Asset Protection Comments I
This page contains more commentaries on the subject of asset protection based on recent news items, recently discovered books or websites, and new or “reborn” asset protection products discovered by WIL’s research team.
While the commentaries on these pages – even when considered as a whole – are hardly exhaustive, we believe they will alert and remind our readers of the always-pressing need for implementation of a sound asset protection plan, encourage critical analysis of the various means of asset protection that are available, and help stimulate creativity in the implementation of one’s chosen strategy.
BACK TO BASICS
Asset protection exists in numerous forms throughout both law and equity. Many state jurisdictions in the U.S., for example, have homestead exemptions which provide that creditors cannot seize your home (or a percentage of the value thereof) for the purpose of satisfying claims against you. Many people exploit these types of statutory provisions by, for example, buying an expensive house in one of these states (Florida, e.g.). Such statutized provisions are perhaps the simplest ways to protect assets and can be effectively discovered and utilized with the help of any competent attorney.
The most pervasive forms of asset protection, however, generally involve relinquishment of legal ownership of assets. This, again, takes many different forms. Gifting assets to a spouse or child, incorporation of a company, transferring property to a trust, contractual exchanges – all are valid and useful in their context, and all involve a legal transfer of ownership.
The simple and obvious reason that transferring ownership is useful and effective is that a financial predator cannot take from you what you do not own. The less obvious and yet equally important consideration is that transferring assets makes you a smaller, and thus less attractive target. Financial predators are usually relatively sophisticated about finding their victim. Just as a lion looks for easy prey, a smart financial predator will, prior to making an attack, assess the likelihood of collection. Does the mark live in a large, expensive house titled in his own name? Does he own a Mercedes Benz or, better still a Ferrari? Can he be spotted regularly at the most upscale restauraunts, American Express Gold card in hand?
There is a tradeoff between living a lifestyle that is fulfilling to you on the one hand, and being sufficiently lavish about it that you awaken the envy (or mere awareness) of those around you to such an extent that you subject that lifestyle to a real and serious threat of attack.
An passage from the Old Testament of the Bible referencing ancient history indicates that this element of human nature is not new:
“At that time Merodach-baladan the son of Baladan, king of Babylon, sent envoys with letters and a present to Hezekiah... And Hezekiah welcomed them, AND HE SHOWED THEM ALL HIS TREASURE HOUSE, the silver, the gold... all that was found in his storehouses; there was nothing in his house or in all his realm that Hezekiah did not show them.
“Then Isaiah the prophet came to King Hezekiah, and said to him, ‘...Behold, the days are coming, when all that is in your house, and that which your fathers have stored up till this day, shall be carried to Babylon; nothing shall be left.’” ~~ 2 Kings 20:12-17, Bible (King James Version).
And so it happened. Having seen the riches of the king’s house and of the temple in Judah, the hungry Babylonians eventually conquered the small nation and carried away all of its riches.
When you are ready to make yourself a smaller, less attractive target, contact WIL to implement practical asset protection strategies, and avoid having your riches carried off to Babylon!
A thought-provoking article in a somewhat similar philosophic vein, on reducing your tax burden by intentionally lowering your personal income, i.e., taking less income in exchange for more leisure, can be found here.
WHEN IS AN OFFSHORE TRUST OBLIGATION “QUALIFIED”
When the outspokenly atheistic comedian W.C. Fields was on his deathbead in a hospital, his nephew one day found him leafing through a Bible. When he queried “Uncle Claude” about the apparent contradiction with his publicly professed beliefs, Fields replied that he was “looking for loopholes.” With slightly less at stake, an army of attorneys, accountants, and amateur legal sleuths peruse the Internal Revenue Code in a battle of wits with the U.S. government regulation writers, looking for ways to avoid the purported one other certainty in life besides death.
It is not a simple matter to improve one’s privacy – never mind reduce one”s taxes – by moving assets into an offshore trust (or other offshore legal entity). Pretty much any offshore trust with a U.S. person named as a grantor, trustee, or beneficiary will be subject to annual reporting requirements and owe taxes on most income and/or distributions. IRS Form 3520 must be filed by U.S. Persons to report “Certain transactions with foreign trusts” as well as “Receipt of certain large gifts or bequests from certain foreign persons.” A “U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules” also must file Form 3520, as well as Form 3520-A. The Form 3520 (and 3520-A) instructions define a trust grantor – and thus a part-owner of the trust assets – to include any person who “directly or indirectly makes a gratuitous transfer of cash or other property to a trust.”
