Asset Protection-The Privacy & Financial Shield LLC

Contact Us

1 (800) 798-2008

The Evolution of International Asset Protection

by

In 1989, modern international asset protection began with the Cook Islands’ self-settled asset protection trust. Since then, the asset protection industry has grown exponentially. Numerous plans have been challenged in court. Some have worked, and some have failed. These cases offer valuable insight. What have we learned from them? How has planning evolved as a result? I offer a brief survey of this important topic. Please note I mostly serve U.S. clients, however much of this article also applies to other jurisdictions.

 

FAPT “Don’ts”: What We’ve Learned

Early Foreign Asset Protection Trusts (“FAPTs”) relied on the following argument: if a person (“settlor”) gifts assets to an irrevocable trust in an FAPT jurisdiction, and the assets and trustee are outside the jurisdiction of any court wherein a settlor or beneficiary resides, then creditors will not be able to reach said assets. This remains a sound argument, and in 2008 an FAPT even withstood the U.S. government’s all-out attempt to collect a $36 million federal debt.[1] Unfortunately, some planners have used unwise strategies that resulted in several FAPT failures, as well as some U.S.-based settlors being incarcerated for, in the courts’ eyes, deliberately ignoring a repatriation order. An analysis of these cases reveals the following “don’ts”:

  • Don’t use FAPTs for assets that can’t relocate offshore once threats arise. A local court will usually disregard foreign law, apply local law (which usually prohibits self-settled spendthrift trusts), and seize any assets within its reach. [2]
  • Don’t let a settlor retain control over FAPT assets or trustees (e.g. power to replace trustees, amend the trust, act as co-trustee, etc.) Furthermore, a domestic trust protector should be replaced with a foreign protector once trouble arises.
  • Trust distributions within a settlor’s/beneficiary’s jurisdiction must be done carefully, especially if a repatriation order exists.[3] Ideally, a trustee would make payments directly to vendors to support living costs (mortgage, car payment, etc.) Having a settlor use lines of credit the trust pays off is also viable.

Those who violate the foregoing forget that even though a trustee and assets are outside their country, the settlor typically remains within a domestic court’s reach. Furthermore, making a “self-created impossibility” to repatriate assets, by settling an FAPT after threats materialize (even if a lawsuit has not yet been filed) is likewise risky.

The temptation to cut corners is substantial. Protector provisions notwithstanding, a settlor may resist transferring his life savings to a foreign stranger (the trustee), without retaining power to unilaterally replace the trustee or repatriate assets. Fortunately, asset protection has evolved, and the best strategies are stronger, more flexible, and much more palatable than the traditional FAPT.

 

The Foreign LLC

Shortly after the FAPT’s inception, jurisdictions such as Nevis began passing Foreign Limited Liability Company (FLLC) legislation. In most instances, FLLCs are superior to International Business Companies (IBCs), due to charging order protection (explained below), lower maintenance and operational hassles, and a streamlined management structure.

FLLCs are exceptional planning tools for the following reasons:

  • Transfers to LLCs involve an exchange of equivalent value (LLC membership exchanged for contributed capital), which makes them more resistant to fraudulent transfer claims.
  • In progressive jurisdictions, the remedy of a member’s creditors is restricted to the charging order. Essentially, a creditor has the right to LLC distributions (attributable to the debtor-member) only if and when the manager(s) make them. In many (not all) jurisdictions, a creditor cannot compel distributions, even if the debtor manages the LLC.
  • Typical FLLC setup and maintenance costs are a fraction of FAPTs. Note that while Belize, the Cook Islands, and Nevis all have very strong LLC laws, Nevis has the lowest maintenance requirements, and thus it’s my preferred FLLC jurisdiction.
  • While FAPTs are contrary to the laws of most jurisdictions, which do not allow a settlor’s beneficial trust interest to be protected from creditors, LLC protection is, for the most part, recognized and supported by most of these same jurisdictions.

Some claim the FLLC is superior to the FAPT. This is not true. Rather, an FLLC has different strengths and weaknesses. For example, if a debtor is the sole LLC member, or a majority member with unilateral power (per an operating agreement) to replace managers, then a domestic court could order replacement of a foreign manager with a U.S. receiver. Jurisdictions such as the Cook Islands and Nevis forbid such by law. Nonetheless, if an LLC manager resides in the U.S., then he could be held in contempt for failing to repatriate foreign assets. Of course, we could structure an FLLC so that 5% of membership is foreign, with the operating agreement requiring consent of all members to replace management. LLC management could also shift offshore once trouble arises. Yet the FLLC faces other problems. Namely, LLCs are business entities, and must be treated as such. Unlike with FAPTs, a manager should only make payments directly to members or those who provide legitimate “arm’s length” business services. It’s not appropriate for a manager to pay a debtor-member’s bills while they are under duress. This is a classic commingling/alter-ego scenario and goes against the fabric of LLC law. Such may cause serious problems if a debtor-member is subject to a charging or repatriation order in his home country, and needs cash to pay living expenses.

 

Combined LLC/Trust Planning

The good news is FLLC and FAPT strengths complement one another, and help mitigate each other’s weaknesses. Properly combined FAPT/FLLC structures are a big step forward, although there are still instances where either a standalone FAPT or FLLC is preferable.

The beauty of LLC/trust combined planning is that a client may often settle an FAPT and continue managing transferred assets, without committing the cardinal “retained control” sins of standalone FAPT planning. Essentially, a person settles an FAPT, and then the FAPT forms an FLLC. FAPT assets are then placed in the FLLC, and the settlor (or his associate) is appointed manager. Because the FAPT now owns an LLC interest, and has no ownership in assets it transferred to the LLC, a settlor may manage LLC assets while retaining no control over FAPT assets (the LLC membership). Not only does this allow the settlor to manage assets he otherwise ought not manage, but since the LLC is owned by the FAPT, the settlor’s creditors may not obtain a charging order against it. Furthermore, an LLC manager could make distributions to its member (the trust) without violating accepted LLC practice, and the trustee could make prudent disbursements in a manner free of local court interference.

 

Domestic/Foreign Hybrid “Contingency” Planning

International planning is often more costly than domestic planning. Though the strongest plans are completely foreign, a domestic/foreign hybrid plan has lower setup and maintenance costs, and is almost as protective. An effective strategy is to form an FLLC that’s owned by a domestic trust. The trust situs, LLC management, and assets would be moved offshore should a creditor “contingency” materialize. This is done independent of the settlor, thus keeping his hands clean from any perceived attempts to evade creditors. Essentially, a lower-cost domestic trust is used until the extra power of an FAPT is needed, thus resulting in a more affordable overall plan. The FAPT may even be re-domiciled onshore once creditor threats are fully resolved.

 

Foreign Private Placement Life Insurance (FPPLI) and Annuities

One way to supplement an FAPT is for the trustee to purchase a FPPLI policy or annuity. For policies with over $1 million paid-in premium, commissions and overhead is minimized, growth may be accessed tax-free via loans (which need not be repaid), and assets are shifted to an investment manager appointed by the insurance company. This strategy has three benefits. First, funds are often “safer” in the settlor’s eyes, since they’re now controlled by a (usually) much larger, better capitalized, and more tightly regulated insurance company. Second, a properly-structured policy helps meet the settlor’s burden of proof that it is indeed impossible to repatriate assets. Finally, the settlor now has a reason for international planning other than asset protection: tax-free investment returns and access to global markets via the policy.

