Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate Planning

Any trust that can help protect your assets from creditors requires that you surrender at least some control over those assets. This goes for an offshore trust; a so-called "domestic asset protection trust"; an irrevocable life insurance trust; and any other trust that gives you creditor protection. If you think about it, this is just common sense. If you retain full control over the assets in a trust, than a judge could order you to hand those assets over to a creditor who has a judgment against you. This is why a revocable grantor trust (frequently used for probate avoidance) provides no creditor protection. Such a trust may be useful to avoid probate, provide asset management, and for other purposes. But it is not going to protect your assets from a judgment creditor.

Surrendering some control of your assets is not necessarily bad, as long as you are willing to do so. But each situation has to be analyzed separately. And, you must be very careful about who you are giving some control to. While this is a broad generalization, it should come as no surprise that the more control you give up, the better creditor protection you get. But surrendering control has its own risks, which should be considered very carefully.

Legitimate asset protection includes a balancing of risks and possible rewards. Always keep in mind that if a particular arrangement looks too good to be true, it probably is. 

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More than 30 foreign jurisdictions now have asset protection trust statutes.  The Cook Islands was the first to adopt an International Trust Act for asset protection purposes in 1989, and many other jurisdictions have based their statutes in whole or in part on Cook Islands' law.  A number of other jurisdictions have traditionally relied on court cases (rather than a statute) to provide asset protection for trust beneficiaries.  The leading example is the Isle of Man (used by many wealthy individuals long before any offshore asset protection statutes were enacted).

Offshore laws vary widely, and there is no one jurisdiction that will automatically meet the needs of all clients.  There are varying statutes of limitations relating to fraudulent conveyances; differences in whether a U.S. judgment will be recognized or whether a new trial will be required; differences whether contingent legal fees will be permitted; and a variety of other variations.

Beware of anyone who is simply trying to sell a particular kind of trust, like a "Cook Islands Trust", or a "Cayman Islands trust".  There is no way someone can know the best choice for you without a careful analysis of your particular situation.  Whether an offshore trust is even a good idea for you in the first place requires careful analysis.

The bottom line is that there is no foreign or domestic asset protection trust that automatically meets the needs of all individuals.  Each situation must be analyzed on its own.

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UBS (the giant Swiss financial institution) has received a lot of bad press recently in connection with offshore tax evasion schemes.  More UBS clients were indicted earlier this month, but federal authorities are focusing on other financial institutions as well.  Lynnley Browning reported last week in the New York Times that arrests have now been made in connection with an international tax evasion scheme said to involve HSBC.

The latest case involves real estate developers who sold a hotel in New York City and allegedly routed the proceeds through sham accounts in Panama, the Virgin Islands, Liechtenstein, Switzerland and the Bahamas to evade taxes.  The complaint against the real estate developers (filed in federal court in Fort Lauderdale, Florida) describes how federal agents used wire taps in 2007 to record various phone conversations.  This shows that authorities are using more aggressive techniques in fighting offshore schemes.

I was setting up companies in Panama for clients more than thirty years ago.  These entities, however, were used for very legitimate business, tax, and asset protection purposes.  Using offshore companies or trusts to unlawfully evade U.S. taxes or for other unlawful purposes is becoming more and more difficult -- as it should be.

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A new law signed by President Obama last month makes it much harder for U.S. citizens to evade taxes by hiding money in offshore accounts.  Foreign financial institutions will now face a 30% tax on their U.S. investments if they refuse to provide information about accounts held by U.S. citizens.

None of this is a surprise.  With huge budgets deficits, Congress is closing offshore tax loopholes and making it harder for U.S. citizens to shelter money in foreign jurisdictions.  You can read about the new law in the March 28, 2010 New York Times article by Gretchen Morgenson titled "Death of a Loophole, and Swiss Banks Will Mourn".

As I have mentioned many times before... This does not mean there is anything inherently wrong with offshore trusts-- as long as they are not used for unlawful tax evasion.

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Offshore trusts are receiving far more media attention than they did in the past.  And much of the media attention is negative.  Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands.  The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City).  The islands are known mostly for tourism.  They contract their national defense to New Zealand, which is four hours away by plane.  Yet the Cook Islands have a thriving international trust business.

Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection.  He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors.  There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.

Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law.  He explains that the latest among them is Jamie L. Solow.  Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud.  U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust.  This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection.  Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust.  It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit.  Many of the asset transfers occurred after the jury rendered its verdict.  As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.

An offshore trust can be an appropriate part of an asset protection plan.  But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.

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I reported in a post earlier this month that as an IRS amnesty deadline approached, more than 7,500 U.S. taxpayers had voluntarily disclosed their secret offshore accounts.  Lynnley Browning reports in a November 18, 2009 New York Times article that the IRS received a flood of additional disclosures just before the deadline expired.  The final number of U.S. taxpayers disclosing secret offshore accounts almost doubled as the deadline approached-- from 7,500 to 14,700.  IRS commissioner Douglas H. Shulman has indicated that billions of additional dollars will come into the U.S. treasury as a result of this IRS program. 