This example is indicative of how the regulation writers have thought ahead to the mechanisms people will to use to attempt to circumvent the rules, and have in effect said: “Before you even think of going there, we are a step ahead of you, and we are looking at the substance of potential transactions, not just the form. Moreover, when there is ambiguity or a lot of room to manoeuvre, we are going to rule that the substance is automatically that you are retaining de facto control of the trust assets – and thus will tax you on the trust income.” (It would appear that the IRS is suspicious that any “gift” to a trust may later be “gifted” back, under some private or unwritten agreement.)
What if, as an alternative to a gift, you exchange assets into a trust in return for an obligation (loan, note, etc.)? If the obligation you would then hold is “qualified” then you still must file Form 3520. An obligation is “qualified” only if:
A consideration of the list might lead lead you to conclude that, with some care, an obligation could fairly readily be structured so that at least one of the above “qualifying” conditions is violated, thereby avoiding filing requirements (assuming other triggering conditions are similarly absent).
DEFENDING AGAINST BEAR MARKETS: THINK “SHORT”, BUT NOT AS IN “-TERM”
The modern-day equivalent of barbarian hordes – lawyers and government agents – are not the only threats to your assets. There are would-be fraud perpetrators, mentioned in a previous column in these pages. And even if you have minimized the danger from the former by prudently diversifying the jurisdictions that have the final legal say on controversies concerning your assets, and are alert to the latter, there is the unavoidable risk for anyone that does not live hand-to-mouth: that which comes from participating in investment markets. A major bear market can devastate the value of your assets fully as effectively as a rogue legal system or government agent.
The almost-universal investor predispositon is to look for investments worthy of purchasing, with the hope of capital gains in time or the expectation of a current income yield. Typical investment assets such as equities, bonds, notes, money funds, bank accounts, real estate, bullion, and collectibles all fit into this mold. However, sophisticated investors, including anyone who has ever participated in the futures markets, understand that the usual advice of “buy low, sell high” can be reversed to “sell high, buy low later.” Short selling, in effect or in reality, involves borrowing an asset from an owner and then selling it, with a promise to redeliver it to the owner in the future. If the price falls, you pocket the price difference (minus dividends, if any, you have paid to the original owner of a stock during the interval – a detail we will not discuss further here).
There are several good reasons to consider adding short selling to your investment tool arsenal, including:
Among the myths about short selling is that it is risky because if you are long (own) an asset the worst that can happen is that it goes to zero, whereas there is no theoretical upper limit to how high, e.g., a stock can go once you have shorted it. In fact large magnitude losses of either kind demonstrate poor money management more than the inherent riskiness of the strategy. Going into any trade you should have some idea of your “I was wrong, it is time to cut my losses and get out” point. Short selling speculative, thinly traded stocks is, however, a game that is best left to sophisticated market players – quick gains are possible when an overhyped or fraudulent stock collapses, but it can become a battle of nerves with the stock’s promoters and large losses are possible as well.
Trading in the futures (or foreign exchange forward) markets – one of the easiest markets in which to trade from the short side – is also alleged to be “risky”. This is because trading in those markets is often done with large amounts of leverage: Traders may only have to put up 5% of a contract’s value or less, so that, e.g., a 5% price movement against them would wipe out their contract margin. Any investment, no matter how stodgy, can be made risky if bought using enough leverage. Again, the solution is to be smart about managing your money rather than disavowing an asset class where you are not forbidden from being imprudent (similar to not going to Las Vegas without having bought a return flight ticket).
The other prevalent myth is that short transactions are tricky, somehow. While shorting an asset does involve finding a willing lender – and retail brokers do often discourage their “unsophisticated” clients from such trades, like many things once you understand the idea and become acclimated to executing it, it loses its mysterious aura. In the futures markets going short is precisely as easy as calling your broker and instructing him to make a short sale trade. For stocks with traded options, a synthetic short sale can be created by buying a put option and selling a call option with the same strike price (shorting a stock option is less involved than shorting a stock).
