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Offshore trusts are perfectly legal. You have the right to set up a trust and/or bank account almost anywhere in the world. While offshore plans often use foreign trusts and foreign banks for safety and quality banking services, offshore planning is not about “secret” numbered bank accounts – it is about using the laws in foreign countries and the laws in the United States that are very favorable to you and unfavorable to creditors. There is no “hiding” of anything from the IRS or others who have a legal right to know about your business. Courts recognize planning for asset protection and planning for limiting one's liability as legitimate goals for both individuals and businesses. Not only is it “legal,” it is an ethical thing to do to protect your assets: “A good man leaveth an inheritance to his children's children . . . .” Proverbs 13:22. It’s hard to leave anyone an inheritance if a trial lawyer takes everything from you. Of course, if you really did injure someone, there is nothing preventing you from helping them financially in order to make restitution to the extent appropriate. Total asset protection (TAP) means that you rather than a “smooth-talking lawyer” or a “results- oriented” judge or jury are in control of your assets.
You need not be a millionaire to establish an offshore trust! After paying the cost of establishing an offshore trust ($19,000), you can initially fund the trust with a minimum of $1,000. In fact, medical doctors who are just beginning their practices might establish an offshore trust and do exactly that. As time goes by, they can deposit more funds into the trust, and their assets are absolutely safe from creditors (including claims that could be asserted in a divorce proceeding). Meanwhile, the trust funds are invested in a portfolio of the client's choosing and continue to grow.
No – unless there is a specific law that would permit you to be jailed for failure to pay a certain type of debt (e.g., many states provide for jail as a punishment for failure to pay court-ordered child support). Also, if you commit a crime such as tax evasion, you can go to jail/prison for such a crime. Basically, you can never be jailed simply because you have placed your assets in an international offshore trust that may be beyond the reach of a U.S. jurisdiction. If you commit a crime, you can go to jail for that crime (e.g., tax evasion, bank robbery, failure to pay child support, etc.). If you are an otherwise law-abiding citizen, you have no worries about setting up an offshore trust to protect your assets.
A properly established and drafted international offshore trust will protect you from being held in “contempt of court” for any failure to bring back the trust assets (i.e., “repatriation”). While a judge can order you to do almost anything, a properly established and drafted offshore trust will not be affected by any U.S. court order – period. While there have been a few cases nationally where some people had offshore trusts and a judge ordered them to repatriate the assets and jailed them for contempt for their failure to bring back the trust assets, in every such case one or both of two problems existed: (1) the trust assets were proceeds of crime (e.g., criminal fraud, money laundering, drug trafficking, etc.) and/or (2) the person who established the offshore trust named himself as a trustee or co-trustee of the offshore trust, thereby conferring legal title and legal rights to all trust assets for any and all reasons. As long as either of these two issues is not present, there has never been anyone successfully held in contempt of court for failing to repatriate assets held in an offshore trust. In fact, there are specific provisions in the trust instrument that make it impossible for the assets to be repatriated or otherwise used to pay creditors or to be payable because of any court order. One of the protective provisions of an offshore trust is a requirement that when the offshore trustee is made aware of litigation pending against the client, the client can request and receive funds from the trust only if the client submits a simple one-page affidavit signed under oath (notarized) affirming that the client's request for funds is in no way related to any actual or threatened court order (i.e., the client is under no duress). This means that a judge would have to order the client to commit perjury in order to comply with any court order to bring the assets back into the U.S. or to have assets transferred to anyone other than the client for the client's own personal lifestyle uses. Judges cannot order you to commit a crime (signing a false affidavit would be perjury, and in this hypothetical situation, it could also be bank fraud, wire fraud, and other crimes as well). If a judge tried to order someone to commit a crime, that order would be immediately quashed by a higher court, and the judge would in all likelihood be removed from the bench (i.e., fired from his/her job). Judges simply cannot order people to break the law. Legally speaking, both "illegality" and "impossibility of performance" are absolute defenses to any charge of contempt of court.
No. As a citizen of the United States, you must report all of your income regardless of where in the world the income originated and also pay federal income tax on your income in accordance with the U.S. tax laws. While there are some tax-planning opportunities to reduce or eliminate certain taxes, all of these plans are legal and are provided for in the tax laws and regulations. In the vast majority of cases, offshore planning is “tax neutral” in that it will neither save money on income earned by the offshore trust, nor will it increase the tax burden to the client. What it will do is provide the maximum amount of asset protection permitted by the laws of any country.
Generally, no. In most states (including Texas) any trust that you establish in the United States will only protect assets in the trust that are totally dedicated for the benefit of others. You cannot protect your own assets from your own creditors in your own trust. Also, a husband can’t establish a trust for his wife and visa versa, as this is treated as a “reciprocal trust,” and creditors can attack the trust – if the trust is located in the United States.