 

The Special Power of Appointment: Must an FAPT be Self-Settled?

The Special Power of Appointment (“SPOA”) is an old estate planning tool that has recently been adapted for asset protection. A SPOA allows an individual, the “appointer”, to make a distribution of trust property to anyone in the world, other than the appointer, his creditors, his estate, or his estate’s creditors. As an extra safeguard, a SPOA could be subject to trustee or protector approval, or to veto by the settlor. This allows for distributions to the settlor, or to anyone who could help the settlor while under duress, without him being a trust beneficiary. The SPOA allows for a trust that is both palatable to the settlor, and protected under U.S. non-self-settled spendthrift law as well as the laws of most common-law jurisdictions.

A SPOA is not a magic bullet: repeated distributions to the settlor may lead a court to conclude the trust is actually self-settled. Nonetheless, it’s much more difficult to prove the trust is self-settled than to prove such when the settlor is a named beneficiary! Add the fact that a SPOA trust will in many instances survive U.S. bankruptcy scrutiny[4] whereas a self-settled trust will often not,[5] and considering that periodic payments could be made to the settlor for managing the FLLC, without using a SPOA (in an LLC/trust structure), and you have a plan that is strong even if it were purely U.S.-based.

 

Summary

The traditional self-settled FAPT, when implemented and maintained properly, remains a viable tool. Nonetheless, the best planners have taken the lessons learned since 1989 and developed new tools to make international planning more affordable, flexible, and protective than ever.

 

Copyright © 2015

Southpac Trust (www.southpactrust.com) in collaboration with The Privacy & Financial Shield LLC (www.pfshield.com)

[1] United States v. Raymond Grant and Arline Grant, 2008 U.S. Dist. LEXIS 51332, U.S. District Ct., S.D. Florida, May 27, 2008.

[2] Brown v. Higashi (In re: Case No.A95-00200, Alaska Bankruptcy Court, 1996); Dahl v. Dahl, P.3d, 2015 UT 23, 2015 WL 404521 (Jan. 30, 2015).

[3] U.S. v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013).

[4] Title 11 U.S.C. § 541(c)(2).

[5] Title 11 U.S.C. § 548(e).

The Special Power of Appointment Trust

by

The Special Power of Appointment Trust, or “SPOA Trust”, has been used by estate planners for many years, but only recently has it been used for asset protection.   The SPOA is specifically mentioned in the trust laws of many states, as well as in the Internal Revenue Code.[1] While it has been touted as a “magic bullet” by a few planners, it is really just another tool in the toolbox, albeit an oftentimes very useful one. In other words, it is appropriate in some circumstances and inappropriate in others. However, in many instances a SPOA Trust offers unique benefits you may not achieve otherwise.

 

What is a SPOA Trust?

A Special Power of Appointment is often used in trusts that require special flexibility. This power is given to an “Appointer”, who has the power to give trust assets to anyone except himself, his creditors, his estate, or creditors of his estate. This power is usually used, of course, to make distributions from the trust to someone other than a beneficiary or the excluded persons we’ve just mentioned.

 

Why Most Domestic Trusts Do Not Protect Assets

The bane of domestic asset protection trust planning is that, in most jurisdictions a self-settled trust, by law, is not allowed to protect trust assets from the settlor’s (a.k.a. grantor’s or trustor’s) creditors. In other words, if you fund a trust in the traditional manner (by way of gift), and you wish to continue to benefit from those assets, then the trust is “self-settled” and you typically will get no asset protection. On the other hand, if you set up an irrevocable trust, and you are not a beneficiary of the trust, and do not retain improper control over trust assets,[2] then a state’s “spendthrift” laws will (subject to fraudulent transfer law) protect trust assets from most creditors.[3] By way of example, the Texas trust spendthrift statute is as follows:

“(a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.”[4]

Although a self-settled trust will generally provide no asset protection, more than a dozen U.S. states[5] have passed Domestic Asset Protection Trust (DAPT) laws. This means that, in some circumstances, a trust may be self-settled and still protect assets from creditors. However, a DAPT typically has severe drawbacks that often make it a subpar asset protection structure. For example:

  • The trust must be funded for 2 to 4 years (depending on the jurisdiction) before the protective features of the DAPT kick in. This means that after you create and fund a DAPT, if a creditor makes a claim before the 2 to 4 year period expires, then that creditor may reach assets in the DAPT. This is true even if there are no existing or foreseeable creditor threats at the time the DAPT is funded.
  • A bankruptcy court may include DAPT assets in the settlor’s bankruptcy estate for up to ten years after the transfer of assets to the trust.[6]
  • A judge in a non-DAPT jurisdiction will likely not respect the DAPT legislation of another state. This means that, if you set up a DAPT in another state, a non-DAPT state’s court may nonetheless allow creditors to attach DAPT assets. If DAPT assets are located in the foreign DAPT state, and you are sued in your home state, it is unclear whether the judge in the foreign state will allow a creditor to attach DAPT assets.[7]
  • DAPT statutes sometimes require the hiring of a professional trust company in the state where the DAPT is domiciled. Professional trust company fees are typically, at a minimum, $1,500 per year or more.
  • Depending on the situs of the trust, there may be statutory exceptions that allow certain creditors to attach DAPT assets. For example, DAPT assets may be subject to tax claims, child support, or alimony.
  • One’s beneficial interest in a DAPT must typically be disclosed to judgment creditors in the course of a post-judgment debtor examination. Failure to disclose such interest is usually perjury.

 

SPOA Trust Advantages

The beauty of a SPOA trust is that the settlor is not a beneficiary of the trust. However, we may use the special power of appointment as a means to, if desired, give assets back to the settlor at some future point, while also making the trust non self-settled so as to obtain spendthrift protection.  Unlike the DAPT, the SPOA Trust may provide meaningful protection in all 50 states.

Because a settlor of a SPOA Trust has no beneficial interest in trust assets, he retains no ownership interest in those assets. This means that he can honestly not list trust assets on a bankruptcy schedule (unless they were transferred within 1-2 years of filing bankruptcy), in a post-judgment debtor’s examination, or in a deposition. This is a benefit that very few, if any, other asset protection structures have. If you place assets in an LLC, for example, you must list your LLC interest on a bankruptcy schedule or in a debtor’s exam. The same goes for corporate stock, partnership interests, or a beneficial interest in a trust (however, unlike many other assets, a beneficial interest in a non-self-settled spendthrift trust is generally not included in one’s bankruptcy estate!)[8] We examine an important section of the U.S. bankruptcy code – section 541 (c)(2), and how it affects the SPOA trust later in this article.

Finally, one of the greatest appeals of a SPOA Trust is its simplified tax treatment. SPOA Trusts are typically set up as ‘grantor trusts’ under the Internal Revenue Code’s grantor trust tax provisions.[9] In most instances, this means we can set up the trust so that it is disregarded as being separate from its settlor for tax purposes. Trust income is treated as if it were earned directly by the settlor, and is reported on the settlor’s personal income tax return. Not having to file an extra return for the SPOA Trust thus greatly reduces administrative hassles. And, unlike an LLC, the SPOA Trust need not be publicly disclosed, and no annual reports need be filed.

