If you can't answer this question in the affirmative, with certainty, it's time to brush up on basic asset protection theory. It's never too late to avoid disaster.
The practice of Asset Protection is a complex business. More than many areas of expertise, it is awash with misconceptions, red herrings, fallacies, and fraudulent methodologies. At this time, with Big Brother Government's increased concern with the flight of home currency, great focus by the authorities is being given to asset protection practices. This means that more care, more knowledge, and more personal responsibility for your asset protection plan becomes essential.
In order to help you get up to speed, and iron out the flaws in your present asset protection system, here is a comprehensive explanation of basic asset protection theory, as expounded by First American Global Advisors LLC (Nevis), for you to check against. A good place to start.
Very few systems will not violate at least one of the following precepts, and probably even good systems could violate two or three and still be viable. More than that, it's not a good plan, and you are flirting with disaster. Any plan which violates more than half of the following precepts is probably a scam, in addition to being a shoddy and defective plan.
A Good Asset Protection System, Is Dynamic
This is the single most important rule. An asset protection plan must be flexible and must change to meet the exigencies of a given situation. Asset protection plans must also follow changes in the law. You are creating a flexible system which, with modifications, will last you the rest of your life, and then, with further modifications, will last the length of your kids' lives, too.
Contrast: A bad asset protection plan will be a single structure, such as the common Family Limited Partnership, Offshore Trust structure, that is expected to protect the client in all circumstances. Bad structures are usually referred to as "Fortresses" and the representation is made that a creditor could never penetrate them. Don't believe it. "Fixed fortifications are monuments to the stupidity of man." G. S. Patton.
A bad asset protection structure will also not adapt to changes in the law. Structures such as Family Limited Partnerships and Offshore Trusts, which offered good protection from creditors in the early 1990s, were penetrated with disturbing regularity in 1998. Doubtless, there are tens-of-thousands of folk who have these defective structures who still, mistakenly, believe their assets are absolutely protected.
Worse, those thick walls which you have set up against your creditors may be turned around to trap you in the structure. Such as when a planner forms a "cheapie" Family Limited Partnership, with the client in his individual capacity as the General Partner. The creditor simply issues a court order, forcing the client to disperse the partnership's assets, which leaves the client with less-than-no protection.
Red Flag; "This structure will protect your assets forever." It won't, because if nothing else the law will change. Avoid planners who "form and forget" a structure, and do not try to update or maintain it.
A Good Asset Protection System, Is Subtle
A good asset protection system will look like a reorganisation plan, a tax plan, an estate plan, anything except an asset protection plan. The client will not have to admit that the plan was implemented to defeat any creditor, and the creditors will be left with only circumstantial (not direct) evidence that the client's purpose was really asset protection. There will be further circumstantial evidence that asset protection was not the purpose of the plan. Under examination, it will be a close call for any judge to say that an asset protection plan was even implemented, while a creditor will not have anywhere near the level of proof required to sustain a finding of contempt.
Contrast: A bad asset protection plan will be referred to as an asset protection plan. It will have features that stand out like a sore thumb, such as the formation of a trust, which requires gifting, at a time when a client is economically troubled and shouldn't be giving gifts to anyone. The plan will not make economic sense, and even if you don't admit it in so many words, it will be obvious that you are trying to defeat your creditors.
A bad asset protection plan will create a situation in which the client will either have to admit that the plan was implemented for asset protection purposes, or it will be rather obvious that the client implemented the plan for that purpose. In either event, this will be proof of actual intent to defeat creditors, which is prevented by the fraudulent transfers rules, and gives a judge the power to simply hold the client in jail for contempt until his assets are released. In other words, if you admit that you have an asset protection plan, you have unnecessarily revealed two things:
1 You have assets worth protecting; and
2 You have engaged in planning with the actual intent of defeating your creditors.
If you have properly planned your affairs, it never becomes necessary for you to reveal these two things. Should someone ask whether you have an asset protection plan, your answer should be, "No, there's nothing to protect, because it is all leveraged to the hilt."
