|
Asset Protection
Trusts That Really Work
by
Richard
M. Colombik, Esq., CPA
Itasca,
Illinois
Many
commentators have come out and advised various parties that foreign
asset protection trusts really do not work. The reality is they
do! A properly drafted foreign asset protection trust gives one
protection against creditors. How do they work? How can
you set them up? What do you do? This article will explore
what a foreign asset protection trust is and how it works.
What is
a Foreign Trust?
In
the simplest terms, a foreign asset protection trust, hereinafter
referred to as an APT, is a trust that is drafted
in accordance with, and governed by, the laws of a foreign country designed
to protect assets from all creditors. This gives the creator,
settlor of the trust, the choice of which country?s laws to use, which
trustee and what provisions to draft into the trust. This is the
point where experienced professionals familiar with drafting APTs
are essential.
___________________________________
About The Author
 Richard
M. Colombik is a tax partner in the Schaumburg headquartered firm of
Richard M. Colombik & Associates, P.C. Mr. Colombik concentrates
his practice on IRS Tax Defense, Estate Planning and Asset Protection
Plans for individuals as well as corporate clients. He received
his B.S. Degree in Business from the University of Colorado and his
J.D., Cum Laude, from the John Marshall Law School. He is also
a Certified Public Accountant. Mr. Colombik has spoken at numerous
engagements and is a well publicized author regarding Income Tax, Estate
Tax, and Asset Protection Planning. He is currently a member of
the Illinois State Bar Association?s Trust and Estate Section Council,
an officer in the Northwest Suburban Bar Association and the Illinois
Chapter of the American Association of Attorney-CPAs, a member in the
Offshore Institute, the State Bar?s liaison to the Internal Revenue
Service and the past chair of the ISBA Federal Taxation Section Council.
Mr.
Colombik may also be reached on the Internet at www.colombik.com.
What and
Why Should Anyone Look to a Foreign Jurisdiction?
Generally,
one would look for a foreign jurisdiction that does not automatically
recognize United States judgments. This would require the party
that had obtained a judgment against you in the United States to relitigate
their claims in a foreign jurisdiction. Foreign jurisdiction,
on a whole, do not allow for contingent fee cases. Therefore,
your potential claimant would have to hire a new attorney somewhere
else in the world to relitigate the same case. This would greatly
increase their costs, as well as their risk of losing the case, as the
standards of proof are generally greater to win a civil suit in selected
foreign jurisdictions. Additionally, time and expense will be
incurred for your opponent to pursue you, including, in some jurisdictions,
the requirement of posting a cash bond to commence a suit.
An additional
risk that creditors encounter is that laws in a properly selected jurisdiction
are more favorable to the party protecting assets, since many foreign
jurisdictions encourage United States citizens and others to create
asset protection trusts within their country. This could be defined
either in the imposition of a higher standard of proof in civil litigation,
or the establishment of a very short statute of limitations, barring
a creditor?s lawsuit.
Consider
that with the court backlog in Cook County, Illinois, it generally takes
three to five years to obtain a judgment. If your assets were
in an offshore trust during this time period, then even if you lost
your case, your assets in the offshore jurisdiction could not be attached
by a creditor, since the two-year limitations to file a lawsuit in the
offshore jurisdiction would have lapsed.
Trust Complexities
There
are many complexities to the establishment of an offshore trust, but
they are really no more complex than many of the concepts and ideas
utilized in United States estate planning.
First,
you must understand that an APT is generally set up as an irrevocable
trust rather than a revocable trust. The reason for this is that
if the creator of the trust could revoke the trust, then theoretically
a judgment creditor could force the trust?s creator to revoke it and
pay the creditor your funds!
Income Tax-Wise There is no Benefit to an APT
An APT
trust, if properly drafted, is considered a grantor trust for federal
income tax purposes. A grantor trust means that the trust income
is taxed to the grantor, the person that created it. Therefore,
there is no income tax advantage to an APT. The foreign jurisdiction
will not generally tax the trust or its income.
My Assets
Overseas?
Another
Problem that confronts many people is a lack of comfort when placing
assets overseas. This can be overcome by using various techniques.
A commonly utilized technique is to create a limited partnership, (hereafter
known as ?LP?) or a Limited Liability Company, (hereafter known
as ?LLC?) within the United States, where the trust?s creator
is the general partner of a LP, or the managing member of a LLC. (This
is the party that controls the LP or LLC.)
The assets
that an individual owns are transferred to the LLC or LP. An interest
in the LLC or LP is then used to fund the foreign APT. Since the
trust?s creator is the general partner or managing member, this allows
full control of the trust?s assets and the ability to keep the assets
in the U.S. The Trust?s creator would not have ownership of
the assets to be retained in the United States in control of the creator,
but still benefiting from foreign APT laws.
Should
litigation commence against the trust?s creator, the assets, if liquid,
could be wire transferred to a trust account anywhere in the world.
Provisions
Aside
from standard U.S. trust provisions, a properly drafted APT generally
contains additional provisions.
Additional
provisions include:
- Flight Provisions
- Duress Provisions
- Investment Provisions
Flight
provisions allow for the grantor or protector to change the situs, or
country, where the trust is located. This could be based upon
many events, and could include the changing of the favorable laws that
lead to the trust?s establishment, or it could be the inclusion of
broad language relative to military invasions, lack of comfort with
the jurisdiction, or merely to change trustees. Again, war, civil
disturbance, political actions, change or enactment in any part of the
world of measures that could directly or indirectly affect the trust
could be included.
This allows transferring of funds from jurisdiction to jurisdiction
which makes it very difficult to determine where one should file a lawsuit
to pursue trust assets.
The selection
of a foreign trustee is also extremely essential. A foreign trustee
should provide the stability, experience and track record to properly
serve their function. In addition to these issues, a foreign trustee
should not have any contact or business presence within the United States.
If a foreign trustee is available to service of process within the United
States, then how secure are you relative to the foreign trust?
Duress
provisions are extremely important. The easiest way one would consider
to attach an APT would be to obtain a U.S. court order directing the
trust?s creator, a U.S. trustee or general partner, to turn over all
funds to whomever the court directs. If the trust has a properly
drafted duress provision, the trustee would be unable to follow any
direction, control or guidance from the creator or beneficiaries, once
duress has occurred. The definition of duress would include directions
from courts, third parties, or others that would compel or require action
by the settlor, beneficiary, trust protector, or trustee.
Establishing a Foreign
Situs
Once
the foreign situs is selected, many commentators have indicated the
following steps should be pursued:
- Utilizing a foreign
trustee who is domiciled in the selected offshore jurisdiction.
- Administering the
trust that selects the offshore jurisdiction.
- A direction within
the trust that selects the offshore jurisdiction as the situs of the
trust.
- Language within
the trust requiring the trust to be administered in the selected jurisdiction.
- Physical recording
or transfer of the trust, or evidence thereof, in the selected jurisdiction.
Conclusion
To simplify
the usage of an offshore trust, use a U.S. based limited partnership
of which you are the general partner. You could use monies that
you actually have sitting in your bank account today; transfer them
to your
LP or LLC.
Use an interest in the LP or LLC to fund the foreign trust so that you
maintain control. This allows your money, in theory, to go all
the way around the world, but in reality it stays where it started.
The benefit is that you can achieve protection against creditors with
your assets staying in the same bank!
|