 

Potential SPOA Trust Drawbacks

SPOA trusts do have some disadvantages. For example, like most trusts, a SPOA trust is typically funded by way of gift (however, for better protection, we may also fund it via installment sale, a strategy we discuss later). Under fraudulent transfer law, gifts are the most easily reversible type of transfer. At any point within 4 years of the transfer, or up to 7 years in a few states such as California, a judgment creditor may undo a transfer, even if the creditor was not a creditor at the time of the gift, if he can show both of the following to be true:

  • The transfer was a gift, or if consideration was received, the consideration was less than fair market value; and
  • The debtor is unable or unwilling to pay the creditor (insolvent).

In addition to the foregoing, if frequent distributions are made from the trust back to the settlor, a savvy creditor may argue the settlor is a de facto trust beneficiary, even if he’s not listed as such in the trust document. This may lead a judge to treat the trust as if it were self-settled. However, for a married individual with children, or for a combined trust/LLC structure (described below), it is often not difficult to structure a trust so that its assets chiefly go to the beneficiaries, e.g. the spouse and children, rather than the settlor; this is a strategy we’ll examine shortly.

Finally, we must realize that, absent a provision restricting the special power of appointment, the Appointer may distribute trust assets to anyone other than himself, his estate, his creditors, or creditors of his estate. So as to ensure an improper appointment is not made, we could appoint a trust Protector, who would have power to veto an Appointer’s actions, or even fire and replace an Appointer, or we could give the trust’s settlor the right to veto trust distributions (but not the power to replace or remove a trustee, protector, or Appointer). Note that, if the settlor retains the power to veto trust distributions, this may cause inclusion of trust assets in his estate for estate tax purposes.[10] This will not be an issue for most individuals, since currently the estate tax is only levied to the extent an estate’s assets exceed $5.25 million at the time of one’s death (or $10.5 million for a married couple).

 

Using a SPOA Trust with an LLC

For business assets, SPOA Trusts work best in tandem with a limited liability company (LLC). Because transfers to an LLC are an exchange of equivalent value and not a gift, a combined SPOA Trust/LLC structure (where the trust is a non-managing member of the LLC) would be less susceptible to fraudulent transfer claims, without necessarily having to make installment sales to the trust. A properly structured LLC can mitigate or even eliminate most SPOA Trust shortcomings.

For example, one could manage the LLC and keep assets inside the LLC instead of in the SPOA Trust, with the trust only owning the LLC as a non-managing member. This would mitigate concerns about whether an Appointer would always act in accordance with the settlor’s wishes. One could also receive money from the LLC by charging management fees, or by rendering services to the LLC and charging for those services. Taking out cash in this manner would prevent a creditor from arguing that the settlor is a beneficiary of the trust, since payments are for legitimate services, and are not distributions to the settlor from the trust.

Using a SPOA Trust in combination with an LLC provides more protection than using an LLC by itself. This is because, if one were to own an LLC outright, a creditor could obtain a charging order against the owner’s LLC interest. Although a creditor of an owner may not control an LLC, become a member, attach LLC assets, or force assets out of an LLC, a charging order allows a creditor to attach LLC distributions if and when they are made to the debtor-owner. If the LLC were owned by a SPOA Trust, however, then the debtor would no longer own the LLC, and the creditor could not obtain a charging order. Assuming there are no fraudulent transfer issues, a creditor would thus have no way to attach the LLC interest. He is simply out of luck!

There are instances where a SPOA Trust should not be used with an LLC. For example, case law has shown us that it is generally inappropriate for an LLC to own strictly personal assets, such as a personal residence.[11] In such an instance, we would use a SPOA trust by itself, and perhaps sell the asset to the trust instead funding it by way of gift, so as to minimize the likelihood of a fraudulent transfer claim.

 

Using a SPOA Trust with Family Planning to Protect Your Home and Other Property

SPOA trusts are perhaps most effective when doing planning for a married couple. This is because one spouse can place assets in trust for the benefit of the other spouse and their children (if any). So long as the settlor spouse’s assets are treated as his sole and separate property (which may require a post-nuptial or transmutation agreement, especially in community property states), then this will not be a self-settled trust. In other words, the trust will be protected against creditors of either or both spouses. This is what a court decided in Lakeside v. Evans, where a husband put a home into an irrevocable trust for the benefit of his wife.[12] The court in Lakeside ruled that, even though the husband continued to live in the house rent-free, the trust was not self-settled, nor was it the altar-ego of the husband, and the home was therefore not available to the husband’s creditors. In another case, In re Yerushami,[13] a married couple placed their home in a type of trust authorized by the Internal Revenue Code, commonly known as a Qualified Personal Residence Trust (QPRT). A QPRT is a trust where a home is placed in trust for a number of years, during which the settlors live in the property rent-free, and after which the home passes to the trust’s beneficiaries. The court in Yerushami ruled that the home was not available to the settlors’ creditors due to the fact that the settlors only retained the right to live in the home, and not ownership of the home itself. Furthermore, this type of trust was commonly used for estate planning, and therefore the transfer of the home to the trust was for estate planning purposes and not done to defraud creditors. Note that in both cases, the trusts were ‘old and cold’, i.e. they were not challenged by creditors until years after the fraudulent transfer statute of limitations had expired.

At its most basic, a SPOA trust can be used like the trust in Lakeside.

You simply have one spouse put a home or other asset in an irrevocable trust for the benefit of the other spouse – we’ll refer to this as the ‘baseline strategy’ for the rest of the article.  The special power of appointment gives extra flexibility to take the home out of the trust if necessary – for example in order to refinance a home. (Note that lenders typically do not refinance a home that’s owned by an irrevocable trust, however the Garn-St. Germaine Act[14] prohibits a lender from exercising a loan’s due-on-sale clause when a home is conveyed to certain trusts, which means after refinancing, it’s acceptable to re-convey the home into the trust). A properly structured SPOA trust, or a post-nuptial agreement, also ensures that one spouse doesn’t walk away with an unfair share of marital property (as trust beneficiary) should a marriage end in divorce.

The foregoing strategy is easy to do and may very well provide meaningful protection when challenged. However, in both Lakeside and Yerushami, creditors challenged the trust because there were vulnerabilities they thought could be exploited. The defendants in both cases were fortunate that the judge chose to honor each trust, despite the substantial vulnerabilities each trust had. A different judge may very well have decided in favor of the plaintiffs. So what were these shortcomings, and how can we make a trust a strong as possible?

First, as previously discussed, gifting a home to a trust will likely result in a plan failing if it is challenged before the four year (or sometimes longer) fraudulent transfer statute of limitations expires. We may, however, mitigate this problem by selling an asset to a trust instead of funding it via gift. Any transaction that involves an exchange of equivalent value (such as a sale at fair market value) is much harder to undo under fraudulent transfer law. If an exchange of equivalent value occurs, then a creditor has to prove the transfer occurred with specific intent to hinder creditors. If the transfer occurs when the creditor seas are calm, then a future creditor will find it difficult to argue such intent, since they weren’t a threat when the transfer occurred. This is even more difficult in light of the fact that the trust has valid estate and family planning benefits, with asset protection merely as an ‘incidental’ side benefit.