Hopefully this brief introduction will stimulate further research on your part if the idea of actually incorporating short selling into your money management strategy is new to you. There is no need to fear bear markets any more! As a bonus, markets usually fall faster than they rise, with the usual explanation being that fear is a stronger motivator than greed.
ANOTHER ONE BITES THE DUST
Another prominent author and offshore services promoter has gone down in flames. Terry Neal, author of The Offshore Advantage and four other books, and former head of Nevis American Trust Company has plead guilty to conspiring to defraud the United States government and faces a possible five-year prison term.
This follows the conviction of Marc Harris, another prominent offshore services provider and founder of the Marc M. Harris Group on 16 counts of financial fraud, including tax evasion and money laundering, in November of 2003.
And most recently, eight more people were indicted on federal charges relative to the activities of The Aegis Co., which allegedly helped hundreds of rich Americans avoid $68 million in taxes through the use of domestic and offshore trusts (link here).
The impact of these cases on the clients of these various companies will not be favorable. At best they will now be an active entry in some federal financial cop agency watchlist. Goodbye privacy and living a “below the radar” lifestyle. The less lucky – in all likelihood those who pushed the legal boundaries most egregiously – will be subject to corollary prosecutions. Having killed the mother hen, the chicks are undefended. And given the usual inclination of United States Prosecutors to emphasize high-profile “slam dunk” cases it is natural for them to try and pick off followups to cases where the publicity wheels are already turning.
The column below entitled “OFFSHORE SCAMS = ASSET PROTECTION IN REVERSE” discussed the pitfalls of unwise offshore investment practices, and is well worthy of our readers’ consideration. The general principle elucidated in that column applies equally to today’s article. Whether you are the victim of a fraudulent offshore investment, or whether you are involved in defrauding the government of your “home” country and are subsequently discovered – facing asset forfeiture and/or prison time, you have done the exact opposite of what you intended to do by implementing an asset protection plan in the first place.
The moral of this story is identical with the message that WIL has been conveying since its very inception: If one is seeking gains by taking advantage of the myriad benefits available in both domestic as well as international planning and structuring, ONE MUST FOLLOW THE LAW TO THE VERY LETTER. No taking advantage of fake deductions, no skirting over filing requirements, no acting as though a corporation or trust is your alter ego, etc. and ad nauseum. All structures, contracts, and other interactions between structures and especially those involving yourself MUST HAVE REAL SUBSTANCE in addition to having proper legal form. Asset protection and successful investments are the rewards of the diligent, not the haphazard.
If you desire planning that avoids the use of mere tricks and stage magic illusions, and value reliance on strict legal groundwork and totally above-board strategies, contact us to begin your asset protection planning now.
MUCH ADO ABOUT TRUST PROTECTORS
For those of our readers who are making a study of trusts and the usage of trusts in an asset protection plan, you have undoubtedly defined for yourself and come to an undertanding regarding the roles of the various traditional parties to a trust.
There is the Settlor (also referred to as a Creator or Grantor) – which is the entity that actually establishes the trust for the benefit of the Beneficiary.
The Beneficiary is the entity that is entitled to equitable distributions of the trust property or income in accordance with the trust document and/or the direction of the Trustee. Various jurisdictions now allow trusts to be established without a specific ascertainable beneficiary and instead allow the trust to be established for the benefit of a specific purpose (for example: feeding starving children). In such cases the trust document either specifies exactly how the purpose is to be met, or the Trustee is given discretion regarding how best to satisfy the purpose. The possibility of a “purpose trust” allows for a certain amount of flexibility in interfacing with and carrying out the objectives of the trust.
The Trustee is the legal fiduciary of the trust’s assets and is the legal representative of the trust. The Trustee holds the assets for the benefit of the Beneficiary (or for the Purpose, as the case may be).
In addition to these traditional roles, the Trustee generally has the authority to hire any number of people to fill various managerial or consultancy positions as may be required.
In modern asset protection planning, an additional position has become vogue – that of a trust Protector. Some jurisdictions have actually statutized the Protector position into their trust legislation. However, in any jurisdiction where a contractual trust can be formed, the position of Protector can be added and specifically defined in the trust contract itself.