Avoid planners who purport to keep your asset protection structure distinct from your estate or tax planning structure. If there are no other reasons for the structure than asset protection, you might as well as have signed an affidavit saying that you created the structure to cheat your creditors, i.e., a plan which has no other purpose than asset protection amounts to actual intent to defraud creditors. As mentioned, a good asset protection plan will look like anything except an asset protection plan. When a planner tells you that you should keep your asset protection plan separate from everything else, that usually just means that they don't have the skills to implement the other type of planning, or that they are too lazy to keep up with necessary changes in your estate or tax plan. It is critically important that your asset protection plan blend in with your other planning, and by definition, it can't blend in if it is separate.
Red Flag: "Merely telling your creditors about your asset protection plan will scare them off." This means that the plan is so obviously a plan to cheat your creditors, a judge will immediately see through it and begin looking for ways to hold you in contempt. Nobody who has ever had to actually stand before a judge would dare create a plan for the stated purpose of defeating that judge's orders. Anyone who suggests such a thing is so naive they shouldn't be doing your planning.
A Good Asset Protection System, Is Fail-Safe
A good asset protection system is designed like the old Apollo lunar missions: Every system has a back-up, and every back-up has a back-up, and if the back-up to the back-up fails there is a plan in place to create a new back-up, so no matter what goes wrong, or how far from home you are, there will always be a back-up system which will get you safely back to earth. In other words, a good asset protection system assumes that "what can go wrong will go wrong" and therefore does not rely entirely on anything. It always asks "What if?" There will be multiple lines of defence, and as the existing lines of defence are being penetrated, new lines of defence are being created, in this way the client and the client's assets are kept several steps ahead of any creditor. Each line of defence is created in such a fashion that the creditor will not know of its existence, until he has penetrated the line of defence in front of it.
Contrast: A bad asset protection plan will have a single line of defence, such as a Family Limited Partnership, or maybe a second line of defence, with an offshore trust behind that. The plan will not take into account that either line of defence can be penetrated, and that nobody has any idea what to do if the court holds the client in jail in contempt, until the client compels the offshore trustee to bring the assets back into the U.S. for the benefit of creditors.
Red Flag: "Creditors will never beat this." There is no "last ditch" that creditors will not be able to cross. It doesn't exist, and anyone who suggests that it does is either a liar or a dullard. Your only hope is to take advantage of the slowness of the courts, and the fact that you can create new ditches much faster and much cheaper than your creditors can cross them, so that your creditors eventually get tired and/or frustrated and settle on some favourable terms. For a planner to suggest such a thing indicates that they have never been in a tough fight, and know not what they do.
A Good Asset Protection System, Doesn't Rely On Particular Rulings
A good asset protection system will not rely on the law of any jurisdiction,
or on a judge making what you consider to be the correct determination of
law. A good plan will (again) be a flexible system that is not vulnerable to how a particular judge rules on any particular provision of law. If the judge rules in your favour: "Great! You've won." If the judge doesn't rule in your favour, you didn't count on it anyhow and can move to the next line of defence, in the next courtroom, in the next jurisdiction, and then in the next courtroom in the next jurisdiction, and so on and so forth, until the creditor gets the picture and accepts a reasonable settlement.
Contrast: A bad asset protection plan will first rely on a U.S. judge restricting your creditors' rights to a "charging order", and then will ultimately rely on an offshore judge holding that your offshore trustee doesn't have to return the assets to you. Usually, the planners who advocate this kind of plan will spend a lot of time explaining why the laws of Banana Republic No. 1 are better than the laws of Banana Republic No. 2, or Banana Republic No. 3.
While, for practical purposes, the laws of all the offshore jurisdictions are the same.
Red Flag: "Based on the laws of X, a judge will have to rule in your favour." For example, the Cook Islands supposedly have the best trust laws in the world, and there is a whole group of planners who do seminars nation-wide on the virtues of Cooks Islands trusts. In spite of these expertly-crafted laws, Cook Islands trusts have been penetrated with disturbing regularity over the last several years. Plus, as the Anderson case in Las Vegas has recently illustrated, the laws of the Cook Islands will only theoretically prevent a U.S. judge from holding you in contempt of court, although the Andersons may be technically correct, they still sit in federal prison today under an order of contempt.
A Good Asset Protection System, Is Open
A good asset protection system will be open and disclosable to everyone: your creditors, your spouse, the IRS, bankruptcy trustees, etc. The plan is formed with the expectation that every single scrap of paper will be produced to those who are hostile towards you, but that it will not matter. With a good asset protection system, you will be swamping your creditors with proof that your transactions have economic substance, not trying to hide accounts and tax returns from them. If your ex-spouse or ex-secretary "tells all" it will not matter if a good plan is in place. You can also look any judge or jury in the eye and tell them everything that they want to know. The hallmark of a good asset protection system is that everything is out in the open, and you can sleep well at night without worrying about who knows what.
