Worldwide: Facing The New Reality In Offshore Asset Protection Strategies – Re-Evaluating Traditional Trusts And Foundations

Article by J. Hersch

Recent Changes In Economic Climate And Effects On Conventional Asset Protection Strategies

Since the implementation of the Patriot Act and other applicable legislation, such as the OECD mandate, which hold the intermediary responsible or culpable, the concept that it will be forensically difficult to see through nominees is extremely outdated and unrealistic. This risk of culpability has made many traditional nominees, who craft trust and foundation structures in far off jurisdictions, loathsome to continue to act in this manner and take on the liability of their clients. Sadly though, many do, and some members of the legal community seek refuge in these few dinosaur fiscal providers, in second-rate offshore jurisdictions, still willing to take on client risk.

Sophisticated forensics and cooperation by global regulators are such that it's simply a matter of time before illegal structures are found. The fact that many are still not uncovered has more to do with the; "too many fish in the sea concept" than anything - but time is running out. If you can't defend the structure because it's illegal, or it exists because of a complex system of nominees obscuring ownership, or if the jurisdiction is so exotic or foreign that normalized relations with other countries do not exist, then the structure will not be effective for any duration of time in the post-911 world.

Need For A Strong Long-Term Asset Protection Strategy

The bottom line is that the asset protection structures must be as defendable and as easy to access as domestic ones, yet provide all the benefits of an offshore solution. You should not have to accept less and should know that the protection will be there for generations to follow. In sum, it's time for professionals to wake up and realize that there is a huge difference between giving advice as to asset protection versus tax-assisted offshore planning. If you want to protect a client's assets, you can no longer hide them in antiquated "secret" formats. You need the law to serve and protect the structure. It's time to espouse irrevocable, declared, and regulated, legal asset protection planning, if only because it works.

New Alternative To Traditional Trusts And Foundations – Asset Protection Insurance ("APITM")

Today's latest variation in structures for asset protection is Asset Protection Insurance, currently offered by a limited amount of providers and referred to as APITM. The insurance product can easily replace the use of offshore or domestic trust and foundations in application, but its role is limited primarily to asset protection and estate/accession planning, not taxation specifically. With APITM most of the issues regarding the legitimacy of the structure and control of the assets themselves are avoided as all aspects are fully disclosed. There is complete transparency and a failure to report any liability (including taxation) would probably constitute an event invalidating the policy as the insurance can only protect fully disclosed assets and liabilities. The APITM policy application specifically asks and requires a full delineation of all assets and liabilities, real or contingent. The APITM application form and due diligence process are, in fact, far more detailed than the current anti-money laundering standards.

Guarding Against The Sham Structure APITM Uses A 3-Tiered Approach

Within an APITM structure, unlike the trust or foundation, the Protector's powers (or in the case of a foundation, those of the board of directors powers) are severely limited as there are three separate parties involved in the governing process: 1) the Financial Advisor (whose role is limited to investment advice), 2) the Protector, and 3) the Policy Trustee. Because in the case of an APITM, there is always an irrevocable disposition of the assets, an independent role exists for all three parties. These clearly defined independent roles refute the concept or hint of a sham structure. This factor can always be used to tear down trust or foundations. In fact, many trusts and foundations employ the nominee layer, with the issue of continued control over the assets being the key factor rendering it potentially a sham or, in fact, fraudulent. In the case of trusts this is accomplished through nominee trustees, or sham Protectors that have the will of the trustee. In the case of foundations the technique varies between a straw board, and the use of power of attorneys from board members held by nominees, or the client beneficiary himself in some manner. The APITM policy with its three-tiered structure is clearly deigned to refute this.

Building An Impenetrable And Defendable Structure The Strength Of Alternatives Like APITM

This also leads to complete cooperation and disclosure by the third party service providers to the policy, based upon the arms length nature and more importantly complete disclosure (the APITM is an asset protection proposition first). There is an inability to deal in a deceitful manner with an APITM policy, as it could invalidate the policy. The APITM format derives all of its strength from the fact that the assets are irrevocably transferred and declared, and thus the policy is defendable in a court of law. This is not to imply that foundations or trusts cannot go to court to defend their assets. Theoretically they can, unfortunately, a court will not uphold an illegal contract or sham proposition against creditors.

Domestic vs. Offshore – Why You Still Need To Take The Assets Offshore For Better Protection

A domestic asset planning scenario using a trust (or equally in civil jurisdictions involving a domestic foundation) is always a viable option to an offshore one, however, domestic solutions only work on a limited basis. In the case of a domestic foundation as well as a trust the reach of local law, courts, and creditors minimize some of the asset protection effectiveness. There is always the issue as to the number of years for which a trust can exist usually this limitation period is no greater than 21 years depending on the regional laws of perpetuity. An APITM policy has no statutory limitation period technically, which becomes critical for long-term asset protection planning. Also, in most cases, assets domestically are still subject to negative deemed taxable dispositions and are assailable if they remain in the same domestic jurisdiction as the owner of those assets. This can encourage and increase the likelihood of provoking litigation and discovery, allowing a plaintiff the ability to easily discover the assets, amend pleadings, and obtain leverage in a proceeding, even if spurious.

Business Applications Of APITM - Protect Offshore But Remain Onshore For Accounting Purposes

APITM is a viable domestic choice to the domestic trust/foundation structure or even an offshore version, especially for business applications or for intellectual properties. This insurance format will protect assets inside a business while remaining on the company's balance sheets since there is complete disclosure and taxes have been paid. In the case of a properly formed trust or an APITM policy, a domestic judge will have difficulty attaching assets if they have been irrevocably ceded, fully disclosed, with taxes paid. Under this scenario, the ownership of the assets has changed - end of story. The most critical aspect of any asset protection structure is that it must be an irrevocable declared structure, for only then can you use the law to defend it.

APITM Is Effective Protection Against Future Uncertainties

With the litigious nature of society presenting one of the greatest risks to the preservation of wealth, an APITM policy will provide the ability to legally creditor proof and pass on these assets, ensuring smooth intergenerational transfers with the security of an insurance backing should unforeseen issues arise at a later date. Simply put, the APITM policy is like a property casualty policy for protecting any type of asset, versus a simple structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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