Normally a Protector does what the name implies – it protects the integrity of a trust (i.e., that operation of the trust in strict accordance with the intent of the parties as specified in the trust document) via oversight of the Trustee. Generally a Protector is given the authority to change trustees, and sometimes even to amend the trust, change beneficiaries, or change the situs of the trust.
While in general, having a party to ensure that the Trustee is strictly following the provisions of the trust as specified in the trust document is probably a good idea, keep in mind, here as with any offshore financial services provider, that if a trustee or other party who has access to a trust’s funds is truly dishonest then the ability of a protector to step in and assert control of the situation is of limited value. By the time the Protector has effectively fired the dishonest parties and taken control, there will probably not be much left to control.
Further, since the Trustee can be fired at will by the Protector, the Protector could be claimed to have substantive control of the trust. This, in turn, could overturn most of the benefits that arise from setting up a trust in the first place. As such, in most cases it is wise to resist the inclination to hold the office of Protector yourself.
Just as you make a careful decision when choosing whom to trust as your banker, broker, financial adviser, and attorney, it is important to make a well-educated decision to trust a professional foreign trustee firm and a professional protector when interacting in any way with a foreign trust.
That said, WIL does not recommend trusts for most clients due to the negative stigma and extra scrutiny that trusts receive. Site visitors interested in asset protection should contact us to schedule a consultation, which will allow us to recommend personally tailored solutions that are much more practical than setting up a foreign trust.
OFFSHORE SCAMS = ASSET PROTECTION IN REVERSE
It is easy to see the many possible benefits of diversifying one’s wealth internationally. Greatly increased financial privacy, enhanced asset protection, a sharp increase in the number of available attractive investments, all while possibly lessening one’s tax burden, are some of the most common motivations for implementing various multi-jurisdictional strategies.
However, it is a sad fact that many people, in their enthusiasm to avail themselves of these benefits, throw caution to the wind and involve themselves in schemes that they would have never participated in their home country.
Trust is an important factor in all financial dealings, and making use of the services of well-respected attorneys, bankers, accountants, competent trustees, and professional money managers that have a proven track record of success are all important and valuable components of successful financial planning, and more specifically international financial planning.
On the other hand, dreams of big returns that turned to dust, with principal losses of 100% due to mismanagement or fraud, have occurred with sobering frequency. The exercise of discretion is something that is lacking all too often in “newbies” to the international financial arena. Protecting oneself, however, is not so difficult. Attention to some basic rules that you utilize in your home country will serve your international planning equally as well.
Other commentaries delve into more detail, but these provide a good starting point.
Remember this: Rushing offshore to lose all of your money in a bad or miscalculated investment is asset protection in reverse, and is more financially devastating than frivolous lawsuits, angry ex-spouses, evil business partners, or having half of your earnings disappear in taxes.
W.I.L.’s mission is, as it has always been, to inform you of the great benefits available internationally and to encourage you to take advantage of them. But do so carefully. Give thorough consideration to your planning. Follow the investment rules specified in this article. Asset protection and investment success are the rewards of the diligent, not the haphazard.
When you are ready to take these steps, contact us. We are here to assist you every step of the way.
BEWARE REPORTING REQUIREMENTS!
Note: This lesson deals with U.S. Internal Revenue reporting requirements and thus applies primarily to U.S. citizens and residents.
In our previous asset protection lesson (below) we discussed practical guidelines to follow when implementing an asset protection plan. One of those guidelines was the minimization of legal reporting requirements in order to maximize privacy. In this lesson we will review some of those reporting requirements.
Each United States person who has a financial interest in, or signature authority over a bank, brokerage, or other financial account in a foreign country which exceeded $10,000 in aggregate value at any point during the reporting year, must report the existence of the account(s) on Form 1040, Schedule B, line 7a, and Form TDF 90-22.1.
Each United States person that receives a distribution – including collateral-free and interest-free loans of cash or marketable securities in excess of $10,000 – from a foreign trust, is a grantor of a foreign trust, or is a transferror to a foreign trust with one or more U.S. beneficiaries must provide additional information via Form 3520.
