to do anything as a result of his own illegality.

Asset protection Insurance (API) was the outgrowth of legal methodology designed to protect assets and researching the wide assortment of methods that could be used to successfully attack wealth. The solution had to be completely legal and thus a defendable, visible structure. In this respect an irrevocable declared structure was and is the only route that works. As will be seen in this article there really are very few ways to effectively protect assets legally. There are many myths that permeate the offshore world that in reality only provide a backdrop for disrepute and mystic dishonor. In fact, the legal community serves as a beehive of activity for pro-claimers of ways to "protect your assets from creditors and the government".

The basic premise is that there are few ways to legally protect assets internationally; changing citizenship, residency in some cases, irrevocable declared trusts, in limited cases foundations, and the best alternative that I know of; asset protection insurance (API). As stated, the most critical aspect of any asset protection structure is that it be an irrevocable declared structure, for only then can you use the law to defend it. The legal axioms; that you must come to the court with clean hands, and that a court will never uphold an illegal contract, mitigate against most hoping and hiding strategies ever being defendable or useful for intergenerational transfer and the protection of those assets. Even in an established and stable jurisdiction such as the Bahamas there was a limited amount of uncertainty in its legal system as its own Supreme Court invalidated the passage of new anti-money laundering legislation (http://www.lowtax.net/lowtax/html/jba2tax.html, http://www.google.com/search?hl=en&rlz=1t4skpbenCA238CA239&q=Supreme+Court). Certainty and consistency of the judicial system is one of the most critical hallmarks of a good asset protection jurisdiction. Many North American practitioners always see some third world judicial and regulatory environments or their inferiority as a favorable advantage. This is of course until their clients' need to use that same system to recover assets or stave off an attack. Some of these extreme exotic jurisdictions may work for hoping and hiding, or fleeing debtor short term asset scenarios, but they are completely useless for long term planning (unless your client is a criminal). They are not acceptable because you can't use this system to enforce your legal rights with certainty. You have simply hidden their existence (temporarily) and have to hope this little secret is never found.

Comparison of Trusts, Foundations and Asset Protection Insurance

Trusts

Foundations

Asset Pro. Insurance

Extended Life (greater than 75 yrs.)

Yes

Yes

Yes

Limits Liability

Partially

Partially

Completely

Cost of Set Up

Min. $7.5k

Min. $9k

Min. $15k

Cost of Annual Admin

Min. $3.5k

Min. $4.5k

Min. $10k

Liability of Assets Insured

No

No

Completely

Types of assets held within structure:

Real Estate

Difficult/Expensive

Difficult/Expensive

Yes

Cash/Securit.

Yes

Yes

Yes

Shares of a private Business

Difficult/Expensive

Difficult/Expensive

Yes

Insurance Contracts

Difficult/Expensive

Difficult/Expensive

Yes

Operating Business

Difficult/Expensive

Difficult/Expensive

Yes

Antiquities

Difficult/Expensive

Difficult/Expensive

Yes

Operating other structures within

Difficult/Expensive

Difficult/Expensive

Yes

Intellectual Property

Difficult/Expensive

Difficult/Expensive

Yes

Royalty Streams

Difficult/Expensive

Difficult/Expensive

Yes

Safety of assets inside

Good

Fair

Perfect-Insured

Legal Protection of Assets

Good

Good

Excellent

Lives Assured

No

No

Yes up to five

Death Benefit

No

No

Yes

Can choose financial & other advisors

Limited

Limited

Very Flexible

Here are some of the best lies that offshore "professionals" proliferate to the masses about asset protection;

Myth 1

When a liability occurs there is still time to protect assets. The concept and tactics to rehabilitate a fleeing debtor, and the ability to avoid a fraudulent preference is not be discussed here in detail. My advice to any practitioner (and the related structure) is that they maybe committing an act of fraud by accepting assets which are illegally obtained, or invalid as to title, or participates in their movement, or are complicit in the process. The whole transaction will be tainted from day one. The short answer is that in the case of an existing liability occuring and a fleeing debtor, it is almost always a situation of a potential fraudulent preference wherever you go and it will be a case of hoping and hiding. All effective asset protection structures can only protect future liabilities effectively. This article specifically does not deal or even entertain the notion of criminal techniques used to assist fleeing debtors-it's just too late for legal enforceable remedies.

