Asset protection strategies can provide a perfectly legal means for individuals to protect their wealth. However, many strategies for asset protection employ complex structures. It is essential to know and abide by the law in order for an asset protection plan to be effective and to avoid the downside. There are a number of factors which can heavily affect on the effectiveness and legal pitfalls of various asset protection strategies. These factors include the choice of jurisdiction and the type of creditors that will potentially make claims against assets. They also include financial privacy and the timing of asset transfers.
The following information can be used to guide individuals down a path towards strong, legal asset protection. However, the best asset protection strategies can often involve complex structures located in multiple jurisdictions. For this reason, it is always advisable to seek the advice of a knowledgeable expert in the field of asset protection. Discuss the following topics with an asset protection specialist in order to craft the strongest asset protection possible. Our organization has been providing such services for decades and was established in 1906. There are phone numbers an in inquiry form on this page that you can use now for further information.
Choice of Jurisdiction
One of the most important things to consider when crafting an asset protection strategy is the choice of jurisdiction. Laws regarding asset protection vary greatly by jurisdiction. There is also a substantial amount of variation in the protection afforded by asset protection tools in different locations.
The first decision to make is whether to use domestic or offshore solutions for asset protection. Examples of domestic solutions for asset protection include trusts, exempt assets, homestead exemptions, and the organization of limited liability companies. The advantage to domestic solutions for asset protection is that they are generally a bit less expensive than offshore solutions for asset protection. They can also be more convenient to establish and maintain. The downside, however, is that domestic solutions are generally much less effective than their offshore counterparts. The reason for this is that domestic tools for asset protection are subject to the judgments of United States courts. Many creditors who win judgments in US courts in their favor will be able to attack the assets held within domestic structures.
Offshore solutions for asset protection tend to require a slightly greater investment up front than domestic asset protection solutions. These solutions include establishing offshore trusts and limited liability companies, among other tools. The most expensive asset protection strategy is the one that doesn’t work. So, going offshore can provide huge savings in the long run by protecting assets where domestic asset protection structures may fail. This is because offshore entities are not subject to the decisions of US courts. It is difficult pursue a claim against a person with assets held in a trust in an offshore jurisdiction. In favorable jurisdictions, the creditor must travel to the jurisdiction to have their case heard. In these jurisdictions, the burden of proof also lies with the creditor. The creditor must prove their case beyond a reasonable doubt. This is a much higher burden of proof than what is required by most states in the US.
For those who insist upon using domestic asset protection structures, choice of jurisdiction is still very important. Different states within the United States offer legal tools for asset protection. These tools include trusts and incorporation of business entities. Currently, there are 17 states in the US which allow individuals to settle domestic asset protection trusts. Domestic asset protection trusts, or DAPT, are self-settled spendthrift trusts. Only states which offer DAPT allow individuals to use trusts to protect their own assets. In all other states, trusts may only be used to protect assets which will be given to beneficiaries. Even between states which offer DAPT, there is a substantial amount of variation in the amount of protection offered, This is because all states except Nevada have exception creditors. As previously mentioned, domestic asset protection structures offer less protection than offshore structures. This is because domestic asset protection structures are subject to the judgments of US courts.
Exception Creditors
In many cases domestic structures do not provide asset protection from creditors. Thus, the domestic creditor can easily reach the assets held inside of these tools. This is the case if the creditor is considered an exception creditor. Exception creditors are creditors who have the ability to pierce through the protection provided by local asset protection structures. Examples of exception creditors include state and local governments for tax purposes. They also include alimony and child support creditors. For this reason, domestic asset protection structures may not be effective in protecting assets during divorce.
One of the major advantages of offshore asset protection solutions over domestic asset protection solutions is that they do not have exception creditors. This makes offshore trusts and other offshore legal entities ideal to use for asset protection in divorce. A former spouse would be required to travel to the jurisdiction where the asset protection structure is based in order to make a claim. They may possibly be able to make claims based on fraudulent conveyance of assets. However, in most favorable jurisdictions laws make such a pursuit nearly insurmountable.
Fraudulent Conveyance
The greatest threat to any asset protection strategy is a claim of fraudulent conveyance of assets. Fraudulent conveyance of assets is commonly referred to as fraudulent transfer of assets. Fraudulent conveyance occurs when a person intentionally transfers assets to delay or defraud existing creditors claims to those assets. It also occurs when a person transfers assets when it could be reasonably anticipated that a creditor will try to claim those assets. An example of fraudulent conveyance of assets is the transferring of assets when a divorce or lawsuit were occurring or reasonably imminent.
It is important to note that fraudulent conveyance is a civil matter. Not a criminal one. It is not the same as fraud. Fraud is a criminal offense. Cases of fraud are deliberated by criminal courts. People who are convicted of fraud are subject to criminal penalties, such as incarceration. Fraudulent conveyance is a civil matter. Cases of fraudulent conveyance are heard in civil court. Individuals found to have partaken in a fraudulent conveyance are merely subject to civil remedies, such as orders to turn over the assets.