Contrast: A bad asset protection plan relies primarily on "stealth" (confidentiality and secrecy), which ultimately means that at some point you will be asked who is the beneficial owner of this or that. At that point, for the plan to work, you will have to perjure yourself. The bad planners somehow never figure out that the secrecy and confidentiality laws of offshore locations have no meaningful effect before U.S. judges. With a bad plan, a single bad ruling from a judge on a discovery issue, could make you produce that one piece of paper which will destroy your whole strategy. With a good plan, your affairs are structured so that it doesn't matter who sees what, and no discovery decision will materially affect you. This doesn't mean that you shouldn't take advantage of opportunities to protect the privacy of your information; you should. Just keep in mind that excessive secrecy will attract attention, which is counter productive. Be like an iceberg: let people see about 10% of your assets and business interests, while they can only speculate on the 90% they can't see.
Red Flag: "There's no way they can find this." Run from any planner who advocates hiding assets and tells you that "they will never find out about it", and/or they start quoting you provisions from some Banana Republic's secrecy & confidentiality statutes.
A Good Asset Protection System, Is Multi-Disciplined
A good asset protection system is formed by a team consisting of at least one litigation professional and one tax professional. Asset protection inherently rests upon predictions as to what a judge will or will not do, based upon certain evidence. Thus, to be able to plan in advance, transactions which will stand up in court, it takes someone who understands courtroom rules and procedures, evidentiary rules, and, most of all, how judges think. At the same time, as stated earlier, transactions should absolutely not be done for "asset protection" purposes. To meet this requirement, you need a tax professional to assist with this planning, not only to avoid tax pitfalls, but also so the transaction makes economic sense for some reason other than asset protection. Plus, these transactions are complicated. It helps to have two professionals with different viewpoints examining each other's work. Also, the litigator who forms your plan, can also defend your plan in court.
Contrast: A bad asset protection plan will be formed by a single professional: Either someone who has never tried a case and will have no idea how to defend the plan in court, or who doesn't understand taxation and will get you into a series of transactions which you will spend years trying to back out of to avoid penalties. Alternatively, you will have someone who understands one aspect very well, and the other aspect only superficially, so they will not be as aggressive in both areas of planning as they need to be. Any single planner who claims to know both litigation procedures and tax planning probably knows neither well. The truth is, you need a team approach.
It is important that the planner who forms your asset protection system will also defend it in court. It doesn't matter how good the plan is, if it is not adequately defended. You don't want to be landed with an attorney who doesn't understand asset protection, and what you are trying to accomplish, and/or who consistently miscommunicates with your non-litigation planner about what you need to accomplish in litigation. If you do not have someone standing by who can immediately step in and defend your plan, you shouldn't waste money creating it.
Red Flag: "I can do asset protection because I understand tax law." Ask: Where is the word "tax" in the phrase "asset protection" anyhow? Avoid asset protection planners who have never tried a case. At first sign of trouble, they will bail out and make you go to litigation attorneys. Why not go to litigation attorneys first? Also be careful of non-tax planners who try to create tax plans.
A Good Asset Protection System, Is Custom-Tailored
A good asset protection system meets your specific circumstances and needs. A good planner will closely examine your personal, business and financial circumstances (often going back many years), and will then create a system which is consistent with, and blends in with, your past and present circumstances. A good system will also accommodate the way that you conduct your affairs and do business.
Contrast: A bad asset protection plan will be a cookie-cutter" one size fits all" structure irrespective of your particular needs. For something as important as protecting your life's work and savings, you need a plan that fits you as perfectly as possible, within the limitations of your budget.
Red Flag: "This is what I usually do for people like you." Avoid planners who do not try to determine your past and present personal, business, and financial circumstances before deciding what plan is appropriate for you, and planners whose clients all get more-or-less the same structure.
A Good Asset Protection System, Protects Real Estate
A good asset protection system will tie up all of your real estate, either by "equity stripping" all of the value out of the property, by having "friendly" creditors place liens on the property, or by a combination of all these and similar methods.