Myth 2

There is a way to transfer assets legally where the ownership is hidden or placed behind nominees. Besides the risk of a fraudulent preference there is the issue of the validity of the transfer that will always be questioned. As well, there is the basic question of who is this nominee and what will it take for them to keep this illegal secret as such, and what if anything can you do about it if they stray. The concept that it will be forensically difficult to see through nominees is extremely antiquated, and naive, in the context of Patriot Act and other applicable legislation (such as the Organization for Economic and Cooperation and Development (OECD ) mandate) that hold the intermediary responsible or culpable. The culpability has made many traditional nominees in far off jurisdictions loathsome to act in this manner and take on the liability of their client. Sadly though, many still do, and the legal community seeks refuge in these few dinosaur offshore fiscal providers in second rate offshore jurisdictions that are still willing to take on client risk.

Myth 3

That secret structures or methods exist at law that only a privileged few know of, and that these can be used to secretly hide assets successfully. There is for example, an "elite" group of New York based legal professionals who bask as the denizens of this secret society, knowing the hidden places to "park money". They bask in self importance sending clients to (in their minds) far off and "exotic" locals like the Cook Islands or Liechtenstein. These areas did offer advantages to the hiding and hoping style client. While this statement may have been true ten years ago, as will be discussed, the world is a very small place. Forensics and cooperation by global regulators is such that it's simply a matter of time and the fact that many are still not caught with their illegal structures has more to do with too many fish in the sea-but time is running out. If you can't defend the structure because it's illegal, or it exists because of a complex system of nominees obscuring ownership, or the jurisdiction so exotic or foreign that normalized relations with other countries do not exist, then the structure will not be effective for any duration of time in the post 911 world. The bottom line is that the structure must be defendable and as easy to access and use as a domestic solution. You should not have to accept less and should know that the protection will be there for generations.

The truth is that if you have achieved exceptional wealth you can take advantage of changing your residence (legally) or investing and operating a real active business structure in a tax treaty foreign jurisdiction that has little or no enterprise taxation. All of these solutions require money, management, and a real operating business, and they all must be declared in order for them to work properly. This article deals with legal asset protection. The test is; would a court of law defend the legal structure or is the proposition simply an attempt at hiding assets. Clients who have chosen to use an illegal structure must accept the reality that a court in a competent jurisdiction will not defend or perfect the illegal entity and that you must come to the court with clean hands. If you want to evade taxes, or hide assets, renounce your citizenship (become a non resident for others) and move to a tax haven. You can't have it both ways legally.

Myth 4

There are structures that will completely protect your assets from attack, because no one will even find them. The hiding assets and hoping that no one will find them strategy, is the cornerstone of most offshore legal providers and domestic lawyers and accountants who claim to practice in the offshore area over the last 40 years, and most are still out there. Largely oblivious to forensics and the way money is transferred or securities cleared. These offshore practitioners still provide the rich and ill informed with the boloney of far off beaches and palm treed destinations. As will be discussed, unless in the land of lawless (check the list of OECD blacklisted countries http://en.wikipedia.org/wiki/OECD), you can not only find and trace where assets are, but the former impediments of exotic travel and information access are no longer valid or formidable obstacles. The internet, global travel, and access to justice in what were once exotic locations are now more easily available. This also underscores another pretext, that you can't defend an illegal contract, and that the majority of legal systems will not go out of their way to entertain shady structures or their owners.

