By M. Wayne Patton, JD, Guest Writer
At its core, asset protection is nothing more than risk management. Unlike liability or malpractice insurance, asset protection is active planning that covers all sorts of liabilities from professional to personal, and if done properly, it will also allow you complete control over the investments inside your plan along with the option to remove your assets from the plan without any sort of penalty. For that reason alone, asset protection planning is far superior to whole life insurance.
Separate Ownership from Control
The legal basis for asset protection planning is the age-old concept of separating legal ownership from beneficial use and control of assets. Most physicians and almost all entrepreneurs take advantage of this legal separation every day without consciously thinking about it. Any time you direct the actions of an LLC, S Corporation, or a limited partnership, you are managing assets, employees, and liabilities that don't belong to you personally. That's true even though you personally benefit from the profits and capital gains appreciation of the underlying business entity. From this example, let's set out Rule #1 of Asset Protection Planning:
It is legally permissible to separate legal ownership from beneficial use and control.
For purposes of protecting your wealth, there is no tool better suited to take advantage of Rule #1 for the protection of personal wealth than a Portable Asset Protection Trust, which very effectively removes individuals from legal title while allowing them to retain exclusive control and use of the assets. The reason this protects the assets is that if you don't technically, legally own an asset, that asset cannot be taken from you, even if you have the right to use and benefit from the asset.
Different Place, Different Laws
Before we dive too deeply into specifics, let's first identify Rule #2 of Asset Protection Planning:
You have the legal right to determine the choice of law that governs a trust.
Rule #2 is what allows so many promoters to legally tout and create offshore trusts for their clients. To be sure, there are many benefits to being offshore. It is certainly an ironclad form of asset protection available for non-exempt assets (i.e., assets outside of a 401(k) or homestead exemption, for example).
How Do Offshore Trusts Work?
Offshore trusts work like this: assets are titled in the name of an offshore trust of which you are a beneficiary (and which you control). If you are personally sued and have a judgment entered against you, the assets in the offshore trust are off limits. Sure, an aggressive attorney or even the court might send letters to the offshore trust company demanding payment from trust assets, but those letters will be put in an offshore wastebasket!
Are Offshore Trusts Legal?
When I describe this to potential clients, the first question asked is “How can that be legal?” Well, reference Rule #2 of Asset Protection Planning above. You have the legal right to choose the jurisdiction that governs a trust. If the jurisdiction you choose happens to have a law in place that says it will ignore judgments of US courts, that rule will be respected.
At this stage of the game, a lot of people ask if they can be held in contempt of court if an offshore trust doesn't pony up on a judgment. Courts certainly have gone to this extent in the past, but in the majority of cases, the answer is “No.” I've never had a client held or even threatened with contempt. In the reported cases where contempt has been used as a remedy, the timing of trust creation or funding has been questionable to say the least (i.e., trusts were created or funded after a claim or lawsuit was filed). All of my clients also benefit from other customized tools I’ve developed that are intended to reduce the likelihood of contempt to a minuscule risk.
Disadvantages of Using Offshore Trusts for Asset Protection
What most proponents of offshore trusts won't tell you is that maintaining an offshore trust is extremely expensive. It requires an annual accounting to the IRS, which usually costs between $3,000 and $5,000, and it requires that you have an offshore trustee on retainer (about $3,500). That's obviously significant. In order to curb those costs, I put many of my clients into Portable Offshore Trusts. The benefits of this type of trust are that it's initially a US based trust, it is ignored for tax purposes, and it can be moved offshore without consequence if a threat to assets ever arises. While it's generally not okay to create or fund a trust when there's legal trouble on the horizon, there is nothing wrong with moving an existing trust offshore to take advantage of favorable international laws in the face of potential litigation, so long as the trust is properly structured on day one.
Benefits of a Family LLC for Asset Protection
While every situation is different, in many cases asset protection plans have two components. The first is a Family Limited Liability Company or Family LLC. The Family LLC usually holds “safe assets” directly. Safe assets consist of cash, stocks, bonds, precious metals—pretty much anything that can't generate a liability. “Risky assets” (e.g., rental real estate, airplanes, etc.) are best compartmentalized into sub-LLCs (i.e., an LLC that is owned by the Family LLC).
The Family LLC is wholly owned by a Portable Offshore Trust. This structure gives you the most privacy available under the law, and it gives you the option to legally upstream your assets into the Portable Offshore Trust and into a foreign jurisdiction without any hiccups if you're ever threatened with a lawsuit.