If done correctly, selling a home or other asset to a SPOA trust will not trigger tax liability, even if the asset has appreciated in value, and even if an interest-bearing installment note is involved. Figure 1 illustrates how such an arrangement would work. In Figure 1, the husband is the grantor, and the wife and children are beneficiaries (the husband and wife roles may be switched at will). The wife owns a home in her name as her sole and separate property. The husband first gifts cash or other property into the trust, equal to 10% of the home’s value (or net equity, if the home has a mortgage). This establishes the husband as the grantor of the trust. Next, the wife sells the home to the trust in exchange for an installment note. This note obligates the trust to pay for the home over several years. Installment payments may be once a year, or more often as desired. The husband’s initial funding of the trust goes to the wife as a down payment on the home, and then husband pays rent for living in the home. We structure this trust so that the wife is the owner of the trust under the grantor trust rules of the internal revenue code.[15] If husband and wife file joint tax returns, then there is no income tax due from making rent payments or paying interest on the note.

FIGURE 1

 SPOA Trust Figure 1

The strategy we’ve just described eliminates the vulnerabilities of our baseline strategy. First, the trust grantor does not have free use of trust assets, as he pays rent for living in the home (which payments are then used to pay off the installment note). This makes it so that he will not be seen as a trust beneficiary, which means the trust will not be deemed self-settled. Furthermore, gifts to the trust are used to make note payments (or an initial down payment to purchase the home or other property), and the property itself is sold to the trust. This means there are effectively no assets that are gifted to the trust that remain in trust. In other words, all trust assets have been sold to the trust, and it will thus be difficult for a creditor to make a fraudulent transfer claim, so long as the transfer occurred before creditor problems materialized. The installment note itself may further include anti-creditor language. The note could provide that it will cancel in the event of its involuntary assignment, or if its owner declares bankruptcy, and it could also allow for payments to be deferred for a number of years in certain circumstances.

Finally, this trust may be structured so that its assets are included in one’s taxable estate, subject to estate tax, or excluded from one’s taxable estate for estate tax savings. This highlights the fact that, in addition to structuring a trust for estate tax savings, or not, there are many other tweaks that may be made to a trust, LLC, or other asset protection plan. For example, we may set up a trust with one spouse as the settlor, another spouse as the trustee, and the children as beneficiaries, instead of using a “trusted person” as the trustee, as shown in Figure 1. Perhaps we give the special power of appointment to the beneficiary spouse, or perhaps we include no special power of appointment at all. Perhaps the arrangement in Figure 1 is used to hold property other than a home. Figure 1 is therefore only an example, and may not be appropriate for any particular individual or married couple.

Structuring a trust for stronger protection, like we did in Figure 1, makes the arrangement more complex than our initial ‘baseline’ strategy. The question anyone structuring such a trust must ask is: is the extra complexity worth it? Let’s examine how much maintenance is involved with the strategy in Figure 1. After setup, the grantor will have to make rent payments to the trust at least once per year, and the trust will turn around and make installment note payments at least once a year. In most instances, however, the trust will not have to file a tax return, and no tax liability is triggered with this arrangement. If an individual is willing to follow these additional requirements, then the stronger method should be implemented instead of the baseline strategy. However, if a person wants a very simple arrangement, then the baseline strategy provides much more protection than doing nothing.

 

The Offshore SPOA Trust

Due to the marketing efforts of certain asset protection professionals, the offshore trust is sometimes viewed in a negative light. However, it is viewed negatively for all the wrong reasons. You see, U.S. courts do not take issue with offshore trusts. Rather, they take issue with self-settled trusts, since U.S. laws generally do not allow self-settled trusts to protect assets from creditors. Because most offshore asset protection trusts are self-settled, they are in conflict with U.S. law and hence the stigma. But it is not the offshore aspect of the trust that is a problem, only the self-settled aspect.

The SPOA trust is designed to not be self-settled, and therefore it is compliant with U.S. law. Merely moving the trust offshore does not cause the conflict, but it may very well provide stronger protection and extra benefits. The fact of the matter is offshore trusts sometimes work, even if they’re self-settled, because when assets are moved offshore, they are moved outside the reach of U.S. courts. This was amply demonstrated in the case U.S. v. Arline Grant, where the U.S. federal government failed to bust an offshore trust in an attempt to collect on a $36 million federal debt, and where the trust’s grantor was not held in contempt of court for failing to repatriate trust assets. By using a much stronger trust, such as a SPOA trust, we may combine the extra benefits of offshore protection with the benefits of the SPOA trust. In effect, we would create the ultimate offshore trust – one that is actually compliant with U.S. law. We may also place language in a domestic SPOA trust so that it may re-domicile offshore upon the occurrence of certain contingencies, or if the trustee or another individual (such as the protector, whom we discuss shortly) deem such to be expedient. Having a trust move offshore means that, if a court assigned an installment note to a creditor, and said the note cannot cancel, then the offshore trust would simply ignore the court’s order to make note payments to the creditor instead of the trust’s beneficiary.

 

The SPOA Trust and Bankruptcy

Unlike with an LLC, DAPT, or other asset protection strategy, property in a properly structured SPOA trust will typically survive bankruptcy without losing ownership of trust property. This is because of section 541(c)(2) of the bankruptcy code, which states:

Section 541(c)(2) :

“A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.”

In layman’s terms, this means that an irrevocable, non-self-settled spendthrift trust (such as a SPOA trust) will not be available to one’s creditors in bankruptcy. Compare this to the DAPT, which the bankruptcy code specifically includes in one’s bankruptcy estate, forfeit to creditors, unless assets have been in the DAPT for at least ten years.[16] With LLC ownership, bankruptcy law is murky – an LLC ownership interest that is tied to ‘executory obligations’ may be protected in bankruptcy, however the case law is not entirely decided with regards to this matter, and therefore even a well-structured LLC interest may be at risk in bankruptcy.

 

Using a Trust Protector

A trust protector is an individual who has no power over trust property, but who may replace a trustee at will, or veto certain trustee actions. Essentially, a protector makes sure the trustee does his job properly, and may replace him if he doesn’t. The protector’s duties and powers are set forth in the trust agreement.

If a protector is appointed, then protector language should be carefully drafted, so that the Protector can take the trust offshore, but language would ideally not reflect that this would automatically happen in the event of creditor attack. In other words, we give the Protector the power to do this unquestionably, but without being too specific. Drafting the trust in this manner allows the grantor to claim that the protector did this on his own, and that such was not the grantor’s intent. This helps the grantor keep his hands clean should the protector move the trust offshore in order to reinforce the asset protection characteristics of the trust.

 

Additional SPOA Trust Strategies

Although we’ve outlined SPOA trust strategies for family planning, a single person with no children may also take advantage of the SPOA trust. In this instance, one may put an LLC in a SPOA trust, with a charity as the trust’s beneficiary. Assets will be taken out of the LLC as payments to the manager, but at portion could be distributed to the charity from time to time, with the charity receiving the remainder when the grantor dies. If that person later marries – no problem! The trust may specify that if the grantor marries or has children, then those individuals will become the new beneficiaries (this is will automatically happen because the trust provides for this), or simply use the special power of appointment to take the LLC interest out of the trust, and give it to the spouse or other individual.

 

Conclusion

Though not appropriate for all situations, a SPOA Trust is an exciting asset protection tool with unique benefits. It is often best combined with an LLC or other business entity, but occasionally it may be appropriately used by itself, so long as the settlor is aware of its potential drawbacks. Please send any comments or suggestions regarding this article to ryan@pfshield.com.