In 2014 the Uniform Law Commission changed the term to “voidable transaction,” as the universal term. This more clearly conveys the issue as a civil matter; not a criminal one. Thus, their formerly named the Uniform Fraudulent Transfer Act (UFTA) is now termed the Uniform Voidable Transactions Act (UVTA).
Modern fraudulent conveyance laws originate from the Statute of Elizabeth, which was written in England in 1571. This legal doctrine enables courts to reverse transfers of assets which they determine to be fraudulent. Many Common Law jurisdictions use the Statute of Elizabeth as the basis for their fraudulent transfer laws.
Statute of Limitations on Fraudulent Conveyance
The statute of limitations regarding a fraudulent transfer law determines how long a creditor has to make a claim of fraudulent transfer. Once this window of time has passed, the creditor may no longer make a claim of fraudulent transfer regarding this transfer of assets. Statutes of limitations for fraudulent transfer vary greatly by jurisdiction. The downside in the U.S. is most states have fairly long statutes of limitations of four to ten years. The statute of limitations in favorable offshore jurisdictions, such as the Cook Islands, are much lower than in most domestic jurisdictions. For a Cook Islands trust, that is one year; or two years from the underlying cause of action.
Here is how it works. First the event occurs that triggered the lawsuit; car wreck, contract breach, slip-and fall, etc. Then, the plaintiff gets around to filing the lawsuit. Then the case has is drug through the courts, with the normal delays and continuances. Next, the creditor’s counsel schedules the debtor’s exams. By the time one gets around finding that the trust exists, and tries to file brand new suit in the Cook Islands, their courts will refuse to hear the case.
Thus, a short statute of limitations protects assets from creditors. This is even more substantial in an offshore jurisdiction that does not acknowledge foreign judgments because the creditor must travel to the jurisdiction to bring the claim. Using an offshore asset protection strategy in a jurisdiction with a short stature of limitations helps to prevent frivolous lawsuits. There is no shortage of money-hungry individuals looking for a quick payday. Any person of means needs to consider a strong asset protection strategy in order to protect what they have worked so hard for. A short statute of limitations on fraudulent conveyance means stronger asset protection.
Even if the creditor files suit in the Cook Islands before the clock expires, there are barriers that are so overwhelming, that we have never seen any of our clients lose their hard-earned wealth. As indicated above, Cook Islands courts do not recognize foreign judgments. So, the case would have to be readjudicated there. Moreover, the plaintiff would have to prove his or her case beyond a reasonable doubt, or about 97% to 3%. Most civil cases are a mere preponderance of the evidence, 51% to 49%. To top it all off, the plaintiff would have to prove that the defendant set up the trust to fraudulently convey assets away from that particular creditor; not any creditor — but that one in particular.
Choosing the correct jurisdiction is an essential part of protecting assets from creditors. However, the timing of the transfer of assets is also very important in avoiding claims of fraudulent conveyance. In a phrase, when it comes to asset protection, “the sooner the better.”
Downside of Waiting Until It’s Too Late
One of the most important components to avoiding a claim of fraudulent transfer is timing. A transfer of assets which is made during or immediately before a lawsuit or a divorce can be problematic. This type of transfer is subject to claims of fraudulent conveyance as stated above. This is because the creditor can reasonably assume that the transfer of assets was made to avoid paying the debt owed to the creditor. In this scenario, it will be very difficult for an asset protection structure to be used to protect the assets in question.
At most times it is perfectly legal to transfer assets to an asset protection structure. Society is becoming increasingly litigious. The threat of lawsuits which come as a surprise is very real, especially for those in high risk professions. For this reason, it is advisable to transfer assets well in advance of any creditor’s claims.
Financial Privacy
One of the best ways for individuals to protect their wealth is by keeping their financial matters private. Creditors can only attack assets that they know exist. Money-hungry plaintiffs looking to get rich quick with a predatory lawsuit will target those whose assets are readily available. In the United States, anyone with a court order can obtain access to sensitive financial information. Many legal entities that people use for domestic asset protection require registration in the public records. Information regarding the directorship of companies is available to the public. This makes those using domestic asset protection structures vulnerable to creditors and predators alike.
Conversely, there are a number of favorable offshore jurisdictions which company formation as a private matter. Settling of trusts and associated settlors and beneficiaries are not publicly disclosed. Thus, many of the best jurisdictions, may not even be an individual establishing a trust or business entity to register their names with the government.
With the help of a qualified asset protection specialist, it is possible to choose the best jurisdiction for protecting assets and avoid the downside. Transferring assets in a timely fashion to a legal asset protection structure in the correct jurisdiction can help ensure that assets are securely protected from creditors’ claims.
