A business succession plan is a key component of any asset protection plan.  In most cases, a family business constitutes a large percentage of the owners’ assets.  Yet a significant number of businesses have absolutely no succession plan in place.

In thirty years of representing family businesses, I have come to understand why succession planning is so difficult.  There are many reasons for this but I believe three of the most significant are as follows:

  1. It is simply difficult for many business owners to imagine that anyone else (including family members) will run their business as well as they do.  And they are frequently correct about this!  Unfortunately, this is not a good reason for having no succession plan in place.  It reminds me of naming guardians for minor children in a Will.  Most parents feel that no one would raise their children with the same care and attention that they would; and that is probably correct.  It is nevertheless foolish to simply ignore what would happen if both parents died.  The same is true in business.  Lack of a succession plan can lead to confusion and needless controversy following the death, disabilty or retirement of the owner.
  2. Many business owners have thought of succession planning, but simply do not know where to start.  All that is really required to get started is to contact a professional…either an attorney or business consultant who specializes in this kind of planning.  Business succession planning should be a team effort involving a number of professionals.  But someone needs to spearhead the effort, and this is frequently the job of an attorney or consultant.
  3. Finally, I find that in today’s lightning-paced business environment, it is simply hard for business owners to find the time for succession planning.  Business owners should realize that developing a succession plan can save huge amounts of time and money in the future.  Speaking in business terms, there is generally a huge return on investment.  This alone should be an incentive to do some planning.

Business owners today are rightfully concerned about catastrophic lawsuits and other creditor problems.  I would guess, however, that more businesses are lost or severely damaged by the lack of a meaningful succession plan than by an unexpected, catastrophic lawsuit.  Asset protection in today’s business environment is abouletly critical.  And a business succession plan is a key component of asset protection.

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.

SEE CORRECTION COMMENT FOLLOWING THIS POST.

A couple recent inquiries from readers of this blog (as well as some recent client questions) reminded me of the critical role of the attorney in the asset protection planning process.

You will frequently benefit by getting input from multiple advisors — such as your investment advisor, accountant, tax preparer, maybe even certain friends and family members.  Only an attorney, however, should ultimately render asset protection advice.  This is because once you have retained an attorney, your discussions with the attorney will be privileged.  The attorney-client privilege is a very strong one and is designed to facilitate open and honest discussions between you and your lawyer.  Correspondence and discussions with your investment advisor and most other professionals will generally not be privileged.  A reputable asset protection attorney will obviously not tolerate discussion about improper or unlawful activities.  It is nevertheless extremely important that you be able to speak freely and openly with your attorney about your particular situation and goals.  Again, input from other advisors is desirable.  But engaging in asset protection planning without the benefit of a trusted attorney is a big mistake.

Another reason that an attorney is so critical to the asset protection process is that only an attorney can lawfully draft certain documents.  For instance, while a financial advisor may have good advice with respect to certain provisions of a will or trust agreement, your financial advisor is not supposed to be drafting those documents.  In fact, that kind of drafting may constitute unauthorized practice of law.  Even putting aside the possible illegality of such action, it just does not make any sense.  I have had a couple instances recently in which I was presented with trust agreement provisions that had been prepared without the help of an attorney.  The poor drafting lead to all kinds of problems.

The failure of many individuals and organizations to engage in asset protection planning costs far more in the long run than the planning itself would have cost.  A team approach to asset protection planning is frequently advisable as long as a lawyer is a key team member.  Asset protection planning without the help of an attorney, however, is likely to be an accident waiting to happen.

I am frequently asked isolated questions about asset protection planning.  Should I consider forming a domestic asset protection trust?  Do you think I should consolidate some of my real estate holdings in a limited liability company?  Should my husband and I transfer joint interest in our residence to my name alone?  Etc., etc.

None of these questions can be answered in isolation.  They are like pieces of a puzzle that must ultimately be brought together in an overall asset protection strategy.

In order to give meaningful advice, an asset protection attorney must obtain information from you about a variety of matters, including the following:

  • Your net worth.  While certainly not determinative, net worth affects asset protection planning.  If your net worth is $200,000, an offshore trust is far less likely to be a meaningful strategy than if your net worth is $20 million.
  • Your specific assets and liabilities.  Protecting real estate may involve different considerations than sheltering marketable securities.  Your attorney must have at least a general idea of your specific holdings.
  • Risk.  Are you in an occupation where you face an increased chance of lawsuits (such as a medical doctor or a small business owner)?  While any individual of a business can potentially benefit from asset protection planning, some businesses and individuals need planning more than others.
  • Fees and expenses.  Various asset protection alternatives have different costs.  Offshore trusts are a lot more expensive to set up and maintain than most domestic asset protection alternatives.  And more expensive alternatives are not always the best choice. 
  • Family situation.  Your marital status, whether or not you have any children, and other personal and family considerations can impact asset protection alternatives.
  • The area in which you live.  Florida and Texas have great homestead exemptions.  Ohio on the other hand has a very low homestead exemption.  State laws definitely impact asset protection planning.
  • Whether you have any current creditor problems.  Once there is a judgment against you, or even a lawsuit filed against you, your alternatives become far more limited.  Fraudulent transfer statutes may prohibit moving assets to avoid paying known creditor claims.

While much of the foregoing may seem obvious, I find that many clients do not initially understand why I want to have a good overview of their personal and financial situation before making any specific asset protection recommendations.  Various asset protection alternatives are like pieces of a puzzle — they must fit together into an overall strategy in order to be effective.

 

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.

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.

My law offices are in the Eaton Center Building in downtown Cleveland, Ohio.  So a recent headline in The Cleveland Plain Dealer Business Section — stating that Eaton might owe billions in damages in an antitrust case — naturally caught my eye.  A jury in federal court in Wilmington, Delaware found that Eaton Corp has monopolized the market for commercial truck transmissions.  The company now faces paying billions of dollars in damages to a competitor.

Eaton does not owe anything immediately.  There will be a second trial to determine the amount of damages; and there will very likely be appeals.  But the case illustrates how one single court judgment can have a catastrophic effect on even a very large company.

While the Eaton case involved an antitrust claim, a catastrophic judgment can result from even a simple contract case.  For example, in the 1980s a Texas jury found Texaco liable to Pennzoil for tortiously interfering with a contract between Getty Oil and Pennzoil.  The jury verdict was for $7.52 billion; and the jury added another $3 billion in punitive damages.  Texaco Inc. v. Pennzoil Co. (1987), 729 S.W. 2d 768 (Tex. Ct. App.).  Texaco of course appealed (all the way to the United States Supreme Court), but the ultimate resolution of the case involved Texaco paying $3 billion and filing bankruptcy.  Texaco at the time was one of the largest corporations in the United States.  This is another classic reminder that a single jury verdict can have an enormous impact on a company — even a very large company.

My post of July 2, 2009 titled "Asset Protection for Your Business" outlines some of the simple strategies that an organization can use to protect at least some of its assets.  Unfortunately, many small business owners tend to focus on asset protection only after some huge lawsuit is filed or some court judgment is entered, at which time it is generally too late to do anything.

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.

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.

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.