Insurance Can Encourage Lawsuits
I'm a fan of insurance. Buy a reasonable amount for general personal liability and as required by law. That said, insurance is not an adequate substitute for asset protection planning. Insurance actually encourages litigation! Asset protection discourages (or even dissuades litigation) and certainly provides an incentive for quick and reasonable settlements. I have talked to many malpractice defense and plaintiffs attorneys about this issue, and one thing is clear: physicians without insurance do not typically get sued! So going bare has its benefits, especially if you have asset protection planning.
As you accumulate wealth, you need a way to protect your assets. WCI’s newest book is The White Coat Investor's Guide to Asset Protection, and it provides the techniques you can use to safeguard your money AND the most comprehensive list of state-specific asset protection laws ever published. Pick up the book today and protect your wealth!
What do you think? Have you “gone offshore?” Do you have enough non-exempt assets to make this worthwhile? Have you formed a family LLC? Comment below!
[Editor's Note: Wayne Patton is an attorney that specializes in asset protection. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
What are the start up costs and annual maintenance costs for Family LLCs and Portable trusts? Are there any further fees associated with moving them off shore if you have are involved in a lawsuit?
I was wondering how you saw this article, then I realized I accidentally published it a day early. Oh well. Yes, there are significant start up costs as you have to pay an attorney to do the legal work. There is additional legal work (and fees) when you move them off shore. Perhaps the guest author could quote what his typical fees are and discuss any maintenance costs.
Hi Charlie. Fees vary significantly in this field. Most lawyers will start at about $5,000 for a Family Limited Partnership (as opposed to an Family LLC), and they argue that the FLP is better and worth the extra cost. I charge $3,500 to do a Family LLC. I wrote an article on the comparison of FLLC to FLPs here: http://www.mwpatton.com/flp-wyoming-llc/
Trusts are a different animal, and you really have to know what you’re getting. A lot of firms sell trusts for $10,000, but often times those come with headaches and hidden annual fees (up to $8,500 per year) as described in the article. These trusts always end up costing way too much or being dissolved. Some of these people have “re-upped” and become my clients. My nearest competitor charges $19,500 for a portable trust that is similar to mine. I know another attorney who decides how much to charge based on an asset analysis (i.e. the more you have, the more he charges). I charge a flat $16,500, and there is an annual fee of $1,200. Taxes are a breeze and do not add any cost.
Triggering the trusts does have a cost of about $6,000. Once that happens, there is a significant annual cost for accounting purposes (paid to your CPA) and to keep the offshore trustee on retainer. Again, the goal is not to trigger unless ABSOLUTELY NECESSARY. The existence of the planning itself and your ability to trigger is often enough to make lawsuits go away with nothing more.
This article is a little one sided and reminds me of articles written by agents selling life insurance investment vehicles. There are plenty of examples of people being held in contempt for not repatriating foreign assets. No one can make you bring the money back, but how much is your money in foreign accounts worth to you in prison? The author (who sells legal advice and tools for setting up these accounts) says those cases are rare, but multimillion dollar lawsuits are also rare. That’s why umbrella insurance is so cheap. Just like insurance as an investment vehicle, this may be a good option for some people, but make sure you do your own research.
Hi Austin, I couldn’t agree with you more. I encourage everyone to do their own homework. You bring up a great point about repatriating assets and contempt of court. In the context of asset protection, the only cases I know of where courts have used contempt involved questionable timing. In other words, trusts and offshore vehicles were created after a lawsuit or claim had been filed. The other situations involve illegally obtained money. Even then, offshore protections can work, and some people do in fact opt to “wait out” contempt charges and keep the money. The point is that it’s their option.
Asset protection isn’t just about protecting against liabilities (unlike insurance), but it’s also smart business planning. It protects against downside risk from contractual obligations when business deals no longer make economic sense. It gives you the option to walk away, if you feel comfortable doing so.
You also make a great point about umbrella insurance. It is cheap, and you should have it. The problem is it only provides some protection for specifically defined circumstances. Insurance companies will look for every possible means of not paying claims (i.e. liability outside scope of policy, you aren’t covered because your application wasn’t perfect, etc.) when the rubber hits the road. I have personally seen that happen multiple times. Besides that, it doesn’t cover malpractice, and those premiums can be ridiculous.
