Offshore trusts have very stringent reporting requirements.  Some of the major filing requirements are the following:

  • IRS Form 1040 NR — while a domestic trust files an IRS Form 1041, a foreign trust must file a Form 1040 NR.
  • IRS Forms 3520 and 3520-A. 
  • TD F 90-22.1 (FBAR) if their are foreign accounts.  This is required for any foreign account over which you have any direct or indirect interest or signature authority.

You are obviously not going to handle foreign trust reporting requirements on your own.  The point here is that it is critical to have an accountant who is familiar with all these requirements.  There are severe penalties for non-compliance.

As I have mentioned in other posts, a foreign asset protection trust may be perfectly appropriate under many circumstances.  It is important to keep in mind, however, that there are very stringent annual maintenance requirements for these trusts — particularly the required tax filings.  If you set up a foreign asset protection trust but subsequently fail to meet reporting requirements, the effects can be disastrous.  Again, the key is to have the proper professional advice to make sure all major reporting rules are complied with.

 

While estate planning and asset protection planning are related, they are not the same.  An asset protection plan is designed principally to protect your assets from creditors during your lifetime.  It can also be designed to protect assets you leave to your spouse, children and other family members.

An estate plan is focused more on how you want your assets distributed after your death.  Estate planning involves other considerations as well (including Powers of Attorney; Health Care documents; minimizing estate taxes; etc.).  But the central focus of estate planning is distribution of your assets following your death.

Assets can be well protected from creditors but still included in your gross estate for federal estate tax purposes.  For example, funds in your 401(k) account are well protected from creditors.  But these funds will be included in your gross estate for federal estate tax purposes.  The point here is that even though you have an asset protection plan, you may still need an estate plan review, and vice versa. 

Asset protection planning and estate planning are clearly interrelated.  But I have learned that many individuals have a rather sophisticated estate plan (often carefully designed to minimize estate taxes); but that plan may do little or nothing to shield assets from creditors.  Many individuals would benefit from consulting with an asset protection lawyer even if they already have a good estate plan.

Limited liability company laws vary significantly from state to state.  Depending on your particular circumstances, one state could have significant advantages or disadvantages over another.

First of all, states have specific requirements when you form a limited liability company.  For example, New York requires a newspaper publication notice.  It also allows a manager-managed limited liability company only if this is specified in the Articles of Organization.  Most other states have no such requirements.  In Ohio, forming an LLC is relatively easy and very little information needs to be provided.  The same is true, for example, in Delaware.  But even in states where formation is relatively simple, trying to form an LLC without the help of an attorney could turn out to be a costly mistake in the long run.

So called charging order protection can also vary substantially from state to state.  A recent Florida Supreme Court decision held that a charging order was not the exclusive remedy for a creditor against a membership interest in a Florida LLC.  Delaware, on the other hand, has a specific statutory provision that makes a charging order an exclusive remedy.

As I mentioned in a recent post, offshore LLC statutes also provide varying degrees of asset protection.  It seems that Nevis is currently a good choice for an offshore LLC.

It is also important to periodically review your LLC arrangement after it is formed.  Statutes and case law can change quickly.

According to Matthew Saltmarsh writing in the Thursday, April 21, 2011 New York Times — Switzerland will probably sign new treaties by the summer with Germany and Britain under which their citizens will pay taxes on most of their undeclared assets in Swiss banks.  It appears that France and Italy will sign similar treaties with Switzerland.  The arrangements will likely involve payment of a flat rate withholding tax, which will be deducted by the Swiss bank.  Client anonymity would be preserved.  But citizens of European countries like France, Great Britain and Germany will no longer be able to completely avoid taxes on undeclared assets in Swiss bank accounts.

While the proposals would preserve Switzerland’s banking secrecy, the New York Times reports that they are likely to accelerate a shift away from banks relying on undeclared assets. These changes could result in more consolidation and down-sizing among Swiss private banks.

It is very important to keep in mind that Swiss banks can offer more than secrecy.  The country has traditionally offered political and economic stability; a strong currency; and quite a bit of banking and investment expertise.  Moreover, from a pure asset protection standpoint, protecting one’s assets does not equal hiding those assets.  In the United States, the best asset protection plans essentially involve holding assets where they are not hidden, but having them lawfully titled in such a way that they are better protected from creditors.

Holding assets in a Swiss account could be a very legitimate part of a lawful and reasonable asset protection plan for a United States citizen — as long as there is no attempt to unlawfully avoid applicable U.S. taxes.

Many things in my law practice run in spurts — just like things in our daily lives.  I may go a whole year without having a client buy or sell a business, and then several clients are engaged in business sales all at once.

This past month I have a had a disproportionate number of inquiries from people across the country who are asking about asset protection options after they have had a lawsuit filed against them — and even after a large judgment has been entered.  About a week ago I spoke to someone who had lost a court case; a judgment had been entered against him; he had appealed; and then he had lost the appeal.  Now he was thinking about protecting his assets.  Guess what?  I was not able to offer any good options for him.

There are situations in which certain legitimate asset protection alternatives could still be available to someone with a judgment against them.  But your options decline drastically once you are sued.