Contrast: A bad asset protection plan will not protect your real estate. Instead, you will get a bunch of lame excuses as to why real estate can't be protected. This is inaccurate, for you know that in the worst case, you can always get a bank to give a you a secured loan or mortgage which gives you some percentage of the money, while the bank gets a first lien. In the best case, the property can not only be equity-stripped, but cross-collateralised by various liens from various entities, so that a creditor would have to fight through multiple claims against the property, just to ascertain whether there is, in fact, any equity to get at.
It is a hallmark of the "one trick pony" planners that they will either not try to protect your real estate, or they will do something which looks like it protects the property, such as conveying it to a trust, but doesn't. Protecting property is hard work, and is not something which easily lends itself to changing names on boilerplate forms.
Red Flag: "Real estate can't be protected because it can't be moved." This is an admission of incompetence. Avoid planners who are either unqualified or too lazy to protect real estate.
A Good Asset Protection System, Leaves Nothing For Creditors
A good asset protection system will keep creditors from getting anything, except what you decide to pay them for a final settlement. This prevents creditors' attorneys from being partially funded by what you have left behind. This approach will usually earn a much quicker and more palatable settlement with your creditor, since creditors don't like digging into their own pockets to finance their attorneys to chase you.
Contrast: A bad asset protection plan will leave assets behind which can be liquidated and used to pay the creditors' attorney's fees so that they can chase you ever further, and with little direct pain to the creditor. An attorney who has won for himself a little "fighting money" from you will be excited by the prospect of a long litigation battle funded by your assets. Plaintiff's attorneys call this "living off the land" while they fight. Defence attorneys say the creditor has "now tasted blood and won't go away." Avoid this situation at all costs.
You might, in a rare case, as a tactical strategy to distract them, throw something to your creditors to fight over, while the statute of limitation runs for more important assets, but again, this strategy is very rarely employed. That is not to say that a good asset protection plan shouldn't settle, because it should. The goal of a good asset protection plan is to force a reasonable settlement. However, everything should settle, and the settlement money should not have an opportunity to fund any further litigation.
Red Flag: "Leave something for your creditors to fight over." Nobody who has ever successfully fought creditors in court would make such an absurd statement. The only time your creditors should get a dime is when they sign the settlement documents, which give you a full and complete release from liability, and not one second sooner.
A Good Asset Protection System, Will Settle
A good asset protection system will be designed with the idea of eventually getting all your creditors to accept a small settlement and go away. Thereafter, this leaves you free to conduct your business without having to worry about creditors. Ideally, this will be accomplished quickly and without your credit being substantially harmed while you negotiate, or, in the worst case, your creditors will agree to fix their reports of your credit history as a condition of settlement.
Contrast: A bad asset protection plan will never settle with your creditors. This may or may not mean that your assets will be forever protected. It does mean that you will probably be forever pursued, that your creditors will try to interfere with your future deals, and that your credit record will be obliterated. The mistake most people make is that they lose five dollars in potential new business while trying to protect a dollar of old business, when they could settle for a dime. Ironically, almost all of the people who get into trouble implementing asset protection plans, could, at one time or another, have worked out a favourable settlement with their creditors. They were just too greedy, stupid, or pigheaded to do so.
Red Flag: "Your creditors will never get a cent." As mentioned, you will want to pay your creditors a small amount to go away, so that you can get on with your life.
A Good Asset Protection System, Is Developed In Advance
A good asset protection system is developed well in advance of any foreseeable problems. It is more difficult for creditors to argue that the transactions which actioned your plan were fraudulent transfers, when they were made years before the occurance of any creditor problems.
Contrast: A bad asset protection plan is created at the last moment, in an emergency situation, for instance, when a debtor attempts to quit-claim everything to his wife or brother for $10, the night before his hearing-on-assets, or debtor's examination.
Red Flag: "This is easy and will stop your creditors cold." These methods will almost always be deemed a fraudulent conveyance.
A Good Asset Protection System, Is Cost-Beneficial
A good asset protection system will give you a reasonable degree of asset
protection for a reasonable price. In the case of a business, the asset
protection plan will not be a drain on the company's finances.
Contrast: A bad asset protection plan will be oppressively priced in conparison to your level of risk. Unscrupulous planners have been known to charge tens, and sometimes, hundreds-of thousands of dollars, in the implementation of huge Fortress-type asset protection plans, which 50 attorneys from the U.S. Department of Justice couldn't penetrate on their best day. All this, for retirees who had very little liability to exposure and not that much to protect (usually only their house and a few liquid investments).