It is important to realize that U.S. taxpayers who use legitimate asset protection techniques should have no concern whatsoever about the recent IRS actions.  The IRS is simply aggresively going after U.S. taxpayers who are not reporting income as required by applicable law.  Offshore accounts can have numerous advantages (both from a financial perspective and from an asset protection standpoint).  You should not be afraid of using offshore accounts or offshort trusts, as long as they are being properly reported and administered.

A big lesson from the recent IRS actions is to carefully choose your financial and legal advisers.  Americans who opened secret offshore accounts and then failed to report income taxes were foolish and/or got very poor advice.  A reputable asset protection attorney would have never recommended the course of action that has now landed many Americans in deep trouble with the IRS.

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It seems that U.S. lawmakers are likely to give the IRS increasing support in its recent assault on offshore accounts.
More than 7,500 U.S. taxpayers have voluntarily disclosed secret offshore accounts to the Internal Revenue Service in connection with a recent amnesty program. The program did not provide any forgiveness for tax evasion. It simply provided possible leniency with respect to penalties for those who voluntarily came forward and disclosed secret offshore accounts. IRS Commissioner Doug Shulman says that the IRS will be scouring the 7,500 disclosures to identify financial institutions, advisors and others who helped taxpayers avoid obligations. 
According to an article by Ryan J. Dommoyer of Bloomberg News (published in The Cleveland Plain Dealer), U.S. lawmakers have praised the recent developments and are calling for stronger laws to help the IRS. Senator Carl Levin heads the Permanent Subcommittee on Investigations. That Committee has held hearings on how UBS solicited Americans to put assets in Swiss banks. Senator Levin has stated that he will keep pushing legislation to give the IRS more tools to fight tax evasion through offshore accounts.
As I have repeatedly stated in posts on this blog, there is nothing inherently wrong with offshore accounts. When such accounts are maintained in a proper and lawful manner, account holders should have no significant concerns about increased IRS scrutiny.

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Brazil has been claiming that Delaware and Wyoming are tax havens -- because they have low costs and minimal disclosure requirements for business entities.  The New York Times reports that Luxembourg's prime minister has now joined in this claim.  He has called for both Delaware and Wyoming to be put on the tax black list of the Organization for Economic Cooperation and Development!

These kinds of allegations are likely the result of recent U.S. efforts to increase tax revenue from U.S. citizens who live, work or simply hold assets outside the United States.  Some foreign jurisdictions resent the U.S. callng them "tax havens" when certain states in the United States seem to have "tax haven" characteristics.

The U.S. is unusual in that it taxes its citizens on income no matter where it is earned.  Tax treaties may reduce the burden, but the general rule is that a United States citizen must pay tax on income earned anywhere in the world.  And the U.S. is increasing its efforts to collect taxes on assets held abroad.

We could certainly debate whether Delaware or Wyoming (or any other U.S. jurisdiction) is a "tax haven."  But it is true that disclosure requirements in many states for corporations and other business entities are less than they would be in many other countries.  For example, a limited liability company can be formed in Delaware, Ohio and many other states without publicly disclosing the names of any of the owners or managers.  This is not the case in many other countries.  If nothing else, this is a good reminder to first consider asset protection strategies that are closer to home before considering offshore options.

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One of the best known international tax havens -- the Cayman Islands -- is being forced to consider something that would have been unthinkable only a couple years ago: raising taxes.  This may be yet another blow to Americans who hold assets in offshore accounts.  As reported in a recent New York Times article by Landon Thomas, Jr., there is "no getting around the fact that the balmy days for exotic offshore financial centers like the Caymans could be coming to an end." 

The Cayman Islands appear to be considering raising the $3,000 annual fee that hedge funds pay to register in this jurisdiction.  The New York Times also reports that the Caymans are considering a small tax on the trillions of dollars that flow in and out of the island on a daily basis.  Many financial firms (particularly hedge funds) are registered in the Cayman Islands because of favorable tax treatment.

I personally doubt that the Cayman Islands will suddenly cease to be a tax haven.  But as noted in The New York Times article, there is a clear trend of greater scrutiny of offshore jurisdictions like the Cayman Islands.  During his campaign, President Obama referred to Ugland House in George Town (where about 19,000 companies are registered) as "the biggest tax scam on record".  Statements like this inevitably bring higher scrutiny.

Assets may be held by U.S. citizens and entities in offshore jurisdictions for a variety of reasons.  Some jurisdictions provide asset protection advantages; some (like the Cayman Islands) provide tax advantages; some have simply provided stable financial banking and financial services; and some (including Switzerland) have provided varying degrees of confidentiality.

