Commonly Asked Questions About Asset Protection – Part Two

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Volume I, Number 4 – November 1992

© Donlevy-Rosen & Rosen, P.A.

COMMONLY ASKED QUESTIONS ABOUT ASSET PROTECTION:

What People Want To Know – Part Two

This is the second of two issues devoted to commonly asked questions about asset protection. Among the questions addressed last month were those relating to the significant protection afforded through the use of the family limited partnership. Continuing where we left off —

SHOULD THE LIMITED PARTNERSHIP OWN ALL TYPES OF ASSETS? No. A partnership should not own certain types of property. For example, a subchapter S election would be lost if S corporation stock were transferred to a partnership. Similarly, the home mortgage interest deduction would be lost if property eligible for that deduction were owned by the partnership. Protection techniques for these types of assets are discussed below.

WHY DO I NEED AN OFFSHORE TRUST IN VIEW OF THE PROTECTION AFFORDED BY THE LIMITED PARTNERSHIP? As mentioned in the above question, certain assets should not be owned by the limited partnership; nonetheless, they still need to be protected. These assets can, however, be directly owned by a properly structured offshore trust. In addition, although a significant degree of protection is available through the use of the family limited partnership, we can never predict how a local court or jury will act. Sometimes a “result oriented” judge or jury will ignore the statute limiting the creditor’s rights against a partner in a limited partnership, and somehow pierce the partnership protection; this happened in two recent California cases. However, significant additional protection is available through the use of an offshore trust as the limited partner in the family limited partnership.

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If there is concern that an unrelenting creditor may convince a result oriented judge or jury to pierce the partnership, then the trust, as a limited partner, will cause the liquidation of the partnership and move the assets offshore – beyond the jurisdiction of a U.S. court. Where the trust is subject to the laws of an appropriate foreign jurisdiction, the creditor’s U.S. judgment will be worthless, and if he is adamant enough (and has the financial means) to attempt to pursue the trust assets, he would have to begin his lawsuit all over again in the foreign country — with one of its lawyers (who, under their law, will not be permitted to take the case on a contingency basis). These geographical, financial, and procedural impediments to reaching the foreign trust will impact significantly on a creditor’s decision to chase assets.

apn1-4WHY CAN’T I JUST HIDE MY MONEY IN A SWISS ACCOUNT? While investing funds in a Swiss or other foreign account may prove to be a worthwhile investment, any asset protection planning which depends upon hiding assets or secrecy is doomed to failure. As a U.S. taxpayer, the law requires you to report your financial interest in, or signature authority over, any foreign bank account, securities account, or other financial account. If you comply with this requirement, as you should, a creditor can obtain this information in a lawsuit, and if you lose the suit, the court can order you to bring the funds back to the U.S. to satisfy the judgment. If you intentionally fail to comply with the foreign account reporting rule, you will be committing a serious crime – and the Internal Revenue Service does have the means to uncover non-reporters.

I HAD MY ESTATE PLANNING DONE SEVERAL YEARS AGO – HOW WILL THE PARTNERSHIP/TRUST COMBINATION FIT IN WITH MY EXISTING PLANNING? The partnership/trust combination discussed in this and the previous issue can be easily integrated with your existing estate plan or, if you wish, it can form the basis of a new estate plan.

I DON’T KNOW IF I’LL FEEL COMFORTABLE WITH MY ASSETS UNDER THE CONTROL OF A FOREIGN TRUSTEE. WHAT PROTECTION IS AFFORDED ME IN THIS REGARD? With respect to the assets held in your partnership (all of the protected assets, with the minor exceptions discussed above), you (as the general partner) will have direct and absolute control. You will write the checks; you will make all the decisions. The foreign trust will be the limited partner, and, as such, it will have no voice in the operation of the partnership. With respect to the assets held by the trust (either initially, as discussed above, or, if the partnership is liquidated), you — as the “trust protector” — will have the power to veto any action of the trustee, and to remove and replace the trustee without cause. As the trust protector, you can also dictate that all trust accounts and assets must have both your signature and the trustee’s signature in order for any transfer to take place.

WHAT IF A COURT ORDERS ME TO BRING THE TRUST ASSETS BACK TO THE U.S., OR TO REMOVE THE TRUSTEE AND APPOINT MY CREDITOR AS TRUSTEE? A court can order you to do almost anything, but it can only hold you responsible if you fail to do something that is within your power. While you do have the power to remove and replace the trustee, the trust provides that the exercise of this power will be ineffective if you attempt to exercise it under duress (such as under a court order). Similarly, a court cannot hold you responsible for failing to bring the trust assets back to the U.S. As the trust protector, you only have the power to veto trustee actions, not to order them. As a practical matter, of course, if you are not under a court order, the trustee will take whatever action you suggest, or you will replace him.

WHAT ARE THE TAX CONSEQUENCES OF THE OFFSHORE TRUST AND PARTNERSHIP COMBINATION?

The entire structure is tax neutral. Tax neutral means that your income, estate, and gift tax “picture” does not change as a result of establishing this structure. The offshore trust does include the marital deduction and unified credit provisions necessary to obtain the maximum estate tax savings on death for married persons.

IS THIS ALL LEGAL? Entirely. The key to effective asset protection planning is the word “ADVANCE”. As long as this type of planning is undertaken in advance of a creditor appearing on the horizon, it is 100% legal to protect yourself. Unfortunately, many people first seek to protect their assets after they have been sued or otherwise incurred an obligation. In such circumstances the planning options are significantly narrowed because of laws (in all states) which permit a court to set aside transfers made at the”eleventh hour”, known as “Fraudulent Conveyance” or “Fraudulent Transfer” laws.

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