What is a good price? Obviously, this depends on the circumstances and the work to be performed. Cheap plans are usually no plans, but it is easy to be charged thousands for boilerplate word-processor forms which are churned out in a couple of minutes. Because so many people have been taken to the cleaners due to excessive asset protection plan charges, it's preferable to request a review of costs prior to any implementation of your plan.
Red Flag: None. Shop around and get a second opinion. Avoid "impulse planning". You don't buy a car at the first lot you go to, you shop around. So why would you not shop around for advice on perhaps the most important planning decisions you will ever make. Make sure that, before you pay a dime, you get a Letter of Engagement, which clearly defines the fees and costs you will be charged, and that you have an understanding of on-going costs relating to the future maintenance and updating of your plan.
A Good Asset Protection System, Simplifies
A good asset protection system will consolidate your affairs and make your
life easier. Where the formation of offshore entities is required, to avoid all sorts of weird offshore tax filing requirements and pitfalls, a good planner will almost always elect to have the entities file their tax returns as domestic entities.
Contrast: A bad asset protection plan will make it difficult to run your business on a daily basis, and/or will require you to file stacks and stacks of annual tax returns for various entities, including complicated returns for offshore trusts or other foreign entities.
Red Flag: "If it's not complicated for you, it's not complicated for them." Not true: It should be complicated for them, but simple for you.
A Good Asset Protection System, Keeps Some Insurance In Place
A good asset protection system will leave at least a small amount of insurance in place to handle nuisance claims and (where possible) to pay
Contrast: A bad asset protection plan will be one where you have no insurance protection, and have to pay to defend and settle nuisance suits out of your own pocket. Asset protection plans will protect your assets, but they will not keep you from being sued (i.e., the court clerk is not going to refuse to accept a petition for filing simply because you have an asset protection plan in place).
Red Flag: "You won't need any insurance anymore because they will realise the futility of suing you and therefore won't." A planner who makes this statement has never defended a nuisance suit.
A Good Asset Protection System, Keeps You In Control
A good asset protection system will always keep you and your family in
control of your assets.
Contrast: A bad asset protection plan will cause you to give up your control of assets. Inadequate asset protection plans force you to rely on your planner, offshore trustees. or other persons who may embezzle your funds.
Red Flag: "Trust me." Say say goodbye to your assets.
A Good Asset Protection System, Uses Diversification Both Of Assets And Of Method
A good asset protection system will spread your assets out, so that no single creditor attack can get any significant portion of your assets. Some assets should be held in your state, some assets should be held in other states, and some assets should be kept out of the country. Similarly, a good asset protection plan utilises a variety of methods to protect individual assets and groups of assets.
Contrast: A bad asset protection plan will place all of your assets into a single entity or behind a single line of defence, so that if the creditor wins against that entity or line of defence, the creditor gets all of your assets. Run from planners who create plans where everything ultimately ends up in the same "bucket".
A bad asset protection plan will only use one method for everything, and if a creditor figures out (or already knows) how to defeat that method, then all is lost.
Don't use planners who will close their minds to certain possibilities simply because they don't understand them. For instance, some planners will not even discuss using offshore jurisdictions, although they give rise to interesting planning possibilities that should at least be considered.
It's not always necessary to use offshore jurisdictions to put together a good asset protection system. This is one of the fallacies of the asset protection industry, spurred on by the offshore trust companies and incorporation services, but there are aspects of offshore planning that are certainly worth considering, and if you blindly ignore all offshore advantages, you will miss some valuable planning opportunities.
Red Flag: "Your creditors will never get past this, so we eventually want to get all of your assets into it." Subtitle: Keep all your battleships in the same harbour so they all can be bombed at once.
A Good Asset Protection System, Avoids Trusts, Gifts, Charity, and Weird Entities
A good asset protection system will be based on transactions which have economic substance and will be "for value". It is very, very difficult for creditors to prove that a "for value" transaction is a fraudulent transfer, irrespective of the purpose of the transaction. Furthermore, a "for value" transaction which was made for a legitimate business purpose is almost impossible to set aside. A good asset protection plan will also keep to familiar entities and structures which blend into traditional planning structures.