 

[1]See for example, Title 26 USC sec. 2041(b)(1), Calif. Probate Cd. Sec. 611(d).

[2] In some circumstances a settlor may retain very limited, narrowly defined control over certain assets of the trust. A skilled asset protection expert will know which powers may be retained without compromising the trust’s protection.

[3] Even the best trusts may not protect from IRS or possibly other federal government claims. See Bank One Ohio Trust Company, N.A. v. United States of America, 80 F.3d 173 (6th Cir. 1996). See also United States v. Rye, 550 F.2d 682, 685 (1st Cir. 1977); United States v. Dallas Nat’l Bank, 152 F.2d 582, 585 (5th Cir. 1945); First Northwestern Trust Co. of South Dakota v. Internal Revenue Service, 622 F.2d 387, 390 (8th Cir. 1980); Leuschner v. First Western Bank & Trust Co., 261 F.2d 705, 707-708 (9th Cir. 1958).

[4] Texas Prop. Cd. §112.035(a).

[5] States with DAPT legislation include Alaska, Colorado, Delaware, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming. The protection offered between jurisdictions varies greatly. For a breakdown of DAPT protections and other DAPT benefits or drawbacks per each jurisdiction, see http://www.oshins.com/images/DAPT_Rankings_-_SJO_chart.pdf.

[6] Title 11 U.S.C., §548(e).

[7] See Where Should I Form My Limited Liability Entity? in “Asset Protection In Financially Unsafe Times” by Arnold S. Goldstein, PhD, and W. Ryan Fowler, p. 102.

[8] Title 11 U.S.C., §541(c)(2).

[9] Title 26 U.S.C., §§ 670-679.

[10] See title 26 U.S.C. §§2036-2038.

[11] In re Turner, 335 B.R. 140 (Bkrpt. N.D. Cal 2005).

[12] Lakeside v. Evans, 2005 UT App 87;2005 Utah App. LEXIS 71, Case No. 20010334-CA.

[13] In re Yerushalmi, 2012 WL 5839938 (Bkrtcy.E.D.N.Y., Slip Copy, Nov. 19, 2012).

[14]Title 12 U.S.C., section 1701j-3(d).

[15]Title 26 U.S.C.. sec. 678. This is accomplished by giving certain rights of withdrawal to the beneficiary that may not be used by her creditors to attach trust assets. The settlor may also make additional gifts to the trust, if the trust needs additional funds to make note payments.

[16]Title 11 U.S.C. sec. 548(e).

Rob Lambert’s New Online Asset Protection Course

by Leave a Comment

Since the early 2000’s Rob Lambert has run one of the web’s top asset protection websites and has been a leader in our field. Since that time the site’s asset protection message board has become a widely respected source of information and a place where you can get any asset protection related question answered by top asset protection professionals, such as myself.

Rob just released a new educational site that teaches individuals about asset protection planning. If you’re interested in Asset Protection this is definitely one site you should check out. Check it out at AssetProtectionTraining.com. If your just learning about asset protection or aren’t really sure what its about I highly recommend watching his free online course that explains the fundamentals of asset protection planning and how to spot an asset protection scam.

Learn More About Protecting Real Estate

by Leave a Comment

Asset Protection in Anticipation of Foreclosure

Around the beginning of 2008, a trend began that forms the basis for this article. I began receiving a lot of inquiries from people who all had the same problem. They were losing investment and/or rental real estate to foreclosure or short sale, and they knew the foreclosure would not pay off their entire loan balance. They fully expected a deficiency judgment to follow foreclosure. Many of these individuals, as investors and independent business people, owned much or all of their retirement outside a creditor-protected retirement plan (401(k), etc.) They were also worried about losing their home or other assets to creditors. Their question to me was always the same: they had been caught with their pants down and had no asset protection plan. Now they were in trouble. Could anything be done?

In normal times, it would be difficult to protect these people’s wealth. This is because of what’s known as fraudulent transfer law. Any transfer a person makes after a creditor threat arises may be suspected as a fraudulent transfer, i.e. an attempt to thwart creditors. If the creditor proves the transfer was done to hinder, delay, or defeat that creditor, the transfer would be undone by a court, so that the creditor could then seize the asset. Therefore, gifting your home to your brother a week before a creditor gets a judgment against you usually doesn’t work.

However, these are not normal times, and there is hope for people in the situation I’ve described above. I must emphasize that implementing an asset protection plan after creditor threats have arisen is by no means bulletproof. Unless you flee the country with your wealth, there is always a chance that even the best plan may fall apart. Fraudulent transfer law can be applied up to 4 years after a transfer has occurred (in a few states such as California, the law may be used up to 7 years after the transfer.)

But here’s the good news: a good asset protection planner knows how to make it more difficult for a creditor to prove assets were transferred in a fraudulent manner. If they can’t prove the debtor’s intent was to thwart a creditor, then they can’t use fraudulent transfer law to reach an asset that’s no longer owned by the debtor. That means a creditor, if he wishes to undo an asset protection plan, will have to use circumstantial evidence to convince a judge that the debtor did a transfer with fraudulent intent. Doing so takes time and effort. And, it’s going to cost the creditor a fair amount in legal fees.

In today’s environment, many creditors (especially banks) don’t have enough resources to chase all their debtors. In fact, if your creditor is a bank, then you can almost be certain (at the time of this writing, at least) that they are overwhelmed with collection cases. Their collection attorneys are overwhelmed due to the flood of foreclosures that have swept across the U.S. They are busy enough just with foreclosures. It may be a year or two, or even longer, before they get to collecting on deficiency judgments. Yes, our economy is that bad.

If you have a solid asset protection plan in place, and you have or expect to have a deficiency judgment against you, then you have transformed yourself from ‘low hanging fruit’ to a hard target. Your creditors will not be able to just grab your assets. They must first prove your plan is a fraudulent transfer. They will have to put 10 ‘easy’ cases on hold in order to commit sufficient resources to undoing your plan. And, especially if the plan is good, they may be uncertain as to whether they can undo your plan even if they try.

Because you are now a hard target, a variety of things may happen. The creditor could walk away from the judgment it has against you (the best case scenario), or it could try and settle the deficiency with you for an amount that is much smaller than it might otherwise have been. Either of these two scenarios are a ‘win’ for you and your asset protection plan. There is still the chance the creditor may try and pierce your plan. But place yourself in your creditor’s shoes: if you have to drop 10 collection cases to chase after a hard target, what would you do? Probably, you’d choose one of the first two scenarios. Still, for those who wish to eliminate or minimize the third scenario (which may still be a win if your plan holds up), my suggestion is to do asset protection planning before you get in trouble. That is the best way to do the strongest planning. With that said, a good asset protection plan, even if implemented after creditor threats materialize, is often much, much, better than doing nothing. And in my experience, with regards to the scenario I’ve outlined above, and in regards to our current economic environment, it will probably work (I’m sorry that I have to be so particular here, but I don’t want anyone to misconstrue what I’m saying as a green  light to try and thwart all creditors in all circumstances!) There are, of course, situations where your creditor problems are too far along, too severe, and where engaging in planning would be a mistake. Often times a judgment call must be made on a case-by-case basis. If you have creditor problems, I will typically have an attorney look at your situation to see if asset protection is appropriate for you. If it is, I generally will implement a plan under attorney supervision. Among other things, this gives you the confidentiality of attorney/client privilege.