As I have mentioned before, there is nothing inherently wrong with U.S. citizens or entities holding assets outside of the United States.  Almost all major U.S. corporations now operate internationally in one way or another, and they generally have some portion of their assets outside of the United States.  But assets held outside of the U.S. are sometimes used as part of a scheme to unlawfully evade U.S. taxes.  There is clearly an increased interest by U.S. authorities in reducing tax advantages for U.S. corporations and individuals who hold assets outside the United States.

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In March of 2009 the IRS began a six month amnesty program with reduced penalties for those who come forward and acknowledge they been have unlawfully hiding assets-- and failing to pay applicable taxes on those assets.  The amnesty program is part of a broader effort by the IRS to crack down on U.S. citizens who are illegally hiding assets overseas.  While the IRS has refused to say how many Americans have applied for the program, the number appears to be more than 3,000.  Offenders still face penalties.  But they can probably avoid jail time, and possibly avoid some penalties.

The IRS announced this week that it will extend the amnesty program until October 15.  There will be no additional extensions.

If you are interested, you can read more about the amnesty program in an article by Stephen Ohlemacher (Associated Press) in the Tuesday, September 22 Cleveland Plain Dealer Business Section.

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Finn M. W. Caspersen, heir to the Beneficial Corporation fortune, was a patron of Harvard and Princeton and gave away tens of millions of dollars to charity.  He was active in New Jersey politics.  Mr. Caspersen served on the Dean's Advisory Council at Harvard Law School.  As Lynnley Browning wrote in the New York Times on September 16, 2009:

"He seemed, in many ways, like a man from another time, a Gatsbyesque figure who glided through a world of old money, private clubs and pedigree horses, his family name emblazoned on Ivy League halls."

Mr. Caspersen's life ended tragically on Labor Day when he shot himself in the head at Shelter Harbor Golf Club in Westerly, Rhode Island.   

No one can be sure why Finn Caspersen ended his life.  He had been suffering from kidney cancer.  But the New York Times reports that at the time of his death, Mr. Caspersen may have been using secret offshore bank accounts to evade taxes.  Investigators were apparently building a case against him.  It is reported that he may have owed as much as $100 million in back taxes and penalties, and may have faced prison.  The Caspersen case apparently involves accounts in Liechtenstein, a leading offshore tax haven.  According to the New York Times, federal authorities recently placed liens on the personal trusts of Mr. Caspersen's four sons.

In any event, it never ceases to amaze me how many super-wealthy Americans have tried to unlawfully evade U.S. income taxes by using "secret" offshore accounts.  Recent IRS actions are making these accounts less and less secret.  As I have said in a number of other posts, there is nothing inherently wrong with offshore accounts.  They can be valuable for a variety of reasons.  But they cannot be used for tax evasion.  Failing to report income and paying the appropriate tax can have disastrous consequences -- both professionally and personally.

I highly recommend the full article by Lynnley Browning in the Business section of the September 16, 2009 New York Times.  It is a fascinating story about a real tragedy.

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Last week, the Swiss banking giant UBS agreed to turn over information on American clients suspected by the IRS of using Swiss accounts for tax evasion.  On Wednesday, August 19, IRS Commissioner Douglas Shulman said that the agency is looking at other banks and intermediaries in Switzerland in addition to UBS. 

The IRS Commissioner was not kidding.  Last Thursday the Justice Department indicted a Swiss banking executive and a Swiss lawyer for selling tax evasion services to wealthy clients.  The services allegedly involved the use of Swiss accounts as part of an unlawful scheme to disguise and hide assets.  The indictment, filed in the United States District Court in Ft. Lauderdale, Florida, accuses a director of a Swiss bank as well as a Swiss lawyer with conspiracy to defraud the United States.  The men are accused of helping clients hide assets by creating the appearance that certain assets of U.S. clients belong to Swiss citizens.  The men were also accused of falsifying documents to disguise interests of United States citizens in certain offshore funds.  It appears that the Justice Department established a special task force in 2007 to focus on Swiss banks that help Americans evade taxes.  Recent actions seem to be the result of some of these investigations. 

The message from the indictments is very clear:  not only will the IRS and the Justice Department investigate large financial institutions like UBS -- but they will also be looking at smaller banks and financial institutions who may be helping U.S. citizens to unlawfully hide assets.  Lawyers who facilitate these unlawful schemes may also become targets of the IRS and the Justice Department.

Only fools and criminals participate in offshore schemes that are designed to evade U.S. income tax obligations.  Legitimate asset protection planning does not involve unlawful tax evasion.  It involves keeping assets essentially in plain sight, while lawfully minimizing taxes and taking advantages of laws that allow you to make assets more difficult for creditors to reach.

You can read more about the recent indictments as well as the Justice Department's on-going attack on Swiss banking secrecy in an August 21, 2009 article in The New York Times. 