Myth 5

There are some legislative structures created in offshore jurisdictions that are designed to protect assets completely. Many smaller jurisdictions have passed legislation that offer new or hybrid structures ( i.e. Belize and its relatively new asset protection trust legislation, or examples of new legislation modeled after the Cook Islands format where the Settlor, Trustee and/or the beneficiary can be one and the same). None of these unique legislatively created structures have been defended and tested internationally or even within their own court system sufficiently through jurisprudence and case law. Basic legal concepts of natural justice will dictate that a court will do what is equitable and just. More important, one simply has to ask themselves would I really want my family's money held in this jurisdiction for the benefit of my children's children. The ludicrous assumption that it's so exotic that one would not travel to this jurisdiction nor sue there, or that information gathering and forensic abilities are that difficult to carry out anymore, are completely incorrect these days. Many of these new legislative creations have no jurisprudence to back them up and as such leaving your assets there is neither easy to manage nor certain as legislation and relationships with creditors is untested and applications uncertain.

Myth 6

That corporate professionals, banks, life insurance companies and their products or people will not inform regulators if they come knocking. It's often a question as to why so many North American lawyers smugly believe that these third tier jurisdictions want to further lower their standards and accept criminals as clients. Or in the alternative, that the regulators and their courts will turn a blind eye and not deliver up their information to international prosecutors. Professionals have preconceived notions in regard to the fact that taxation and its avoidance is not a crime and these jurisdictions appear to not collect any taxes (although simply ask a resident businessman and you will find that the taxation takes different and more subtle forms). This is hedged against that jurisdiction being sanctioned in some manner, being a poster boy for the OECD blacklist, treaty recognition for their commerce, international health and safety issues, bank and securities clearing, humanitarian and fiscal aid (many of the things that can make it a great jurisdiction). In today's global marketplace reputation is everything, and despite the fact that the jurisdiction may advertise secrecy, or privacy (enshrined in their constitution or legislation criminalizing the dissemination of this information), you can bet that if it comes down to a decison of a regulator and the provider, and his livlihood and/or if imprisonment is at stake, some how that information will be provided. For example in the case of the basic old school structure whereby a nominee corporation (through shares and directorships held by nominees) controls a bank or brokerage account. The question of who owns the structure is not the key element. For in this case ownership is irrelevant. The question to ask (and information sought) that will not violate notional concepts of privacy is; "who are the signatories at the bank, or who is authorized to give instructions to the broker or banker". Its not really difficult, just follow the money and if its US securities or US, Canadian, or Euro currency, the system requires naming the real beneficial owner.

The avoidance of compliance in a jurisdiction tends to mirror its international credibility. A jurisdiction that is hungry for corporate business will rarely justify standards lower than OECD requirements without the risk of international chastisement. In the past, many jurisdictions tried to attract offshore business through legislative gimmickry or relaxed standards, only to find that it's impossible to isolate the criminal element to simply the offshore corporate sector.

As stated, The Patriot Act, the OECD mandate, and other applicable regulations that affect providers of offshore services are such that they are not going to cover for clients anymore. It's not even the risk of professional sanction alone; the long arm of the US lawmakers may make the most casual trip to the US a protracted affair for an offshore provider. Not to mention freezing orders both for individual assets and institutions, or the use of restricting or limiting the exemptions to trade, clear, or hold assets by an institution. The role of the OECD has elevated the mandate of anti-money laundering standards to such an extent that in almost all non OECD blacklisted countries, the compliance standards greatly exceed those of North America. In most of those countries it is harder to open up a bank account than in the US. The true bottom line situation is that these regulations will hold the offshore provider/institution responsible for their client, and none are willing to risk losing their livelihood for clients, nor will they ignore or stand behind these structures anymore.

API

Asset Protection and Asset Protection Insurance (API). A proper asset protection strategy can be used to prevent any creditor from ever gaining access to assets. It is an estate planning tool, allowing for assets to be passed to future generations without worry that their wishes will be second guessed by judges, creditors or worse, by family member's decades after their death.

Recognizing these needs, we can conclude that the basic areas of need encompassing asset protection are:

  • litigation and creditor protection,
  • sovereignty protection,
  • succession and intergenerational plans,
  • currency and cash flow protection, and
  • freedom to decide how to deal with one's assets.