Contrast: A bad asset protection plan will utilise gifting of assets to trusts. These transactions will almost always be set aside as fraudulent transfers (sometimes even if made years before a creditor issue arises) if the creditor can show that the transaction was meant to defeat creditors generally, not even that particular creditor. So what if it is deemed a fraudulent transfer? Indeed, in some cases you don't care if the transaction is labelled a fraudulent transfer. In other cases, however, it can mean that you will sit in jail until the money comes back. This happened with the Anderson case in Las Vegas. A couple alleged that the offshore trustee wouldn't return their money; the federal judge didn't care and threw them into jail, anyhow.
Avoid those who advocate any type of "gifting" to anybody or anything (except, in some circumstances, gifting can be properly used for some estate tax planning purposes). This goes for sham charitable donations, where you are encouraged to make donations to a charity which you control. Gifting and donations are inherently without value and will be strictly scrutinised; moreover, the IRS is aware of and detests these types of transactions.
Keep in mind that "for value" transactions almost always have some tax consideration attached to them. While many for-value transactions are not taxed, many are taxed. This provides an additional reason why you need to have a competent tax planner review all transactions.
Avoid the use of structures and entities which are so weird they call unnecessary attention to themselves. Liechtenstein Anstalts are an example of an entity which you should avoid. These weird entities stick out like a man dressed in a Polar Bear suit on a hot beach, and will attract your creditor's attention and scrutiny and the judge's ire. Well-known scams, such as Nauru offshore Private Banks, should be avoided at all costs.
Red Flag: "The trustee will be prevented by the trust document from giving it back to you." Actual response from the U.S. District Judge in U.S. v. Anderson (this involved a Cook Islands' trustee who would not respond to an order to return money): "You're just telling me that you can't get there from here, and I don't believe it," the federal judge stated. "I think the Andersons have the (jail) key. It's up to them to open the door." The Andersons, who set up the trust, have sat in jail for more than six months on charges of contempt. This sheds doubt on the value of offshore trusts as a common asset protection tool.
A Good Asset Protection System, Avoids Personal Bankruptcy
A good asset protection system will keep you out of personal bankruptcy (and will avoid business bankruptcies to the greatest extent possible). Instead, a good asset protection system will help you achieve a non-judicial
resolution with your creditors, whereby they all agree to accept some small
amount in settlement.
Contrast: A bad asset protection plan will positively lead you into bankruptcy, or require that you take bankruptcy to free yourself from creditors. Bankruptcy judges have some of the strongest powers of any judges, and are not hesitant to use them. As a debtor you will never be in a more vulnerable position than you are in bankruptcy. Not only does the bankruptcy judge have broad contempt powers, but there is also the crime of bankruptcy fraud, which means that you can go to prison for certain ordinary transactions that might not even be subject to question outside of bankruptcy. In bankruptcy, creditors find out everything about you. A fail-safe asset protection plan will take into account that you might be forced into an involuntary bankruptcy, and will seek to exclude assets from being subject to the bankruptcy proceeding, and seek to avoid being criticised by the bankruptcy court.
Red Flag: "We'll just roll you into bankruptcy and that will clean everything up." This is an admission on the part of the planner that they really can't help you in any meaningful fashion, for it they could they would attempt to devise a plan to try to keep you out of bankruptcy.
A Good Asset Protection System, Will Protect You As Well As Your Assets
A good asset protection system will keep you far away from allegations of fraudulent transfers, or anything which could subject you to contempt, or charges of bankruptcy fraud, or other crimes.
Contrast: A bad asset protection plan will eventually get you to where you could be held in contempt because somebody will not do something the judge wants them to do. Amazingly, probably more than 95% of all asset protection plans being actively marketed today will get you there. These defective structures always have you ending up in an offshore trust where the offshore trustee refuses to give the money back. The judge can't do anything about it because the trustee is outside the judge's jurisdiction. You, however, are not outside the judge's jurisdiction, and the judge will simply hold you in contempt; leaving you to sit in jail until the money comes back.
Despite denials, by some overly-credentialed seminar speakers, that this could happen, judges have figured out that their best and quickest way to deal with offshore trusts is to simply stick the grantor in jail until the money comes back. A flawed asset protection plan will subject you to federal criminal charges of bankruptcy fraud, or of defeating the collection of taxes, or defeating the collection of a government-backed loan, etc.