As I have mentioned many times before, the time for asset protection planning is right now, before any problems arise.

Asset protection planning is usually triggered by fear of a catastrophic lawsuit.  Most of the clients I work for — especially physicians, closely held business owners and high net worth individuals — are concerned that a single lawsuit could wipe out everything they have.  And this concern is entirely justified.  It is silly not to protect your assets within the bounds of applicable laws.

But lawsuits are not the only reason for asset protection planning.  Totally unexpected catastrophes — anything from natural disasters, a stock market crash, or other economic crisis — can also suddenly expose many of your assets to creditors.  For example, a catastrophic loss of real estate or other property that is not covered by insurance could suddenly put all your other assets at risk.  Asset protection planning — done in advance of such a catastrophe — could insulate your other assets from the reach of creditors.

The recent events in Japan — an earthquake, followed by a tsunami, followed by nuclear power plant disasters, followed by all the economic fallout from these unanticipated disasters — remind us that everything can change in a moment.  You generally cannot lawfully transfer assets once disaster strikes.  Such a transfer would usually be a voidable fraudulent conveyance.

It is difficult to focus on disaster planning when no particular disaster is staring you in the face.  But that is exactly the right time for the most flexible and effective asset protection planning. 

For anyone who did any asset protection planning in 2010 — If you made a gift of more than $13,000 to anyone other than your spouse, you are required to file a federal gift tax return to report the gift(s).  The filing is made on IRS Form 709.  A gift tax return for gifts made during 2010 is due by April 15, 2011.

Assets are frequently transferred from one person to another in connection with asset protection planning, and also in connection with routine estate planning.  It is very important to remember that a gift tax return may be required in connection with such transfers.  If you transfer assets worth more then $13,000 to anyone other than your spouse for no consideration (that is, as a gift), you probably have to file a Form 709.  You will not owe any tax if you are simply applying the amount of the gift to your lifetime federal exemption.  That amount (which is now a unified federal estate, gift and generation-skipping transfer exemption) has been increased to $5 million for 2011 and 2012.  Gift tax will be due once you have used up your applicable lifetime federal exemption.

This post is just a very brief overview of gift tax filing requirements.  It is certainly not a complete summary of all requirements.  If you made a gift to anyone of more than $13,000 in 2010, you should consult with your tax advisor to determine whether a gift tax return is required.

Following up on my posts of January 26, 2011 and July 21, 2010 — I want to emphasize again that not all trusts provide asset protection.

A so-called revocable "living trust" (often designed for probate avoidance) can protect beneficiaries of that trust from claims of creditors.  For example, you can protect assets that you place in trust for the benefit of your children from claims of their creditors.

But in order to protect your own assets from your own creditors — the trust you set up has to be irrevocable.  You have to give up a certain amount of control over the assets you place in such a trust or they will simply be deemed the equivalent of your own personal assets.  As common sense would indicate — if a trust you set up is completely revocable, a court could simply order you to revoke it.  And your judgment creditors could then take steps to seize those assets.

So the bottom line is what common sense would indicate:  if you retain complete control over assets in a trust, then the assets are not going to be insulated from claims of your creditors.

Does a Roth IRA provide better creditor protection than a traditional IRA?  The answer is yes.  This is because with a traditional IRA, you have to begin taking mandatory required distributions (MRD’s) starting in the year you reach age 70 1/2.  These distributions can become a potential target for creditors.  You are not required to take any funds out of a Roth IRA.

Even though a Roth IRA may be a little better for asset protection purposes, you certainly do not want to convert a traditional IRA into a Roth IRA solely for this reason.  Tax considerations will likely be your main focus.  In a traditional IRA, you make contributions in pre-tax dollars, but you must pay tax when you withdraw the funds.  With a Roth IRA, you make contributions in after-tax dollars, and there is no tax when you withdraw the funds.  Converting a traditional IRA to a Roth IRA could result in a significant tax bill.  Such a conversion may or may not be a good idea, depending on your individual situation.

As I have emphasized many times before, a solid asset protection plan can only be developed by focusing on all your assets and liabilities.  Funds in any kind of IRA are going to be a lot better from an asset protection standpoint than funds in an individual investment account.  The Roth IRA simply has an advantage in that there is no requirement to withdraw any funds.

In the United States, a creditor usually has to obtain a court judgment against you before attempting to seize any of your assets. But there are some exceptions to this general rule.

In some cases, a court can issue a temporary restraining order (TRO) or an injunction against a debtor that effectively freezes the debtor’s assets. This frequently happens in divorce cases. Rule 65 of the Federal Rules of Civil Procedure provides rules governing injunctions and TRO’s. Most states have a similar rule.

In other countries, it is often easier for a creditor to freeze a debtor’s assets prior to obtaining a court judgment. In England and most other common law countries, courts are more likely to issue a pre-judgment asset freeze to prevent the defendant from transferring assets. This has become known as a Mareva injunction.  The name comes from an English case, Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyd’s Rep. 509.

So no matter where your assets are, there are some instances in which those assets could be frozen before a judgment is obtained. The key point to remember from all of this?  Asset protection is most effective when done well in advance of any creditor issues.