Asset Protection 101 -- Older Commentaries

This page contains previous commentaries on the subject of asset protection based on recent news items, recently discovered books or websites, and new or “reborn” asset protection products discovered by WIL’s research team. While these commentaries -- and even their cumulative sum -- are by no means meant to be exhaustive, we believe they will alert and remind our readers of the always-pressing need for implementation of a sound asset protection plan, encourage critical analysis of the various means of asset protection that are available, and help stimulate creativity in the implementation of one’s chosen strategy.

6 December, 2004 – ON THE BENEFITS OF BEING OUT OF CONTROL

Understanding the nature of control, when it is appropriate to exercise it, and when it is appropriate to surrender it, is exceedingly important if one wishes to maintain happiness in today’s world.

As sentient beings, most of us consider self-direction – our ability to choose and to participate in the creation of our own destiny – to be our greatest asset. We do not surrender ourselves to the ever-changing whims of the gods, or to the random winds of fate. As Einstein mused, “Man must cease attributing his problems to his environment, and learn again to exercise his will – his personal responsibility.”

But how much control do “we” really have? Psychology has long propounded that, in reality, your conscious mind exercises very little control over your being, at least in comparison to the control exercised by your subconscious mind. This is a huge benefit in most cases. If you had to consciously regulate all of the faculties of the body-mind, how much control would you really have over your life? You would have very little time or ability to concentrate on pursuing the goals and enjoying the results that would truly fulfill your life.

Indeed, it is the very fact that nature has ceded control of some domains of your life that allows you to devote time to asserting control over other aspects of your life that have the highest priority for you.

As you consider how well your subconscious mind serves you, how it enriches your life by allowing you to direct your conscious attention to the most rewarding aspects of your life, maybe you can also imagine how nice it might be to be able to trust professionals to handle other parts of your life as well. After all, you only consciously think about asset protection so that you will not have to worry about, 1.) safeguarding your personal and financial privacy, 2.) protecting your assets from economic crisis and market upheaval, 3.) the devastating effects of lawsuits, and 4.) paying more than your fair share of taxes.

Allow W.I.L. to take the worry out of your asset protection planning by joining us today.

13 November, 2004 -- TAX AVOIDANCE STILL LEGAL

For the past several years the U.S. Internal Revenue Service has been aggressively attacking what they call “abusive tax shelters”. As a result, the historical difference between legal tax avoidance and illegal tax evasion has become obfuscated -- all aggressive tax reduction measures are now tainted with a “stay away from or else” aroma.

Seemingly usurped is the doctrine expressed by U.S. Supreme Court Justice Learned Hand in days prior to the IRS’s reign of terror: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.” [Gregory v. Helvering, 293 U.S. 465 (1935)]

However, the IRS has suffered defeat in two recent tax cases, against both Black and Decker (link) and against Coltec Industries Inc. (link), in which it alleged that the tax strategies that were used by the companies were abusive. The decisions of the courts were significant, and contain valuable lessons which the astute will incorporate into their own tax and asset protection planning.

Relative to the Black and Decker case, U.S. District Court Judge William D. Quarles Jr. stated, “The court may not ignore a transaction that has economic substance, even if the motive for the transaction is to avoid taxes.” The judge ruled that the transactions undertaken by Black and Decker “cannot be disregarded as a sham,” because they “had very real economic implications for... the parties to the transaction.”

In the Coltec case, U.S. Court of Federal Claims Judge Susan Braden wrote that “where a taxpayer has satisfied all statutory requirements established by Congress... the use of the ‘economic substance’ doctrine to trump ‘mere compliance with the code’ would violate the separation of powers” clause of the U.S. Constitution. (The IRS had admitted that the transactions technically followed the tax code.)

One guiding principle that can be extracted from these two cases is the necessity for strict compliance with the letter of all applicable laws, codes, and statutes (i.e., proper legal form of every strategy implemented). Another principle is that structures, contracts, and transactions must have real economic substance to be considered valid. By this we mean that actual actions and transactions occur -- even if, the judges have ruled, the sole and explicit goal is to reduce taxes paid -- as a consequence of of the chosen form. This is as distinct from a paper shuffle that tries to reduce taxes by recasting an existing arrangement while effecting no changes in the transactions or procedures of the parties involved.