A good planner may not be able to structure you out of certain types of these obligations, but will not send you to the pokey, either. They will plan around these obligations so that you can at least protect everything else. A good planner will also give you assistance in working out these other obligations (in some circumstances where the equities are in your favour, the U.S. government will accept settlements just like any other creditor).
Red Flag: "I can protect your assets, but I can't protect you." These planners can't protect either. This is an admission of incompetence on their part, and suggests that with their plan you will be open to charges of contempt, even if your assets are safe (meaning you will have to flee the country if you don't want to sit in jail until the assets come back). You should also run from planners who tell you that you can defeat the collection of taxes, or government-backed loans, or anything else which will land you in prison.
A Good Asset Protection System, Seeks to Trap and Counterattack Creditors
A good asset protection system will take a pro-active approach to resolving creditors' claims. It will set traps for creditors, such as baiting creditors to take over entities which have a large unpaid tax liability. It will patiently await, and then take advantage of opportunities to counter attack creditors when they over-reach. The goal is to place the creditor in a situation where they no longer want the cheese, they just want out of the trap. That's when good settlements are most often achieved.
Contrast: A bad asset protection plan merely tries to keep the creditors at bay and out-last them. Creditors who do not have to "pay the price" for aggressive tactics will only get more and more aggressive, and eventually their tactics may succeed. Moreover, creditors who are not hurting have no incentive to settle. You don't want creditors with this mindset; instead, you want creditors who are gun-shy about doing anything because their hands keep getting slapped. This additionally illustrates why it is critically important that those planning your asset protection system, include skilled litigators, who can set up these traps, and recognise opportunities to launch counterattacks against creditors.
Red Flag: "Now that your plan is in place we will just wait for them to figure out that they're not getting anything , and go away." This is self-delusional. In reality, your creditors are not sitting around pondering their frustration. Instead, they are scheming new surprise ways to plunder your assets. The longer this lasts, the greater the possibility they will succeed. So be active, and look for ways to make your creditors accept a settlement.
A Good Asset Protection System, Heeds Equity
A good asset protection system keeps you on the right side of equity. Judges and juries will tend to be sympathetic towards you. If someone is going to be given a break by a judge on a determination of a technical issue, a good asset protection plan will be designed, so that you're the one who has the best chances of been given a break. You will be the "Good Guy" and your creditors will be the "Bad Guys". Everyone will silently be rooting for
you to win, whatever it is. For example, if you owe money to a bank, a good
asset protection plan will make it appear that while you indeed owe money to the bank, the bank refused to give you promised additional funding when you needed it (so-called "lender liability"), and so, if the bank can't collect, it got what it deserved.
Contrast: A bad asset protection plan has the effect of harming someone, or attempts to protect someone who has intentionally harmed someone, or just flat out cheats someone. For example, if you take a loan from a bank to build your business, and then take all of the money and place it into an offshore trust somewhere, nobody is going to have much sympathy for you. If the equities are way out of balance, a judge has the broadest powers to re-adjust the equities, including holding you in contempt. No appellate court would reverse the judge's decision in such circumstances, irrespective that the law might technically be in your favour.
No trust protects you from criminal penalties. As William McCorkle and his wife recently found out: the fact that the laws of the Cayman Islands protect their money in trust is small consolation, considering their twenty year prison sentence for defrauding folks with bogus distressed real estate materials.
Keep in mind that you and your asset protection plan may be measured by the reputation of your planners. Be sure they're clean. If they are sleazy, your plan will be seen as sleazy, and by association you will be seen as sleazy, too. This is some of the most important planning you may engage in during your lifetime, so be sure to actively conduct thorough background checks on your planners. Ask for professional references, and make sure they don't have a criminal background, or anything else which might make them (and therefore you) look bad on the witness stand.
Red Flag: "You can do whatever you want and nobody will ever be able to get at your assets." Yes, and be sure and bring your toothbrush to the first court hearing.
A Good Asset Protection System, Can Start Domestically
A good asset protection system can be started exclusively in the United States, or your home country, and without any offshore component. Even if you need offshore planning, a good rule of thumb is that, with a well-conceived asset protection system, "just a little offshore can go a long way."