Finally, in my world multi-million dollar lawsuits are not rare. Over 40,000 lawsuits will be filed this year alone. Many of my clients are professionals who also invest in real estate. They often put the money earned on investments aside into a portable trust, and then when property values decrease (as happened in recent memory) and people start filing lawsuits or banks want deficiency judgments, the money is protected.
For example, I have one client (a real estate developer) who was almost $100 million underwater. He escaped with only the $3 million in his portable trust. Everything else was lost. It’s the same concept in planning that saved Donald Trump in the past too.
The problem is that you won’t really appreciate the value of asset protection until you need it–until you’re faced with a huge malpractice liability, underwater real estate, or another type of contractual lien that could compromise your personal nest egg.
See the link below with an emphasis on #7.
http://www.forbes.com/sites/jayadkisson/2011/07/13/ten-rules-for-asset-protection-planning/2/
Again, this is the reason trusts need to be portable and not offshore from day one and created well in advance of any trouble on the horizon. I challenge anyone to find a case where an offshore trust was created proactively (before a claim arose) with legally obtained assets and a contempt charge ensued. It just doesn’t happen.
Jay Adkisson is indeed a very good asset protection lawyer who acknowledges that divorce and business deals (real estate, oil and gas, etc.), and malpractice suits necessitate asset protection. Make no mistake Jay uses offshore trusts as part of his planning. The difference: He uses a bunch of additional offshore business entities (such as IBCs and foreign LLCs), which are very expensive and don’t add a ton of value, in my opinion. It’s no wonder that in Adkisson’s opinion, it is “difficult for the average physician to afford top-shelf asset protection solutions.”
I simply disagree.
An interesting quote from the article you cited is this: “The record? It is 14 years in jail served by former corporate lawyer H. Beatty Chadwick who refused to repatriate money from overseas to pay alimony to his ex-wife.”
The key word there is REFUSED. At least he had the option. Also, as I wrote in the article above, this issue is now largely overcome inside the trust document itself where any request for money has to signed under penalty of perjury that a court is not ordering the repatriation. A judge simply can’t order you to lie under oath . . . .
“Make no mistake Jay uses offshore trusts as part of his planning. The difference: He uses a bunch of additional offshore business entities (such as IBCs and foreign LLCs), which are very expensive and don’t add a ton of value, in my opinion.”
Where does this come from? The truth is that my firm rarely uses offshore trusts for clients, less than one a year, mostly restricting them to circumstances where the client has a true “international family” or some other very unique circumstances where the offshore trust makes sense. Even then, we do not load the client up with a bunch of IBCs or anything else — that is simply false.
Otherwise, the case law has amply demonstrated that offshore trusts simply do not work, unless one wants to be like Stephen Jay Lawrence who remained in jail for 6.5 years until finally released of contempt (even then, he continued to be pursued on his judgment, which has kept him from anything like a normal life). An article that I published last month on the Arline Grant case illustrates the problem with offshore trusts — http://goo.gl/0JZOg
If a physician thinks that they can set up an offshore trust (including one that starts out domestic and migrates offshore), and then if they get into financial trouble or suffer an excess verdict that they can just sit back and hide behind their asset protection trust, they are suffering from a misconception of about the same level as those folks who think that if they take ginseng every day they will not get cancer.
Physicians should first rely on their insurance, but they must also take a proactive approach to their life and their practice, by updating all their insurance coverages, making sure that they are insured against things such as employee practices, HIPPA violations, etc., hire good attorneys to review their partnership agreements of their practice group, don’t make investments where personal guarantees are required, and numerous other things.
Then, to the extent that physicians need asset protection planning, they should first try to take advantage to the greatest degree possible of the exemptions in their state, whether homestead, qualified plans, or even for life insurance or annuities, depending on the state, and then see what their particular state offers that might be advantageous — California, for example, gives a complete exemption to “private retirement plans” formed under CCP 704.114(a)(1), which is an excellent asset protection tool for physicians there. Other states often have their own quirks that allow somebody to legally protect a substantial chunk of their wealth without having to do something complex.
This also illustrates a very important point — clients should hire an asset protection planner who is licensed in their state. We don’t practice outside the states were we are licensed and familiar with the laws, and a physician should stick to somebody who knows their state’s particular laws.