The form vs. substance drum is one that WIL has been beating for a long time, which can be seen in previous Asset Protection 101 articles here, here, and here, as well as in our treatment on the importance of contracts in offshore planning here.

We welcome you to contact us for information and implementation of sound (having both adequate form and substance) contractual relations with offshore entities that provide immediate privacy and asset protection advantages.

15 October, 2004 -- “DOCTRINE OF DISBELIEF”

Within the last several years, United States courts have begun to utilize a legal doctrine in cases involving assets transferred to offshore entities -- specifically offshore trusts -- that has left many trust settlors in quite a precarious position. The so-called “Doctrine of Disbelief” is something that anyone incorporating offshore trusts into his or her financial and business planning needs to be aware of and heed.

The Doctrine of Disbelief is a legal principle wherein the court exercises discretion to rule whether a particular transaction is or is not believable, based on reasonable presumption, and if ruled not believable, then deemed invalid.

As an example, let us say Mr. Jones has liquid assets totaling $8,000,000. He makes a $7,500,000 gift to an offshore trust, of which he is not the Trustee, and not the Protector. Later, creditors take Mr. Jones to court seeking a $6,500,000 judgment for an alleged debt.

If Mr. Jones was the Trustee, we know that the court might order Mr. Jones, in his capacity as Trustee, to repatriate the assets to pay the $6,500,000 debt. If Mr. Jones was the Protector, we know that the court might order Mr. Jones to fire the Trustee and appoint a new court-friendly Trustee that would repatriate the assets required in order to pay the $6,500,000 debt.

However, in such a case where Mr. Jones is neither a Trustee nor a Protector, the court might opt to employ the Doctrine of Disbelief. The court might rule, according to the doctrine, that it was not believable that Mr. Jones would gift $7,500,000 (over 93% of his liquid assets at the time of the transfer) to an entity that was located out of Mr. Jones’s home country, that Mr. Jones neither owned nor controlled. Therefore the court might presume that Mr. Jones does in fact have control of the Trustee (thus transferring the burden of proof to Mr. Jones to prove that he has no control of the Trustee) and order Mr. Jones to have the assets repatriated. If this presumption is not effectively overcome, and Mr. Jones really does not have control of the Trustee, Mr. Jones will find himself in a very precarious position wherein the court can hold him in contempt until the assets are repatriated -- such repatriation being completely up to the discretion of a foreign trustee!

While there are effective legal remedies available to counter a contempt charge of this nature (like, for example, full compliance with any paperwork that the court requests you to sign ordering the trustee to repatriate assets, etc. -- see our comments on the Anderson case), nobody wants to spend any time in jail, for contempt or otherwise.

This scenario illustrates the importance of careful documentation of all relationships and transactions with an offshore entity. Loan agreements (if paid according to the terms of the agreement), sales at market value, fair exchanges, and donations of reasonable percentages of a person’s wealth for charitable purposes are standard fare and are very much believable. Outright gifts of a very large percentage of one’s assets, on the other hand, especially if creditors or other parties have a vested interest in the assets, are far less likely to stand up to legal scrutiny.

To avail yourself of fully legitimate and believable asset protection, and enjoy the benefits of internationalizing your financial interests, contact WIL, or become a client now for the low price of only $950.

20 August, 2004 -- REPORTING REQUIREMENTS REVISITED

In our 12 March 2004 Asset Protection Commentary entitled “Beware Reporting Requirements” we discussed various IRS and Treasury reporting requirements relative to offshore accounts for U.S. citizens. Further details and specifics can be found directly on the IRS’s website here.

In a still earlier article, we had mentioned that many, many offshore asset protection vehicles exist that trigger reporting requirements and that such requirements compromise your privacy and as such effectively eliminate your first line of financial defense. Personal offshore bank and brokerage accounts, controlled foreign corporations, and traditional offshore asset protection trusts all fall under this category.

As mentioned in the 12 March article, one of the required reporting forms is Form TDF 90-22.1. Form TDF 90-22.1 is not a tax return and therefore, unlike a tax return, is not subject to the strict disclosure restrictions that apply to tax returns. Rather, the information disclosed on Form TDF 90-22.1 may be shared with any federal agency in a criminal, tax, or regulatory investigation or litigation, or with state, local, and even foreign law enforcement and regulatory personnel in the performance of their official duties. As a matter of fact, FinCEN’s Gateway initiative allows direct online access by the mentioned officials to the agency’s Bank Secrecy Act database, which includes information provided on Form TDF 90-22.1. Information available through the Gateway system has even been disclosed to the press.

Form TDF 90-22.1 filings can also be made available by court order in the event of a lawsuit, e.g., a family court style divorce suit filed by a disenchanted and vengeful spouse, or a suit for unlawful termination of employment by an incompetent but angry ex-employee, etc. But these are only the so-called “lawful” uses of the information on the reporting forms.

Generally, whatever information is available to law enforcement on the internet, criminal element hackers can and do gain access to from time to time. As a recent article on the subject of security and the Internet put it, “... whatever law enforcement can do, hackers will be able to do easier and faster.” This opens up the actual possibility -- whose actual risk is admittedly hard to assess -- for a variety nefarious schemes targeting you or your assets based on real and actual knowledge of identifiable offshore holdings. Such are the hazards of opening up your private financial data to people outside of your intimate circle.

Remember: Most contractual interaction with a WIL Trust is legally not reportable, and thus preserves your first line of defense (data privacy). Assets can be invested in the numerous investment opportunities and markets available to offshore companies and citizens in total privacy and in a largely tax free environment allowing significantly greater compound growth than if the returns were taxed. Finally, assets are sitused offshore and as such are more difficult for predators to locate and more legally complicated to access than if they were located in your home jurisdiction.

To learn how to take advantage of cutting edge asset protection techniques and put this type of relationship to work for you, contact Wealth International, Ltd. immediately.

31 July, 2004 -- INCIDENCE OF OWNERSHIP?

In the United States there is an interesting tax tool called an Irrevocable Life Insurance Trust. An ILIT keeps life insurance proceeds out of oneqrs estate -- thus avoiding often significant estate taxes, when implemented and interacted with properly.

One of the IRS rules that voids the benefits of an ILIT when violated is the “incidence of ownership” rule. When reserved by the creator of the ILIT, the following retained rights are considered violations:

• Right to change beneficiary
• Right to surrender or cancel the policy
• Right to assign the policy
• Right to revoke an assignment to pledge the policy for a loan
• Right to borrow against the cash surrender value of the policy

Retention of any said rights are deemed to be incidents of OWNERSHIP.

However, the IRS decided in Letter Ruling 9809032 that a loan to an ILIT was not an incident of ownership.

Why are we including a piece on US-based ILITs in our ongoing commentary generally dedicated to asset protection, and more specifically OFFSHORE asset protection? Because the incidence of ownership rule teaches us a valuable asset protection lesson.

While we are not suggesting that the exact rules pertaining to ILITs are specifically applicable in any other specific circumstances, one can extract valuable principles that stay constant when purviewing the general whole of financial, tax, and asset protection planning data available.

One very important principle that we have commented on the importance of both of these principles in previous Asset Protection 101 newsletters as well as elsewhere on the site is that paper control is more or less equivalent to ownership, and direct ownership is the arch-nemisis of most asset protection planning.

Remember: substance over form. Even if the form of paper offshore entities to be used for asset protection, tax planning, and estate planning purposes exist, the breath of life -- substantial contractual interaction -- must be breathed into the entities to bring them to life and put them to work for you. Contact us when you are ready to truly put your asset protection plan to work for you.

9 July, 2004 -- FOUNDATION FUSS

Several jurisdictions have either already implemented legislation allowing for the registration of private foundations, or are in the process of implementing such legislatiton, e.g., Liechtenstein, Luxembourg, Austria, Panama, Gibraltar, Bahamas, Netherlands Antilles, and St. Kitts (see this article -- free registration required).

Liechtenstein popularized the use of Foundations for asset protection, tax, and estate planning purposes with their “Stiftung”, with legislation dating as early as the Law on Persons and Companies of January 20, 1926. Panama followed suit with a much less expensive and rather more flexible version in 1995. Not wanting to miss out on the opportunity to boost government revenues in their small economies, other traditional offshore jurisdictions are now coming on board as well.

Foundations differ from ordinary trusts in that there is often not a particular specified beneficiary, but rather a specific purpose for which the Foundation is established to promote -- although many jurisdictions now allow for the establishment of “purpose trusts”, which are more similar to Foundations.

Foundations differ from corporations in that a Foundation is generally forbidden by legislation from conducting actual business except where such business relates expressly to the promotion of the Foundation’s specified purpose.

Interaction with a Foundation can provide many benefits as the client seeking offshore services can be associated with the Foundation but, according to the law of the jurisdiction where the Foundation is established, not be considered an actual owner or beneficiary of the Foundation -- thus providing possible tax benefits in the client’s home jurisdiction, with obvious privacy and asset protection benefits coming as a result of the client relinquishing legal ownership of assets.

A W.I.L. Trust provides many of these very same benefits, as clients of W.I.L. are not owners or beneficiaries of a W.I.L. trust, but rather benefit through contractual interaction with the trust. In addition, a W.I.L. Trust will generally have a lower fee burden associated with its operation than will a Foundation. Nevertheless, a Foundation is an appropriate vehicle for some people -- especially where certain charitable purposes are desired.

Interaction with clients in conjunction with both a W.I.L. Trust and a Foundation offers a myriad of interesting possibilities.

Whether a W.I.L. Trust ($950) will be of service or whether a Foundation ($1050) is required -- or both -- W.I.L. can help you accomplish your financial and asset protection goals. Contact us to get started, or for further information.

02 July, 2004 -- DOMESTIC APTs?

Further evidence of the increasingly mainstream demand for asset protection continues to evidence itself. A relatively recent creation is the domestic asset protection trust (more specifically, an irrevocable, self-settled spendthrift trust). Legislation in several U.S. states (Delaware, Alaska, Nevada, Rhode Island, and Utah) has been enacted to allow for the creation of this type of trust. You can learn more about these entities here (reasonably nonintrusive registration required).

In short, the idea of domestic Asset Protection Trust legislation is that the Grantor of the trust is to convey assets to a trust, and that after the conveyance the assets will be protected from the Grantor’s future creditors, claimants, ex-spouses, etc. -- with the exception, as in all asset protection plans, that the assets will not be protected in the event of a fraudulent conveyance.

It is possible that these types of entities could provide a useful tool if the Grantor in fact lives in one of the States that has enacted this type of legislation, has all of his or her assets physically within the State, keeps liquid assets in the safe-keeping of banks that have no branches in States outside of the State that has enacted said legislation, and avoids litigation in federal court.

If that is NOT THE CASE -- and for the majority of people interested in this type of asset protection tool, it seems self-evident that it will not be the case -- there are several potential serious legal flaws to this type of a structure.

1. No privacy. As we have mentioned in previous articles, the first line of defense in any asset protection plan is secrecy because it is extremely difficult to try to appropriate assets that one does not know exists. The type of entity under consideration will require a U.S. based trustee, and said trustee will be subject to discovery orders and subpoenas. Each State applies its own procedure and court rules, and as such, any privacy protection enacted in the laws of the State where the trust is formed will be irrelevant outside of that State (which includes Federal litigation).
2. Trustee is subject to U.S. courts. Where an offshore trustee would be completely impervious to a U.S. court order (hence the effectiveness of offshore trusts), a trustee of a domestic asset protection trust would be susceptible. Thus, the U.S. based trustee could be thrown in jail for contempt if he refuses to release assets to a U.S. based court, and the Trustee could even be sued civilly and face expropriation of his own assets for trying to protect the assets of the Grantor.
3. Federal courts can ignore a U.S. asset protection trust. All of these types of trusts are based on State law, which can be overidden by Federal law under certain circumstances due to the Supremacy Clause of the U.S. Constitution -- never mind how often an increasingly power-hungry and arrogant federal executive branch ignores the law, period, these days.
4. Regardless of the State in which the Asset Protection Trust is formed, that State is required by the Full Faith and Credit clause of the U.S. Constitution to recognize the judgment of any other State (even a State that dose not recognize the Asset Protection Trust legislation and has thus ruled against it). This is another benefit of offshore trusts versus their domestic counterparts: An offshore jurisdiction would NOT recognize such a judgment, which thus requires the plaintiff to retry the case all over again in the offshore jurisdiction. This would not be required in a U.S. State due to Full Faith and Credit.

All of the theoretical advantages of U.S. based asset protection trusts exist, and with much more force, offshore. When you are ready to implement an asset protection plan that works, even in the face of the challenges discussed in this article, contact W.I.L. to get started.

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