There is currently only one company that offers API for estate planning needs as aforementioned and they are originators of this insurance product, Allied Sovereign and Equitable Assurance Company Ltd. (http://www.aseassurance.com/). The discussion of their product is straight forward, API is an insurance policy and once assets are within the policy if those assets are ever attached successfully, the policy will replace those assets at the lower of book or market value. Under the API policy the client will irrevocably transfer title of the assets to the insurance company, whom in turn, will administer the policy. The client may appoint a Financial Advisor to make investment recommendations for the API policy assets. If assets are attacked their ownership will be vigorously defended, and, in the unlikely event assets are stripped or attached, the lesser of full market value or book value of the API policy assets will be paid to the Beneficiaries.

API provides three distinct services needed to effectuate the process;

  • Asset Protection & Succession Structure,
  • Custodial Account & Sophisticated Investment Management, and
  • Asset Insurance.

An API policy can run for at least 100 years (the corporate version has a specific maturity or event inspired terminus). You can enlist up to five lives assured. It is similar in some ways to a trust as there is a protector involved and in itself the policy operates like a corpus that could be associated with basic elements of a foundation. Yet, API regardless of how the assets are transferred in, simply insures against an attack by economic predators. Its low cost insurance that still allows the applicant access to quality banks and financial institutions in conjunction with the asset protection strategy. In addition, the client has the ability to name a financial advisor who will have a say in the investment management.

API offers all of the advantages of trusts and foundations and adds ease of usage and insurance coverage to replace assets if needed. The main premise allowing API to work effectively is that by the policies process and application there will be an irrevocable declared disposition of client assets into the policy. The key words are "irrevocable" and "declared". The cornerstone of API is that there is no hiding of the assets and the simple transfer of assets into the policy will cause taxation issues when the assets are vended in. This is a product solely for asset protection. One reason (in addition to insuring the assets against loss), why API protects assets in a fashion superior to other formats is that there has been an irrevocable disposition for value that has been declared. This means that you can use the law to protect the assets and even more critical, ownership has legally and validly changed hands. Unless the client has falsified the API application process somehow, the inherent ability of economic predators to attach this asset is minimized at law significantly. This also means that the price of API is reasonable for the value and future utility served.

Creating an asset protection strategy will offer limited or no protection against litigious or creditor situations where the event causing the problem occurred prior to setting up the strategy. This is true for any legal, declared strategy, and only future oriented protection can be achieved through API. At the end of the day, API insures the assets from all economic predators, which is a superior solution to simply a structure; you have the sanctity of knowing the assets are insured and that they will be defended for generations to come. Most important is the ability to control in a tighter fashion intergenerational dispositions and role-over, whether they are shares of a private business or payments for an unborn child's education generations to come.

An iron clad asset protection strategy such as one using API in itself, will generally not offer enhanced taxation benefits and will likely be, at best, tax neutral in most cases. The API strategy can be used with most tax planning options such as (in the US) a Charitable Annuity Trust or Deferred Annuity Trust. The API in this context is simply the corpus holding the assets; there is the ability for the skilled practitioner to use existing legal taxation deferral mechanisms. Yet, the API product should be considered tax neutral vis a vis any other asset disposition or deemed asset transfer in comparison. The conduit to get the assets into the policy is extremely wide in that the API policy is flexible and its administration malleable to allow the likes of a Charitable Annuity Trust or Deferred Annuity Trusts to work. Skilled legal artisans and accounting professionals will continue to develop ways to take advantage of the API policy format.