Finally, a physician who is looking at asset protection planning should not hesitate to get a second opinion. There have been so many hucksters in the asset protection field that one is more likely to get a bad planner than a good one. I can’t tell you how many of these hucksters that I have met during my career: Marc Harris, Terry Neal, Peter Double, Jerome Schneider, the entire Merrill Scott law firm from Utah, Troy Titus, Bill Reed, etc. — all held themselves out to be gurus, and all were huge flameouts who all went to jail, often after embezzling their client’s moneys, but always leaving their clients in a huge mess. This is particularly true today, when so many estate planners have been effectively put out of work by the “fiscal cliff” deal that raised the estate tax exemption and thus wiped out their business, and so became (you guessed it) asset protection planners overnight, but without any real knowledge of creditor-debtor law.
This isn’t to say that a few estate planners will not eventually become decent asset protection planners, but it will be after years of hard work to re-educate themselves, including taking some collection cases themselves to really see how the judgment enforcement process works in their state.
Apologies for the long post, but I was chagrined to see things imputed to me which were simply untrue. Thanks also to those out there who e-mailed me requesting a response.
Jay, I have absolutely no quarrel with you and, in fact, agree with most of what you said. I do disagree with you on properly formed and timed offshore trusts. My reason for that disagreement is that I have seen offshore trusts work exactly as they are designed to work without adverse consequences. I agree on maximizing state exemptions. I also like domestic childrens’ trusts and special power of appointment trusts, when circumstances call for them and clients are willing to give up control.
I also agree on complying with laws related to HIPPA, labor and employment, insurance, and having updated partenership, LLC, and corporate documents, but those things aren’t enough along with advice to avoid transactions that require a personal guarantee.
Most importantly, I agree on your assessment of attorney licensure and getting second opinions. I have personally seen a lot of what you mentioned above and, like you, have worked to unwind some really bad planning put in place by less than thorough “planners.” I’ll assume here that you weren’t calling me a huckster and accusing me of embezzlement.
I personally want educated clients, and I encourage people to seek diverse viewpoints so they can make educated choices with a clear understanding of risk. With that, I think it would be useful for anyone interested in this subject to read Jay’s book. And Jay, I invite you to review one of my plans sometime.
Finally, I think you’re right about people “transitioning” from estate planning to asset protection, but I’m certainly not in that category.
Well, offshore trusts *sometimes* work in the sense that they settle for a low number, but they *sometimes* don’t work in the sense that they either fail outright, as in the reported cases, or they result in a high settlement. The easiest settlement that I ever won from the creditor’s side was against an offshore trust that paid most of the judgment, when the wife (who was also a debtor) decided that she wasn’t going to be dragged through the contempt proceedings that I threatened.
Again, offshore trusts work for folks with international families or who can leave the contempt jurisdiction of the U.S. courts — but offshore trusts are probably not a good solution for anybody else. If a creditor decides not to settle, and nobody can force a creditor to settle, then it gets grim — no reported cases has been anything like a victory for offshore trusts.
As to the anecdotal evidence of offshore trust successes and failures, that is a lot like trying to measure virga — rain that never hits the grounds. How much fell? Nobody really knows. But the uncertainty is not something that somebody should put their faith in.
What I have long objected to is the portrayal of certain things as being without flaws for marketing purposes; clients deserve full and fair disclosure of the risks of any strategy, and somehow the advertising of offshore trusts seems to always exclude the numerous cases where offshore trusts have resulted in contempt findings, or that there is now a 10-year clawback period in bankruptcy for transfers to offshore trusts under 548(e).
There is no evidence that having a nuclear arsenal served as a deterrent during the Cold War either, and that seems more of an apt comparison than virga. Saying that your best settlement after obtaining an judgment was against a couple with an offshore trust also misses the point. What percentage of cases go to trial? The evidence for the benefits of offshore trusts isn’t diminished just because the cases aren’t reported (e.g. is the settlement you referenced above any less meaningful than in reported cases?). Deterred litigation doesn’t get reported, and nobody expects for a judge (especially a federal judge) to self-emasculate in a reported opinion.
Again, I agree that there are some legitimate objections to offshore planning. The biggest one I see is the risk of surcharging (rather than contempt, which as far as I can see happens in a minuscule number of cases compared to the number of offshore trusts in existence). Even with that risk, however, offshore planning does stack the deck and is often enough to discourage typical litigators who want to target deep, easily accessible pockets.
I find it interesting that the case of Arline Grant is highlighted as a loss, because I think we need to continue to wait and see. Her children could potentially end up with the offshore money, in which case the planning will be a victory for them. Regardless, it is not a representative case. Rather, it is an atypical case where the U.S. government is the plaintiff and tens of millions of dollars are at stake. It doesn’t seem fair to call a stalemate with those facts a “loss.” Few plaintiffs have the wherewithal of the IRS or FTC.