Which brings me to our next question: is it moral to set up an asset protection plan to dodge creditors? You’ll have to answer that question for yourself, but here’s how I see it: if, for example, you have $1 million in the bank and you have a $400,000 deficiency judgment against you, then I will not help you avoid that debt. You can pay the debt off and still be fine, and next time you’ll know not to be so aggressive with your investment activities.

But for those who are trying to keep from losing their retirement or their home, I’d like to quote Thomas Jefferson. He said:

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

Wow, that Jefferson was smart! He predicted, over 200 years ago, what banks would do to us. Actually, he had merely studied history, and had seen greedy bankers do this all before. Yes, bankers are more sophisticated now, but they are still up to their same old tricks.

And on a tangent note, here’s what Pres. Andrew Jackson said about bailouts:

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”

The foregoing is not a perfect fit for our times, but I’m sure you see how this quote remains relevant today. Our current government not only allows corrupt bankers to persist, it bails them out.

Stay safe and prosperous!

Sincerely,

Ryan Fowler

www.pfshield.com

800-798-2008

Explore the Benefits of Timely Asset Protection

by Leave a Comment

When is it too late for asset protection?

Generally speaking, it’s too late to do asset protection once you have a judgment against you, unless you have an arrangement to pay off the judgment (and follow through with that arrangement) and are merely planning in order to safeguard assets against future creditors.

Doing asset protection planning to thwart collection attempts post-judgment may result in you and your asset protection planner being fined by a court! Don’t do it!

Doing asset protection in anticipation of a judgment, bankruptcy, or divorce is often (not always) possible, albeit tricky, even if the storm clouds are already on the horizon. However, there is always a risk that such planning may fail due to fraudulent transfer law.  It’s much, much better to do the planning before such threats arise, because then the possibility of committing a fraudulent transfer is negligible. Nonetheless, doing asset protection after threats arise may often still be effective – but be careful! Egregious or blatant planning may result in fines and penalties. My rule of thumb is if creditor clouds are on the horizon, retain an attorney and have him hire the planner, so that attorney/client privilege covers the plan’s implementation. It’s a good idea for a planner to work under your attorney, regardless. PF Shield maintains attorney relationships in several states, so if you need an attorney, let us know as we’ll refer one to you.

Related Links:

Learn About the Benefits of Going Offshore

by 1 Comment

Take Your Wealth Offshore Before It’s Too Late!

Note: This is the 2nd part of a 2 part series. To read the first part of this series, click here.

In my last newsletter, I talked about going offshore in order to reduce the impact the coming economic super-storm will have on your wealth. This article will focus on three likely consequences of that storm: hyperinflation, exchange controls, and possibly the nationalization of retirement accounts. Let’s start with hyperinflation.

Historical examples of hyperinflation abound. Take post-WWI Germany, for example. The German government had massive reparation debts to pay as a result of the war. Initially inflation was not an insurmountable problem, with the German mark holding somewhat steady at around 60 marks per U.S. dollar through the first half of 1921 (note however that the ratio of marks to dollars in 1914 was only 4.2 to 1). However, the “London Ultimatum” of May 1921 made things much worse, due to the fact that it demanded, beginning August 1921, annual payments of $2 billion gold marks plus 26% of the value of Germany’s exports. Germany had nowhere near enough money to make payments under such a plan, which was supposed to last until 1984, so it printed massive amounts of fiat currency.

This started a severe inflationary trend, which caused a mass panic. This led to a hoarding of living necessities. This in turn caused a shortage of said necessities, which led to higher prices, which led to more panic and hoarding, and so on. The end result was a vicious, self-reinforcing cycle of runaway hyperinflation. Consequently, by December 1923 the mark had devaluated so much that the mark to U.S. dollar ratio was 4.2 trillion to 1.

Our current federal debt, when one includes unfunded liabilities, is well over $53 trillion and rising by trillions of dollars each year (for a better grasp of the magnitude of our debt, visit http://www.usdebtclock.org.) Will $53 trillion+ in debt lead our government to print inconceivable amounts of paper fiat money in an attempt to pay off that debt? What will be the consequences of this debt (which includes our “official” national debt of over $13 trillion), the cost of the Iraq War, and the $12.7 trillion in allocated bailout and stimulus spending? Would the foregoing lead China and other countries to dump their multi-trillion U.S. dollar holdings? China and the IMF have already talked about replacing the dollar as the world’s reserve currency, either with an all-new international currency, or with a basket of currencies which would include the Japanese Yen, the Chinese Yuan, the Euro, and gold. This alone would likely cause a massive dumping of dollars worldwide and hyperinflation in the U.S. Time will tell for sure, but if history is any indicator, the answer to at least some of these questions is almost certainly yes, and a “yes” to any of the above means disaster and hardship on a biblical scale.

Hyperinflation would mean the general populace’s savings are wiped out. This means IRAs, 401k accounts and other retirement funds become almost worthless, because the dollar they are based on becomes almost worthless. Furthermore, hyperinflation typically leads to a system-wide financial panic and a depression or extremely deep recession. It also involves a massive sell-off of non-essential liquid assets in an attempt to purchase necessities, which are then used for bartering since the currency has become a hot potato no one wants. There goes your investment portfolio, along with the stock market in general.

So how does one minimize the effects of hyperinflation, a severe U.S. depression, or other problems that may arise when the super-storm hits? The short answer is: get your wealth out of the U.S. dollar, into investments that retain their value during economic upheaval, and as far away from the U.S. economy as possible. There are several ways to do this:

  • Invest in direct ownership of select commodities (preferably in foreign markets), especially agriculture and fuel-based commodities;
  • Invest in gold, silver, and certain other precious metals (Australia’s Perth Mint is especially attractive, see www.perthmint.com.au);
  • Invest in stable foreign currencies;
  • Invest in stable foreign markets. We must note that, however, an economic crisis in the U.S. will have major repercussions for most of the rest of the world; the aftermath of the 2008 credit crisis makes this evident. Still, there were some countries, such as India, that seem untouched by the financial crisis of 2008 and its aftermath. We expect these countries to fare similarly when the economic super-storm hits.

Up to this point you may be wondering: why should I go offshore to do the foregoing? Can’t I just buy gold and silver, or commodities, or foreign currencies, and own them in the U.S.? This could be dangerous, because at some point I believe we will be subject to exchange controls, and we may also be subject to gold and silver confiscation, much like the gold confiscation program imposed by the federal government in 1933. See Figure 1, below.


FIGURE 1: CONFISCATION OF PRIVATE PROPERTY WITHOUT DUE PROCESS OF LAW? SO MUCH FOR THE 5TH AMENDMENT IN TIMES OF CRISIS!




WHAT ARE EXCHANGE CONTROLS?

“They [the U.S. government] are going to have currency controls and exchange controls and limit the amount of money you can take overseas… the description of a free country is one where you can leave with your money when you please. That is going to get harder and harder.” – Congressman Ron Paul (R-TX)


Exchange controls are a government’s attempt, during a currency crisis, to have its cake and eat it, too. During such a time, a government wants its citizenry to keep using its currency in order to keep it in demand. This facilitates the stabilization of prices. At the same time, the government wants to pay off overwhelming debt without curtailing its massive deficit spending. This requires the printing of huge amounts of fiat currency, which inexorably leads to currency devaluation. As you might guess, although overprinting currency always leads to devaluation, the governments of the world are often stupid enough to think they can defy the laws of mathematics by using exchange controls.

