Archive for August, 2010

Previous case studies on this site were favorable towards the use of an offshore trust for asset protection in the right circumstances.  Due to an overwhelming amount of recent case law to the contrary, the author has revised this case study to illustrate the more common result from the use of an offshore trust.

Richard sold his business and came away with after-tax proceeds of more than $10,000,000.  Richard wanted to set aside a substantial sum in a place where no creditor could find it under any circumstances.  He created a Cook Island Trust for the benefit of himself and his immediate family.  He then transferred most of his money to an offshore bank account owned by the Cook Islands Trust. 

A short time later, Richard was sued and forced into involuntry bankruptcy.  Richard failed to disclose the offshore trust or bank accounts on his bankruptcy questionnaire.  However, in a review of his income tax returns, the Bankruptcy Court discovered the offshore trust and the offshore accounts.  The Bankruptcy Court ordered Richard to turn over the assets of the Cook Islands Trust or suffer the following consequences: (1) Richard would be fined $5,000 per day for thirty days, followed by a fine of $10,000 per day after thirty days, followed by incarceration after 45 days, (2) Richard could be subject to criminal penalties for fraud for failing to report the assets on his bankruptcy questionnaire, and (3) Richard would never receive a discharge in bankruptcy and the creditors could continue collection efforts indefinitely.  Faced with those consequences, Richard turned over the money and sued the promoters of the offshore trust for selling him a false sense of security.

The promoters of offshore trusts and accounts often tout confidentiality as one of the benefits of going offshore.  Nothing could be further from the truth.  If you create an offshore trust or offshore account (including insurance products, annuities or gold), the IRS requires you to disclose this on your personal tax return, as well as filing a return for the trust, the trustee, and the accounts themselves.  Any creditor can easily discover the exact amount of money you hold offshore through a review of your tax returns.  

The following cases indicate that US Courts are willing and able to compel you to turn over the assets of an offshore trust:

In re Colburn, 145 B.R. 851 (Bkrpt E.D. Va. 1992).  (Debtor denied discharge and accused of fraud)

Brown v. Higashi, (Bkrpt Ak. 1995).  (Assets included in bankruptcy estate)

In re Portnoy, 201 B.R. 685 (S.D.N.Y. Bkrpt 1996) (Discharge denied and accused of fraud)

FTC v. Fortuna Alliance (1997) (Debtors were arrested and funds were repatriated)

Riechers v. Riechers, 679 N.Y.S. 2d 333 (1998) (Trust assets included in marital estate for divorce purposes)

Westrate v. Westrate (1998) (Husband accused of fraud and threatened with criminal penalties.  Assets included in marital estate)

In re Brooks, 217 B.R. 98 (D.Conn. Bkrpt. 1998) (Offshore trust disregarded and assets seized by US court)

FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999). (Debtor jailed for refusing to repatriate assets).

SEC v. Brennan, 230 F. 3d 65 (2nd Cir. 2000) (Debtor convicted of bankruptcy fraud)

SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001).  (Debtor jailed for refusing to repatriate assets).

In re Lawrence, 279 F.3d 1294 (11th Cir. 2002).  (Debtor jailed for over six years for refusing to repatriate assets).

BankFirst v. Legendre (Debtor jailed for contempt of court until assets were turned over)

Breitenstine v. Breitenstine, 2003 WY 16, 62 P.3d 587 (Wyo. 2003) (Trust assets included in property division)

Eulich v. U.S., (N.D.Tex. Case No. 99-CV-01842, August 18, 2004) (Debtor found in contempt, threatened with fines and jail time until assets repatriated)

U.S. v. AmeriDebt, Inc., 373 F. Supp. 2d 558 (D Md. 2005) (Debtor found in contempt and threatened with jail time until assets repatriated)

Morris v. Morris, Case Nos. 4D04-3812, 4D04-4621, 4D04-4763, aff'd Appeal No. SC05-1166 (Fla.S.Ct. April 13, 2006); Morris v. Wroble, Case No. CIV-O6-80479 (S.D. Fla.) aff'd Appeal No. 06-80452-CV-DTKH (11th Cir. Nov. 16, 2006).  (Debtor jailed for contempt of court for refusing to repatriate assets.)

Securities and Exchange Commission vs. Jamie Solow, 2010 WL 303959 (S.D. FL., Jan 22, 2010).  (Debtor jailed for contempt of court for refusing to repatriate assets.)
 

Offshore asset protection planning continues to be promoted heavily by internet sites who charge substantial fees for cookie-cutter solutions.  Most of these are not attorneys and it is illegal for them to offer legal services or advice.  More importantly, they have no ability to support the structures that they create.  Most reputable law firms are now recommending against offshore asset protection planning.   

For a better asset protection strategy, see www.assetprotection-attorney.net.

 

If you're aiming to stiff creditors, litigants or an ex-spouse, should you hide your money in Nevis or Nevada?

Asset Protection

From the article:

Forget about hiding money offshore from the Internal Revenue Service--unless you want to risk the penalties, back tax bills and threat of prosecution that thousands of American clients of ubs now face. But what about protecting your cash from vexatious litigants, a grasping ex-spouse or pesky creditors? Then offshore trusts are still an option, but a far less attractive one now that legal reporting requirements for offshore holdings have become more onerous and some U.S. judges have taken to jailing folks who won't (or can't) turn over offshore assets.

Full Article Here

My comments on the article:

  1. Asset protection planning is never used to “stiff” creditors. All fifty states have laws that support legitimate asset protection planning that is done in advance of a problem. It is commonly acceptable behavior to create legal entities to protect personal assets from business liabilities or to set aside assets for the security of your family. Future creditors have every right to ask for your financial statements, obtain appropriate security, and decide whether to deal with you based on your personal financial condition whether or not you have done asset protection planning.
  2. It is true that US courts have jailed some folks for refusing to repatriate assets, but only in situations involving criminal activities and fraudulent transfers. Offshore entities may still be viable options if done in advance and for ethically appropriate purposes as described above.
  3. I agree that Nevada is the best state in which to create a domestic asset protection trust, followed closely by Alaska, Delaware and South Dakota.
  4. The article makes it sound like domestic asset protection trusts are always self-settled trusts. It is possible to design a domestic asset protection trust that is not self-settled and eliminate most of the risk!
  5. The article makes it sound like these trusts are not effective for a period of time. That is not true. These trusts are effective immediately if there is no fraudulent transfer. The time limits discussed in the article only apply if the transfer to the trust was a fraudulent transfer.
  6. The article quotes Steve Oshins in saying that these have been tested and have worked well in obtaining favorable settlements. I have also had several of these tested and they have held up very well. If the trust is designed so it is not a self-settled trust, there are numerous court cases that support the asset protection provided by a discretionary trust.
  7. The article names twelve states that have passed laws upholding self-settled domestic asset protection trusts. Hawaii should be added to that list as well. This trend indicates that it is less likely that another state will refuse to recognize the laws of one of these states because it is against public policy.
  8. The article indicates that annual maintenance costs average between $5,000 and $7,000. In my experience, this can be done for as little as $2,000.