Contrast: A bad asset protection plan will require you to either immediately place everything offshore, or will require you to place everything offshore at the first sign of trouble. This is like immediately discarding your primary parachute, whether or not it is good, and immediately going to your emergency parachute. If this is the game plan, why was the domestic part formed in the first place?
The concept that you don't initially need an offshore component to your asset protection plan is probably considered heretical by most so-called asset protection planners, most of whom charge excessive fees, based on charging structures which are often easier to form offshore than they are to form in the U.S., because the offshore jurisdictions have fewer regulatory requirements. Planners can also engage in "lazy planning" by simply assuming that the offshore jurisdictions will always rule in the debtor's favour (they don't), which relieves them from the burden of actually having to figure out an asset protection system which is workable.
Additionally, the excessive use of offshore structures can draw unnecessary attention to a plan, which is completely counter productive. Another secret that you are not likely to be told, is that many offshore entities can elect to be treated as U.S. entities for tax reporting purposes, which can easily eliminate the need for any international tax planning and decrease the risk of being audited. Even if you decide to have entities offshore, purely for asset protection purposes, it doesn't mean that you have to have an international tax practitioner (and the IRS) watching your every move.
However, it is prudent to at least be versed in basic offshore planning issues, and to have an offshore backup safety net, either planned or in place, in case something goes disastrously wrong with your domestic asset protection system. Typically, opening several small accounts, and establishing good relationships with reputable offshore banks, will suffice for this purpose, and will also teach you the basics of offshore account reporting. After you are comfortable with these accounts, you can plan to build on your offshore component from there.
Red Flag: "Your asset protection plan must be offshore." This is an admission of incompetence by the planner, because it means that he has no idea either how to create a domestic asset protection plan, or how to defend it in U.S. courts.
A Good Asset Protection System, Is Based On Intelligent Planning And Solid Legal Work
The key to a good asset protection system is the key to every good business
plan: Intelligent planning and workmanlike execution. Every significant asset is considered, and the best method to protect that asset is determined. The plan is then implemented by carefully drafted documents, which encompass each and every effectuating transaction.
Contrast: A bad asset protection plan attempts to take advantage of shortcuts, by creating one or two structures, and hoping that they will stand up for all purposes. The Family Limited Partnership/Offshore Trust structure is a classic example of such a shortcut: Form this, the promoters hawk, and it will protect everything you own.
A good rule of thumb is: Asset Protection Plans, which purport to work for everybody, actually work for nobody.
Red Flag: "You can use this for everything." You can watch it lose everything, too.
Warning: The information given here does not constitute legal or accounting advice or opinion, and should not be relied upon for any planning purposes. It is provided solely and exclusively for general, non-specific educational purposes, and to advise the reader of the nature of the services offered individually by First American Global Advisors LLC (Nevis). Planning of this nature is necessarily very circumstance-specific and therefore it would be dangerous to apply the very general rules described herein to any singular fact-pattern. Prudence demands that you consult with an experienced professional before attempting any of the planning techniques described herein. Additionally, the information given is not meant to be a substitute for legal representation. You should consult with your local attorney regarding your suitability for the techniques stated herein under your local laws.
Warning: If you are a U.S. citizen, in conntection with any tax planning technique described herein, you should consult with the U.S. Internal Revenue Service, one of the major accounting firms, or other licensed tax attorney or CPA, prior to beginning any tax planning. All planning must be based on "substantial authority". Tax evasion is a serious crime! If someone tells you not to consult with the IRS or a licensed tax attorney or CPA prior to implementing any planning, there is something seriously wrong and you should think twice about such planning. You should also be aware that any attempt to defeat the collection of certain U.S. government and U.S. government-backed obligations can amount to a crime. You should therefore advise your planner immediately if you have any such obligations.
Editor's Note: The information in this article has been edited and modified for the purposes of clarity and length, without alteration to content or context.
© 2000 by First American Global Advisors LLC (Nevis). All rights reserved.
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"If your ex-spouse or ex-secretary "tells all" it will not matter."
"Be careful of non-tax planners who try to create tax plans."
"Asset protection plans will protect your assets, but will not keep you from being sued."
"These weird entities stick out like a man dressed in a Polar Bear suit on a hot beach."
"A flawed asset protection plan will subject you to federal criminal charges of bankruptcy fraud."
"Creditors who are not hurting have no incentive to settle."
"Asset Protection Plans, which claim to work for everybody, actually work for nobody."