Often when a government implements exchange controls, it requires the exchange of foreign currencies at government-mandated rates. Usually, exchanges may be done legally only via a government agency or government-regulated bank. The rates are always extremely unfavorable. A currency that may have a 2 to 1 rate on the open market (for example, 2 units of a foreign currency buy 1 U.S. dollar) may have a government-mandated 5:1 rate. A recent example of exchange controls is Iceland which, after its currency took a nosedive, imposed strict controls that, among other things, require citizens and businesses to submit all foreign currency to a domestic financial institution for exchange into Iceland Kronas. The exchange rates were, of course, substantially below market rates. This is obviously a disaster for anyone subject to such controls.

If your money remains in the United States, it is all but guaranteed to lose value when the super-storm hits and, if exchange controls are imposed, your wealth may very well be stuck in a trap with no way out. But if you prepare now, there is a way out, which we reveal later in this article.


COULD THE U.S. GOVERNMENT CONFISCATE YOUR RETIREMENT?

In 2009, Argentina confiscated the retirement funds of its citizens as an emergency measure to save its government from crushing debt. Could the same happen in the U.S.? It’s certainly possible. Consider this:

  • We already have a government-sponsored retirement plan called Social Security. Unfortunately, all money that flows into the Social Security Trust Fund is routinely stolen by our federal government and replaced with “IOUs”. How in the world will our government repay these IOUs when the baby-boomers retire and start to collect social security income? If you guessed “by printing an endless supply of fiat money”, I would say you’re on the right track.
  • Congress has, on at least one occasion, discussed the nationalization of 401k and other qualified retirement plans by converting them to government-controlled “Universal Government Accounts” (UGAs) which are administered directly by the federal government. How much would you like to bet that these funds will be (mis)handled just like Social Security is?
  • In January 2010, President Obama proposed a bill that would require all businesses to offer automatic IRA accounts to its employees. But the real kicker is 10% of the funds in these accounts must be invested in U.S. treasuries. In a sense, 10% of these accounts would be nationalized. Is this the beginning of a slippery slope towards nationalization of your retirement?

Those not well-versed in history may scoff at the likelihood of exchange controls or retirement account nationalization. After all, aren’t we the Land of the Free, the Home of the Brave? While we still have some of our freedoms, let’s remember what our federal government is capable of:

  • An income tax bracket of 91% or more (imposed on wealthy individuals from 1944-45 and 1951-1963).
  • Confiscation of all investment-grade gold in 1933 (and it was illegal to own such until 1975).
  • Routine confiscation of real estate, boats, cash, and other property under federal drug confiscation laws, with no due process whatsoever. Only 20% of those whose property is confiscated are ever charged with a crime.
  • The forced imprisonment of 120,000 Japanese-American citizens, without trial and without any evidence of any crime having been committed, during World War II.

We don’t know for sure whether retirement funds will be nationalized, but wouldn’t you rather be safe than sorry? Do you prefer an ounce of prevention or a pound of cure?


HOW TO PREPARE

Before doing anything else, I strongly recommend you buy a year’s supply of food and cooking fuel. Storing a couple weeks’ worth of water is a good idea as well. I also recommend getting a few thousand dollars worth of silver (which is much more spendable in small amounts than gold) and store it in a safe place (do not store it in a bank’s safe deposit box!) And of course, you should have a reliable semi-automatic pistol and rifle with several hundred rounds of ammunition, in case you ever need to defend yourself. When the super-crash hits, crime will certainly increase exponentially.

But what about protecting your life’s savings? The best way to protect your liquid assets is to place at least a portion of it offshore, where it will be outside of the U.S. government’s jurisdiction and not subject to exchange controls, confiscation, or other unconstitutional schemes. Simply opening a foreign bank account is not enough. People have done such in the past and, when push comes to shove (in the event of a lawsuit or other matter that leads to a courtroom) a judge typically orders one to repatriate foreign assets. Failure to comply leads to civil contempt, which means you find yourself in jail until you comply with the order. In one case, In re: Lawrence, Mr. Lawrence found himself in prison for nearly seven years for failing to repatriate offshore assets.

The only way to insulate yourself from a repatriation order is to put your wealth in an asset protection structure that can survive an attack by the federal government. And, case law has shown us that you must do this before you find yourself in hot water. One court case, U.S. vs. Raymond and Arline Grant (S.D.Fla. 06/17/2005) shows us that doing this is possible. The IRS went after Arline for $36 million in back taxes owed by her deceased husband (unfortunately for Arline, she and her husband filed joint tax returns, which made her liable for his unpaid taxes). Despite their best efforts, including an attempt by the IRS to throw Arline in jail for failing to repatriate foreign assets, Arline not only stayed out of jail but her wealth also stayed safely offshore. To be fair, there have been a handful of offshore trusts that did not fare as well when challenged, but there were three key differences between the trusts that failed and Arline’s trust, which passed the ultimate test with flying colors:

  • The trust beneficiary did not retain control over trust assets,
  • The trust was carefully drafted (although, in my book Asset Protection in Financially Unsafe Times, I discuss how Arline’s Trust could have been drafted better), and
  • The trust was set up long before creditor problems arose (the courts have ruled that setting up an offshore trust after creditor threats arise, so that you are unable to repatriate those assets, constitutes a “self-created impossibility” to comply with a repatriation order. Judges can and have thrown debtors in prison for such shenanigans.)

The fact of the matter is, offshore trusts and other offshore structures have worked countless times, if they are set up before creditors come knocking. I have seen cases where a creditor had a $1 million legal fund available to try and pierce an offshore structure. That creditor failed. I saw another $10 million claim slip away quietly after the creditor found out the the defendant had an “old and cold” asset protection plan in place. At this point in time, it is 100% legal to go offshore (however you must generally disclose that you are doing so to the government.) At some point I believe it will no longer be legal to do this. If you wait until then, it will then be too late to protect yourself.

Although we can’t predict for certain how things are going to pan out in the U.S., if history is any indicator, much or all of what we’ve discussed is likely to occur. One thing is certain: we have painted ourselves into a corner and there will be a day of reckoning. It will be a horrifying day for those who are unprepared. Considering the magnitude of what we face, along with the history of how governments deal with such crisis, doesn’t it make sense to prepare by placing at least a portion of your wealth out of harm’s reach while it is still safe and legal to do so? In addition, you will be protected from lawsuits, and you may also be protected from (depending on your circumstances when you initiate the planning) divorce, a business gone bad, bankruptcy, unforeseen tax problems, and other threats as well.

To your asset protection and financial success,


W. Ryan Fowler

Chief Consultant, Founder

www.PFShield.com

Learn About the Value of Asset Protection

by 1 Comment

Why Go Offshore?

Note: This is the first in a 2-part series. To read the 2nd part of this series, click here.

The question I’d like to answer today is: why go offshore? After all, a plethora of asset protection and estate planning options are available domestically. I myself routinely implement a wide variety of both domestic and offshore plans.