How would you have planned for the Grant’s differently so that Arline didn’t end up here? I would have advised her husband and her to pay their income taxes, because asset protection is not about tax avoidance. Blaming their predicament on the type of planning they have misses the point completely. With completely domestic planning, the Grant assets would be gone already.
Even in the Anderson case, what did the FTC ultimately get and what did the parties keep?
Granted, Arline Grant’s money is frozen, but she (or perhaps one of her descendants) may one day “wise up,” leave the country, and keep the money. If one has a lot of money offshore, that’s not necessarily a bad option.
I actually met Denyse Anderson. The problem with the Anderson case is that the FTC used the existence of their offshore trusts to convince the judge that they were somehow involved in the fraudulent part of the telemarketing scheme, when there was scant little evidence of that. So they ended up paying $1 million from their trust as part of a settlement, where arguably they owed nothing at all.
The truth is that we’ve had about 20 cases involving offshore trusts, pretty much all of which have been disasters for the debtors. As far as settlements go, there are claims all over the place — some debtor-planners claim complete success and some creditor-planner claim complete success — it is just not worth much either way, since that anecdotal noise will not help somebody in a particular case.
For those who can leave the country when things get bad, offshore trusts might be a possible consideration among numerous things. But for those who for practical reasons cannot, including professionals who can’t hope to earn nearly as much money outside the U.S., offshore trusts are simply not a reasonable solution, and not the least of the reasons is that an offshore trust will imperil a debtor’s discharge and thus allow creditors to go after future income streams, which for most professionals are truly their largest assets.
Reasonable planners can disagree, but the pitching of offshore trusts without revealing their significant flaws, limitations, and their very bad case-law history, does not serve the asset protection sector well.
It is noteworthy, as you mentioned above that even the FTC — the U.S. government — settled for $1 million and the Andersons kept many millions more than that. We will never know how things would have turned out without an offshore trust involved, but the government would have had many more legal remedies (i.e. much more settlement leverage) at its disposal such as the ability to freeze assets.
To your other very good comment, accumulated wealth does become more valuable than earning power at some point in time. At that point, the decision to leave the country (in the extremely unlikely event of being threatened with contempt) is an easy economic choice. For that reason, if no other, it makes sense to use offshore planning as a contingency (ignoring all the other benefits) and as an early planning method (given 548(e) and the ten year clawback).
It is just one part of preventative planning, and I’m not sure that I’ve seen a case where such preventative, proactive planning resulted in contempt absent some illegal/fraudulent activity, so the case law you’ve cited doesn’t apply to proper use of these legal tools.
Of course, the 548(e) limitation is just as to fraudulent transfers. The assets of a self-settled trust are property of the bankruptcy estate regardless of when transferred into the trust if the debtor is in a state where the spendthrift provisions of self-settled trusts are not respected, i.e., the trust could be 50 years old and if the debtor was not a resident of a state that allowed self-settled trusts, the trust assets would be part of the bankruptcy estate.
The Lawrence case is just one example of a purely civil creditor — Lawrence was being chased by Bear Stearns on a margin call, which is about as an innocuous a type of liability that one could imagine. Lawrence was not a fraudster or criminal, yet spent 6.5 years in jail with his offshore trust.
I guess we’ll have to agree to disagree. I wouldn’t even normally respond to threads like these except that I received e-mails asking whether I use “a bunch of additional offshore business entities (such as IBCs and foreign LLCs), which are very expensive”, which was statement was simply false.
Excellent article with some really good back and forth commentary. I am a tax and estates attorney from Philly and my comments relate to the tax end. Those considering these offshore arrangements must be made aware of the tax requirements in this area, the new FBAR rules and of course the highly increased scrutiny being brought to bear from our friends at the IRS. As Jimi Hendrix once sang “I’m commin’ to getch you.”
Welcome to the blog! It’s great to see non-physician professionals participating. We all benefit from getting more experts on here.
I couldn’t agree more, Steven. Offshore accounts need to be disclosed to the IRS. And people with undisclosed offshore accounts should take full advantage of the current amnesty program by voluntarily disclosing ASAP. We simply don’t know how long the IRS will be lenient, but with the “targeting” now making news, its safe to say that consequences for people who try to hide assets will be severe. Thanks for your comment.
Great article in the New England Journal of Medicine on Malpractice Risk According to Physician Specialty.
http://www.nejm.org/doi/full/10.1056/NEJMsa1012370#t=article