API is not a particularly good scheme aimed at masking or hiding assets. In order for API to truly work and assets to be insured, the assets themselves must change from their current ownership arrangements. In addition, the API application procedure is long and arduous. A large quantity of due diligence is captured in the application process most of which far exceeds normal information gathering. Detailed data is collected on associated and affiliated entities, liabilities both contingent and other, as well as any related information. This is then reviewed and deficiencies answered. Despite the extensive review the insurance will not pay out until the expiry of two years from the date the policy is issued. This is why this type of insurance protection is unsuitable for fleeing debtors or last minute solution seeking applicants. The design is that it will take in most cases two years in general for most contingent liabilities to come to light and that since much of what is involved in the application form is a voluntary disclosure, underwriting risks are best mitigated in such a fashion. The disclosure in the API application of an associated liability is dealt with by specific omission, or not undertaking to cover that particular risk fully (or partially/conditionally covering it), and essentially insuring all residual assets fully.

Similar to most quasi insurance products such as a portfolio bond or insurance wrapper, API can hold cash and marketable securities within the policy portfolio. What is unique about API (beside the fact that it is 100% insurance and not an insurance portfolio bond or variation thereof) is the fact that it can insure almost any type of asset; securities of any nature, real estate, intellectual property, all forms of royalty streams, shares of a private business, operating businesses, antiquities and even other insurance products. There are a variety of situations under which an API Policy would not pay out such as; fleeing debtors, tax evaders or persons involved in any form of criminal or unsavory activities. The API application has an extensive questionnaire detailing pending or inferred litigation. The client must sign off to acknowledge the invalidity of the API Policy if these specific liabilities arise at a later date.

API policies are divided into segments for the purposes of litigation and other underwriting reasons. The maximum individual policy size for each API Policy is capped at USD $5 million. Clients with needs in excess of USD $5 million will hold a number of API Policies jointly and contiguously (i.e. $20 million in assets, four API Policies are required). There is an Establishment Fee of 1.5% of Assets Under Management ("AUM").There is also an annual premium of between 1.40% and 2% per annum based on AUM. If applicable, additional charges for brokerage and the client appointed Financial Advisor may also apply but these charges are based on usage and will vary.

Besides the retail API applications for doctors, lawyers, and all forms of professionals in risk occupations, as well as entrepreneurs with low priced shares looking to go public, replacing prenuptial agreements, and family business wealth or assets; the most unique API uses have been in the area of protecting corporate assets (especially intellectual property). The API has been applied to protect all forms of intellectual property (from film and record rights, patents and technology licenses), royalties, as well as income streams on pending transactions (insuring a third party gets paid or that proceeds are insured). These scenarios work well because the API policy works like a corpus, having all of the characteristics and benefits of an incorporated entity itself. The assets are vended into the API policy managed and available (for example) to license and receive income from third parties. We have seen intellectual property held in this fashion to force a suitor to pay a higher value for it, as the value is insured and protected and there are limited ways to attach it. Yet, the ability to use the asset in the same business sense is maintained. Another related corporate use is in regard to royalty flows like oil and gas interests. The policy protects the property rights and the cash flow from economic creditors.

As stated in regard to the administration of the API, there is a role reserved for a protector. The protector on the policy is a completely independent ombudsman (to all parties related or involved in the API process) who overseas in a very limited capacity the policies administration, but unlike a trust, the role is estate oriented and there is no room for undue influence or sham presumptiveness. There is a limited ability to influence the API Policy through the use of a Protector. In fact, the role of the Protector is significantly less than in a traditional trust relationship or that of the governing Board of Directors in the case of a foundation. The role is limited to: 1) name but not revoke Beneficiaries or their entitlement, 2) provide limited input to asset allocation and portfolio management, essentially ensuring that the independent financial advisor is in fact doing their job, 3) provide input to the disposition of capital or income to Beneficiaries, and 4) If the Policy needs to be amended, the Protector will be consulted.

In sum, API will provide insurance in the event policy assets are attacked by economic predators, the attack will be vigorously defended, and if successfully attached, the lesser of full market value or book value will be paid to the Beneficiaries of the API Policy, reducing the potential for asset loss to a minimum. The completed API Application process creates an irrevocable declared asset protection structure. To begin the process, the client will irrevocably transfer title of the assets to the Insurance Company. The assets will be administered and held at all times by regulated and accountable independent institutions. The idea is to avoid the complexities of the asset protection area by offering insurance against asset losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions