© Copyright 2000 Wealth International, Ltd.
NOTE: This report is presented with the understanding that the publisher is not engaged in rendering legal or accounting services. Questions relevant to the specific tax, legal, and accounting needs of the reader should be addressed to practicing members of those professions. This information was gathered from sources believed to be reliable but it can not be guaranteed insofar as it applies to any particular taxpayer. Wealth International, Limited specifically disclaims any liability, loss, or risk, personal or otherwise, incurred as a consequence directly or indirectly of the use and application of any of the techniques or contents of this report. No copies of this material may be made or redistributed without the express written consent of Wealth International, Ltd.
It is not effective to “think about” or ignore or just live in fear of the potentialities recited above. What is effective is to to take cost-efficient action, similar in concept to buying insurance.
A Quick Test
We invite you to consider the following questions:
Draw your own conclusions here. You know your situation best. But as the number of affirmative answers and the income/asset numbers increase then, we think, the more relevant the concept of taking active measures to protect your assets becomes.
If you read the rest of this report you will be presented with tools with which one can:
Protect your home, investment real estate, liquid assets, anything of value.
Protect a business or other valuable assets from government and other claimants.
Reduce or eliminate expensive liability insurance premiums.
Avoid estate taxes, death taxes, and inheritance taxes. Avoid costly and time-consuming probate.
Reduce your small business and investment taxes.
Defer taxes on the income and capital gains from investments.
As the system does not offer any inherent protection worth counting on, the impetus must come from the asset owner. A start at neutralizing the described threats and problems is to implement a strategy that adds legal obstacles and provides privacy. The further you remove your assets out of harm’s way, the lower the chance that they will have to be defended at all. But if they should be attacked one will be prepared, and not have to desperately shore up one’s defenses at the last minute.
Any well-designed strategy to reduce your exposure to those who would take what you have involves changing the legal ownership, but not necessarily the parties who obtain use and enjoyment, of those assets and thereby disassociating your name from the property. This can be accomplished in more than one way. The most important points to remember are: (1) That which is in your name, i.e., which you legally own, and which is under their legal jurisdiction can be taken away immediately. That which is in your name and not under their legal jurisdiction takes a little longer (but they do have their ways). That which you have no legal interest in and is not under their jurisdiction is as safe as it gets. (2) It is difficult to determine what assets you have an interest in if your name and identifying numbers are not associated with them. [PLEASE NOTE: We do not condone or advocate attempting to renege on the responsibilities one has for fulfilling one’s agreements, or for making whole those whom one has damaged. The universe generally sees to it that such attempts prove more costly in the end than just “facing the music”. We do promote protecting oneself against potential losses unrelated to the operation of universally understood and shared laws of justice, such as thinly-disguised theft under color of law.]
Once you have divested yourself of ownership of your important assets, we believe that the most effective method of removing them from harm’s way is to site the ownership of the property in an offshore venue, ideally a country that does not routinely recognize U.S. court judgments or supinely acquiesce to U.S. (or fellow OECD-gang member) government demands. If your would-be adversary must travel to a foreign country, hire foreign attorneys, and persuade a foreign court to do what it is reluctant to do (because the country’s reputation as a safe haven, and therefore its potential earnings from offshore financial services, would be jeopardized), then he or she is likely to give up at the start. Ownership can be structured so that the property may be relocated again on short notice, making successful pursuit more difficult still. Dividing your assets among a series of different holding entities adds further to the cost of pursuit.
An ancillary benefit of moving offshore is that one can start limiting the amount of information that one feeds to the multitude of commercial and governmental databases. Credit or debit cards issued by offshore banks do not, as a rule, automatically feed account transactions into a central database the way that a card issued by a U.S. bank would. An offshore credit card issued to a holder whose name is distinct from yours would provide an additional buffer against this incessant intrusion.
In a world where governments and courts operate as if no law applies to them, no solution is foolproof. The ideas presented herein are hardly a cure-all. Even with every asset of real value out of your name and in an offshore structure, if the right (i.e., wrong) people think you have access to valuable assets somewhere/anywhere, then they may just throw you in jail, or break your figurative legs some other way – such as harassing less-protected family members, until you “cough it up”. In the end it makes sense to think of your and your would-be aggressor’s situation inside a cost-benefit framework. The harder it is for any party, government or private, to discover and gain access to your assets the more likely it is that they will spend their time on alternative pursuits, going after easier prey. And the less costly it is for you to throw up some obstacles in the path to your assets, the more sense it makes to do so.
Corporations (S- and C-)
Many businesses start out as “S” corporations. S-Corporation shareholders are taxed on their shares of the profits whether or not the profits are distributed – thus the profits are said to be “passed through” to the shareholders – but the distribution of profits as dividends is not a further taxable event to the shareholders. The classic liability limiting trait of corporations holds, in that the shareholders are not personally responsible for liabilities incurred by the business (excepting the growing body of legally “innovative” exceptions noted above). Incorporating as an S-Corp cannot put the owner in a lower federal or state tax bracket because of the profits pass through, but it can reduce self-employment taxes when compared to operating as a sole proprietorship. As a business grows, certain built-in limitations of the structure arise, such as restrictions on the number of shareholders and the types of entities that are allowed to be shareholders. And whenever some benefit (“loophole”) accruing from the structure becomes too effective as a tax avoidance mechanism, Congress changes the rules.
With “C” corporations, profits do not automatically flow through to shareholders. This means can be advantageously divided between the business owners and the corporation, possibly lowering the total tax liability. This strategy can work effectively for a small business, but is not a general before-the-fact benefit to the structure. Some tax breaks are available when a corporation provides deductible, but tax-free to the recipient, benefits to its employees, including the CEO/majority owner, as is discussed further later in this report.
A problem intrinsic to the U.S. C-Corporation is that any income earned will be taxed twice, once at the corporate level and a second time when it is paid out to the shareholders as dividends (we will withhold any hosannas for recent laws that allegedly mitigate this until we see how they work in practice, after legislative tinkering and IRS interpreting). Net revenues not paid out as salaries or other deductible expenses are thus given a haircut before anyone else gets his or her hands on them, even if the intended use is direct reinvestment in the corporate business itself. Moreover, C-Corporations that are used for holding passive investments are taxed at high rates starting with the first dollar earned. In most cases a conventionally managed C-Corp will not by itself produce important tax savings, and alternative or supplemental strategies are needed if tax savings – as well as superior liability and asset protection – are sought.
So the act of incorporating is hardly the gateway to tax benefits promised land. Corporations clearly have their uses in many business situations. Of course the vast majority of companies with publicly traded interests choose a corporate structure. The huge body of law and legal rulings concerning corporations, as well as the large number of knowledgeable professionals in the arena, are certainly positives.
The effectiveness of a U.S. Corporation in protecting assets significantly depends as much on whether privacy-enhancing actions such as those suggested in this report for the individual are taken on behalf of the business, as on the power of the legal structure itself. Attorneys have recently taken to attacking the officers, directors, and major shareholders of a corporation in addition to the corporation itself, as touched upon earlier. Such individuals are well advised to take measures to protect themselves against this possibility. And, of course, shares held in one’s own name can easily be attached to satisfy a claimant. We think that anything the private individual can achieve using corporations can be achieved just as well using other arrangements, discussed subsequently, with additional asset protection, privacy, and possibly tax savings benefits in the bargain.
Note: Some individuals have a philosophical objection to using corporations because their use is a privilege bestowed by the State. While sympathetic to this view, we are more inclined to be pragmatic here and look at the final result. If using them increases one’s well-being without directly hurting another then we find it hard to object.
Limited Partnerships
In this legal structure, ownership interest is allocated between: (a) the general partner (GP), who is responsible for the operational management of the entity and has unlimited liability for debts, judgements, etc. incurred by the partnership; and (b) the limited partners (LPs), who can have no management role but are entitled to a predetermined interest in the partnership’s income and assets, and have no liability exposure beyond their interest in the partnership itself. Profits are passed through directly to the partners in proportions specified by the partnership agreement, whether the profits are distributed or not, thus – as with an S-Corporation – the tax reduction opportunities inherent in the structure are limited. The easy flexibility with which costs and profits can be allocated has always been a major attraction for LPs.
Obviously a person trying to protect their assets will not voluntarily assume the position of a general partner. The Limited Partnership arrangement does possess some interesting characteristics within the realm of asset protection. For instance, (a) if the GP has great discretion in how much of the profits are distributed, (b) an LP with a significant ownership interest incurs a judgement, then (c) the GP might choose to refrain from distributing any of the partnership profits. The result? A judgement winner who is awarded the LP’s partnership interest has a recurring tax liability but no distributions with which to pay it! The winner will presumably be interested in making a settlement more favorable to the LP than would have otherwise been the case.
Limited Liability Companies (LLCs)
The LLC is a relatively new U.S. domestic legal business entity that can be viewed as a hybrid between a limited partnership and a corporation. It has the same limited liability protections for company member/shareholders as the corporation but can be structured so that it is treated like a partnership for tax purposes, thereby avoiding double taxation. There is considerable flexibility in the allocation of profits, taxes, liabilities, etc. among the members. An LLC can be structured such that the LLC membership shares receive a much greater level of protection from judgments than shares in a corporation (similar to how an interest in a Limited Partnership can be made very hard for a creditor to get at, as described above). LLCs escape many of the restrictions that apply to S-Corporations, and do not have the reporting requirements that C-Corporations have once foreign individuals or companies own a certain percentage. Much of the extensive Limited Partnership law and precedent logically applies to the newer LLC, although this will take years to fully prove out.
All of these entities can play a valuable role in asset protection and tax liability optimization. Combining entities can magnify the effectiveness. For example, a C-Corporation could be appointed as the General Partner of a limited partnership, thereby limiting the total liability of any natural persons involved in the partnership while retaining signficant flexibility in allocating profits. (This could be accomplished with an LLC today. Before the widespread use of LLCs the described arrangement was a way to accomplish the same ends.) As we will see subsequently, asset protection and privacy can be enhanced by augmenting or supplanting the strategies that would use these entities with innovative legal structures, diversifying legal jurisdications, and rigorously adhering to certain procedures.
Sole Proprietorships
A sole proprietorship provides absolutely no asset protection from potential lawsuits. The business owner is “doing business as” (DBA) a business name other than him/herself, but there is no legal distinction between the business assets and the owner’s personal assets. Business assets under this structure can be used to satisfy a personal lawsuit, and the reverse.
The Revocable Living Trust
This well-known entity provides NO ASSET PROTECTION prior to your death. It can help your estate avoid the time and expense of probate and is almost certainly preferable to doing nothing, but there are other alternatives to “nothing”. The revocable living trust is a statutory creation of the United States government, and by intention and design provides only limited benefits.
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