U.S shareholders of controlled foreign corporations must report their pro rata share of certain income to the IRS, including income from dividends, interest, annuities, capital gains, gains from commodities and foreign currency as well as rents and royalties from related entities (nonoperating sources of income, basically). Income sourced from manufacturing, trading or selling to unrelated parties, drilling and mining, insurance or reinsurance of foreign risks and certain off-shore banking profits is not currently included in the reportable category.
Failure to comply with applicable tax laws may result in criminal prosecution.
Tax and reporting guidelines are general in nature and are provided for information purposes only. For specific tax advice applicable directly to you, please contact a tax professional.
For further details see http://www.irs.gov/instructions/i1040sa/ar02.html#d0e1667.
To some degree, reporting the existence of offshore structures and accounts compromises your privacy and as such effectively eliminates your first line of financial defense, which is a financial predator’s lack of awareness of the assets’ existence. Nevertheless, violating reporting requirements can ultimately land you in jail – which for most people would be far worse than the discovery of the assets’ existence.
U.S. citizens are greatly compromised in this regard as compared to citizens of other countries. Ultimately, the only legally viable remedy for U.S. citizens to the aforesaid obligations is to expatriate, then gain citizenship in another country that cares much less about what you do outside of its borders, and subsequently renounce your U.S. citizenship completely.
Obviously expatriation is a very serious step and is not to be taken lightly. However, if you have thoroughly considered your options and have decided to renounce your current citizenship and/or obtain alternate citizenship, contact Wealth International, Ltd. immediately to learn how we can be of assistance to you.
ASSET PROTECTION GOES MAINSTREAM
Society is becoming more and more predatory in nature. An annual survey published by Lawyers Weekly indicates that the 10 largest verdicts in 2003 to individual plaintiffs (amounting to $1.3 billion) represents an increase of over 200% since 1997.
Even Forbes has run articles on the importance of asset protection (article here).
In response to this increasing threat, leading lawyers are now asserting that asset protection is an affirmative duty of today’s financial and legal advisors. Not so long ago, if one was not already very wealthy and connected with the top international attorneys that have traditionally provided these services, one was required to either peruse the mail-order catalogs of alternative and survivalist book peddlers or, more recently, to scour the internet and wade through a mountain-stack of hay in order to find the proverbial needle of valuable and accurate asset protection advice and/or services.
Now, however, financial planners and attorneys from London to Beverly Hills and New York City are peddling their brand of asset protection strategies. Many are worthless, some are a small step in the right direction, and a precious few are staggeringly effective. Perhaps the majority fall somewhere between those extremes.
So how does one know whether an asset protection plan is going to be effective in practice? Here are some guiding principles that you may find useful:
Stick to these six principles and your asset protection plan is sure to be a success.
If you require planning that satisfies all of these criterion, please contact us to find out how to get started immediately.
NON-DOMESTIC INSURANCE AND ANNUITIES
Non-domestic life insurance and annuities have been a highly publicized asset protection strategy for many years. Traditionally, Switzerland has been the jurisdiction of choice for these types of arrangements, and rightly so. According to Swiss law, annuity and life insurance policies cannot be included in a bankruptcy proceedings or seized by creditors. Even if a foreign court should specifically order the seizure of a Swiss annuity or mandate its inclusion in a bankruptcy estate, the insurance policy will not be seized by the Swiss authorities, provided that the following conditions exist:
This arrangement offers obvious benefits in terms of asset protection. However, it should be noted that, for U.S. citizens, as of April 7, 1995 the annual income on most foreign annuity contracts is taxable, and if if its income is reported every year then, ipso facto, the annuity’s existence is known and the privacy benefit is gone.
While no asset protection plan should rely strictly on secrecy in order to be effective, aggressively shielding one’s privacy is a powerful first step in terms of asset protection simply because financial predators cannot take that which they cannot see (and hopefully do not even know exists).
The good news is that, as mentioned in passing under #1 above, a policy’s beneficiary can often be designated as a legal entity of some kind. This offers the opportunity to combine the traditional non-domestic insurance or annuity product with properly structured business entities in a very balanced and comprehensive asset protection strategy.
Please contact us for further information.