Some people think going offshore is a bit scary. People see markets such as Hong Kong, Brazil, or Singapore as being the Wild West of investing, when really they are anything but. Let me ask you: have you noticed that, when adjusted for inflation, the U.S. stock market is worse off today than it was 10 years ago? Many other markets have realized huge gains in the last 10 years. Thus, the real question we should be asking is not “why go offshore”. Rather, we should ask “who in their right mind would keep their money in the U.S. over other far more lucrative markets and currencies?”

There are several reasons why one might want an offshore asset protection, estate, and investing strategy over a domestic one, for example:

  • Stronger protection arising from the fact that your assets are no longer in the U.S.;
  • Broader investment opportunities with higher yield potential, from markets with stronger economies than the U.S. (such as Brazil, Russia, India, and China, a.k.a. the “BRIC” countries and other emerging markets);
  • Not having to worry about a U.S. court suddenly changing its mind as to how much protection your domestic structure actually has (this recently happened with regards to Florida LLCs, both single member and multi-member, in the landmark Florida Supreme Court case Olmstead v. FTC, which I’ll discuss in a future article);
  • Purchasing a foreign life insurance policy with less overhead and ‘drag’ than may be available in the United States.

One way to illustrate the benefits of going offshore (besides to protect your assets, of course) is to compare the performance of the Japanese Yen vs. the U.S. dollar since January 2000. In January 2000, 1 Yen would buy 0.0094846 U.S. dollars. As of January 2011, 1 Yen would buy 0.0120764 U.S. Dollars. In other words, if you would have merely taken your U.S. dollars and placed them in the Yen, you would have, in 11 years, realized a gain of 27.3%. Had you invested in Euros in the same time period, you would have realized a gain of 31%. Swiss Francs would have netted you 62.2%. Even the Canadian dollar would have netted you a 46% return. It’s not that these currencies have grown in value, mind you. They’ve actually decreased in value somewhat, thanks to inflation. But, the U.S. dollar has decreased in value much more. This trend will increase exponentially at some point in the near future, which brings me to my next point.

You see, none of the above is the greatest reason to go offshore. The reason that overshadows all others is this: an enormous financial storm is coming to the United States. When this storm hits, you will want at least some of your wealth offshore, i.e. far away from ‘ground zero’. Some people think the storm has already hit, and indeed our country is currently in a very deep recession, perhaps even a depression. But what we are experiencing now is only a precursor. The macroeconomic fundamentals comprising the underpinnings of the U.S. economy point to an even worse dilemma that is likely less than a decade away, or even just a year or two away.

Perhaps David Walker, who was until 2008 the U.S. Comptroller General, described what’s coming best when he said:


“People seem to think the government has money… the government doesn’t have any money… The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government’s finances… The difference is that the magnitude of the federal government’s financial situation is at least 25 times greater.” — David Walker, 7/17/2008 [emphasis is ours].


25 times greater than the 2008 crisis? One may find that hard to believe, much less comprehend. But before planting your head in the sand and writing off Mr. Walker as a raving lunatic, consider this: until 2008 Mr. Walker was the federal government’s chief accountant. If anyone is qualified to talk about our government’s financial state, it is him. Furthermore, he is not the only respected individual who’s sounding the alarm. We highly recommend everyone watch the 2008 documentary IOUSA — it’s perhaps the scariest film ever made. It features commentary by multi-billionaire Warren Buffett, former Federal Reserve chairman Alan Greenspan, former U.S. Treasury Secretary Paul O’Neill, U.S. congressman Ron Paul, former Federal Reserve chairman Paul Volcker, and Bob Bixby of the Concord Coalition. It is a must-see. (At the time of this writing, you may watch a 30-minute version of IOUSA for free online at: http://www.iousathemovie.com)

The underlying premise behind this movie is that federal entitlement programs such as Medicaid, Medicare, and Social Security (which comprise almost 40% of all federal spending) will, in the next decade or less, spiral hopelessly out of control. The 2008 $700 billion bailout (only one of several bailouts that total over $12.7 trillion) and the cost of the Iraq War further exacerbate the matter. Nevertheless, the worst culprit by far is entitlement spending. Entitlement spending woes arise largely because of a demographic anomaly known as the baby boom generation. This term refers to a period in U.S. history marked by a sharp increase in births arising from unprecedented economic prosperity. The bad news is, as of 2008, the baby boomers became eligible to collect early retirement benefits, and a few years later they’ll be eligible to begin collecting full benefits. What does this mean to the federal budget? As popular CNN commentator Glenn Beck puts it, it means a $53 trillion financial “asteroid” will hit us sometime next decade. Mr. Beck refers to this threat as an asteroid because, just like an asteroid hitting earth could wipe out all life on the planet, this asteroid could wipe out all wealth in the U.S., something not even the Great Depression managed to do.

Specifically, this asteroid arises from, according to the 2007 Financial Report of the United States, “[the] federal government’s total liabilities and unfunded commitments for future benefits payments promised under the current Social Security and Medicare programs”. Note that in the 2000 report, these obligations were a “mere” $20 trillion. If these obligations grew by $33 trillion in only 7 years ($8 trillion because of so-called “conservative” President George W. Bush’s signing of the Medicare-D prescription medication program into law), how much will they grow in the future?

Even President Obama is aware of this problem. Here is an excerpt from a 2009 C-Span interview where he admits how bad things really are:


SCULLY: “You know the numbers, $11 trillion debt, a national deficit of $1.7 trillion. At what point do we run out of money?”

PRESIDENT OBAMA: “Well, we are out of money now. We are operating in deep deficits… This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue…

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything...” [emphasis is mine.]


What will happen when this asteroid hits? No one can say with 100% certainty. However, if history is any indicator we have a good idea of what will probably occur: stagflation (severe inflation in a recession or depression) or more likely hyperinflation coupled with an economic collapse (or near-collapse) and the federal government’s bankruptcy. Also, the government will likely respond to the crisis with exchange controls. There has also been talk in congress of nationalizing qualified retirement plans, such as 401k plans, and replacing them with “Universal Government Accounts” – a trick that would be stolen from Argentina, which nationalized its citizen’s retirement plans in 2009.

We’ll discuss hyperinflation, exchange controls, and the potential nationalization of your retirement in more detail in the next newsletter. For now, let me leave you with this: our government is overwhelmed with debt, and in the coming years our debt load will grow exponentially worse. It will crush our nation. The government can only sell so many treasury bonds and only raise taxes so high. The only other option will be to monetize the debt by printing massive amounts of fiat money. This is a trend that has happened in many, many countries throughout history; 30 nations in the 20th century alone experienced hyperinflation and its devastating effects. Historically, hyperinflation is often followed by exchange controls. Exchange controls are the confiscation of precious metals (gold, silver, etc.; note that our government once already confiscated our gold in 1933) and foreign stable currencies, or restricting the exchange of such currencies at rates far below actual market rates. The only way to legally avoid the fallout from hyperinflation and exchange controls is to legally place your wealth outside of the U.S. government’s reach before these contingencies occur. And, if you have the power to unilaterally repatriate such assets, moving wealth offshore by itself won’t work, as you’ll likely be subject to a law or court order requiring repatriation of your wealth back to the U.S. In addition to moving wealth offshore, you’ll need an offshore trust (OAPT) or some other foreign structure that, when properly implemented and maintained, has a history of surviving severe creditor threats. We will discuss all this in the next letter.

To your asset protection and financial success,


W. Ryan Fowler

Chief Consultant, Founder

www.PFShield.com