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On Wednesday, August 19, UBS (one of Switzerland's largest banks) agreed to turn over information on more than 4,450 American clients suspected by the IRS of using Swiss accounts for tax evasion.  Due to provisions of a new tax treaty between the U.S. and Switzerland, it could be more than a year before the IRS has all the information it wants.  It is clear, however, that the IRS is stepping up its efforts against tax evaders who are using Swiss accounts in an attempt to hide assets.  You can read more about these IRS efforts in an August 20, 2009 New York Times article.

In February of 2009, UBS paid $780 million and admitted to criminal wrongdoing in selling offshore banking services that contributed to tax evasion by U.S. citizens.  And the U.S. Department of Justice has a number of criminal investigations pending against UBS clients.  Swiss bank accounts are not going to remain as secret as they once were. 

There are still valid reasons to have Swiss bank accounts.  Switzerland has traditionally provided a very stable political and economic climate.  Many of its banks have provided a very high level of personal client services and good money management.  Swiss accounts (like other offshore accounts) can certainly be part of a legitimate, lawful asset protection plan.  It may be more difficult for a creditor to reach assets in a Swiss account than in a U.S. bank account.

Recent enforcement actions by the IRS, however, are a clear reminder that you cannot use Swiss accounts (or any other offshore accounts) in order to evade U.S. tax obligations.  United States citizens are required to pay tax on income whether that income is received in the United States or abroad.  As I have discussed in other posts -- and as I will continue to emphasize -- legitimate asset protection does not involve unlawfully hiding assets in order to evade taxes.  In fact, the best asset protection plans essentially leave assets in relatively plain sight, and simply take advantage of applicable laws in order to make it more difficult for creditors to reach those assets.

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A lawyer accused of hiding assets was released from prison last week -- after serving 14 years in jail.  H. Beatty Chadwick was sent to prison in 1995 for allegedly hiding $2.5 milion in assets in connection with his divorce.  By the time he was released last week from a county prison in suburban Philadelphia, Chadwick had been in prison for 14 years.

The Chadwick case is an important reminder that judges throughout the United States have broad civil contempt powers.  Judges can jail debtors who appear to be unlawfully hiding assets.  You can read more about Chadwick's case in a number of recent articles including The Philadelphia Inquirer and the July 12, 2009 New York Times. 

While the Chadwick case seems to have set a record, many other courts have imposed what asset protection attorneys call "Anderson relief".  That term comes from Michael and Denyse Anderson, who were jailed in the 1990s for refusing to return funds from their Cook Islands trust (after they had been caught by the Federal Trade Commission in an apparent telemarketing scheme).  A federal judge in Nevada imprisoned the Andersons for 6 months for contempt of court when they refused to take steps to return funds from their offshore trust.  The United States Court of Appeals for the Ninth Circuit affirmed the finding of contempt and affirmed the jailing of the couple as an appropriate way to coerce certain debtors to turn over assets from offshore trusts.  This has become known as "Anderson relief."

The Anderson case and the recent Chadwich case are important reminders that certain asset protection strategies can land you in jail.  There are many reasonable, lawful asset protection alternatives; but crossing certain lines can have disastrous effects.

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A number of offshore jurisdictions have enacted trust laws that provide significant protection for debtors.  One example is St. Vincent in the West Indies.  Its trust laws have a number of separate provisions that make assets held in a St. Vincent trust very difficult for a U.S. creditor to reach.  One such provision is that St. Vincent simply does not recognize foreign judgments with respect to trusts.  If a U.S. creditor has a judgment against a debtor in the United States, the creditor cannot collect assets of that debtor held in a St. Vincent trust without filing a new action in St. Vincent.  That new action will be subject to numerous requirements that put obstacles in the creditor’s path.  Legal proceedings in jurisdictions like St. Vincent often move very slowly.  Several years ago one of my clients was involved in a real estate transaction in St. Vincent.  I learned that navigating various St. Vincent legal requirements was difficult and very time consuming.  Jurisdictions such as St. Vincent also provide very short statutes of limitations for fraudulent transfers, which favor debtors over creditors. 

There are many other choices for offshore trust arrangements including the Isle of Man, the Cook Islands and the Cayman Islands.

While offshore trust can provide valuable asset protection, they are expensive to set up; there will be annual maintenance fees; they all involve loss of control of your assets to some degree; and they have various other risks.  They can also sometimes do more harm than good because many judges are naturally skeptical of entities formed in places most Americans have never heard of.

The bottom line is that an offshore trust arrangement may be an appropriate part of an asset protection plan, especially for certain high net worth individuals.  Generally, however, there will be simpler and less expensive alternatives available. 

Finally, it is important to note that offshore trusts cannot be used to avoid U.S. income taxes.  This continues to be a big misconception that many Americans have about offshore trusts.

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