First, there are no court cases that tell us that the new laws passed in Alaska or any other state actually work from an asset-protection standpoint. We know from decades of litigation that the laws in the Cook Islands do, in fact, actually protect the clients’ assets from creditors, and more importantly, the Cook Islands courts uphold their asset-protection laws. Regarding domestic asset- protection trusts, the only possible favorable outcome for using an Alaska asset-protection trust is if you live in Alaska and are sued by a fellow Alaska resident due to an event (cause of action) that occurred in Alaska. If you are not a resident of a state with domestic asset-protection laws (e.g., Alaska, Delaware, South Dakota, et al.), such a trust will not protect your assets from creditors. If you are a resident of such a state but the person who sued you is not, then such a domestic asset-protection trust will not work for you. Law professors as well as legal scholars have also pointed out one obvious and fatal flaw to using any domestic jurisdiction for asset protection: the U.S. Constitution’s full-faith and credit clause requires all states to give full legal effect to all final judgments of all other states, and our federal Constitution will “trump” any state law that conflicts with this requirement. It is not worth the risk to guess or hope that your assets are protected with a domestic trust when you can know that an offshore trust really works. Unless you are establishing a trust solely for the benefit of others, never use a domestic trust or business entity if you want the assets to be protected from creditors.
The offshore trust can act as the client’s estate plan (or can easily be integrated into an existing estate plan). Costs can vary, but generally speaking it will cost $22,000 to establish both an offshore trust and offshore LLC and will cost $3,900 annually to maintain. An offshore trust alone will cost $19,000 (with annual costs of $3,000) and an offshore LLC alone will cost $3,000 (with annual costs of $900). In all cases, the first year's annual maintenance fees are included in the price quoted. Annual expenses are incurred for corporate trustee fees, trust protector fees, local registered agent fees (for the Nevis LLC) and government registration fees (apply to both trusts and LLCs). All required forms for reporting the establishment and/or initial funding of foreign financial accounts to the U.S. government will be provided and submitted as required under federal law.
You are not at the mercy of the whims of a corporate trustee. First, you set the terms of the trust, and the trustee is required by law to follow the trust terms. When you establish the trust, you will dictate in the terms of the trust that the assets in your trust be available to be used to provide for your lifestyle (i.e., health, education, maintenance, and support). You determine your lifestyle – not the trustee. Most clients use the trust as an additional savings vehicle and maintain their lifestyles from currently earned income. Sometimes, clients may want to spend a large amount for special occasions (e.g., sending money to a child’s college to pay tuition, buying a new car or boat, or spending a month in Hawaii), and in these instances, the trustee will transfer funds either to the client or directly to the vendor the client specifies the funds go to (e.g., the University of Miami, the client’s local car dealership, or a travel agency). A few clients have nearly all their bills placed on a credit card for automatic payment, and then they have the trustee pay the credit card bill in full every month, thereby permitting the client to spend weeks or months away from home while enjoying a cruise without worrying if the utilities are being disconnected. The trust company in the Cook Islands I often recommend, Southpac, is well regarded for having the highest levels of customer service, and Southpac will provide bill-paying services if the client desires – for a small hourly rate and not for any percentage of amounts held or transferred in trust. Lastly, if for any reason the client is not happy with the trustee, the client can arrange for a new corporate trustee to administer the trust. When a trustee knows that his customer can “fire” him, he will maintain the highest level of customer service. While the trust is “irrevocable” and the client cannot be a trustee (no professional estate planning attorney would allow such), the client is a current beneficiary of the trust and has full legal rights to require that the trustee provide for the client’s lifestyle, and the client will also have the power to have the trustee replaced if customer service is ever unsatisfactory.
Asset-protection planning is best used as a vaccine and not a cure. In other words, it is best to establish and fund an offshore trust before trouble arises. Essentially, there are only two ways anyone can seize assets that are in an offshore trust: (1) the creditor must prove that you committed a crime and that the assets in the offshore trust are proceeds of that crime, or (2) the creditor must prove that the assets in the offshore trust were “fraudulently transferred” into the trust to avoid a known creditor. Any lawsuit to seize assets in an offshore trust must be filed in the offshore jurisdiction and must be proven based on the higher standards of proof required in the offshore jurisdiction. Simply showing up with a judgment obtained in Dallas will be of no use to the creditor. Note that the term “fraudulent transfer” is a term of art and must be determined under foreign law, not domestic U.S. law. For example, on Tuesday your spouse had a terrible car accident wherein two people died and one will need extensive rehab or full-time nursing care for many years. You are facing a multi-million-dollar lawsuit and judgment. On Wednesday you establish an offshore trust and transfer assets into it. This transfer would be a “fraudulent transfer” as to the car-crash victims (but not any other creditors whose claims arose after Wednesday). The car-crash victims could get a local U.S. judgment, then hire an attorney in the foreign country where the trust is located (but no contingency fees are permitted or taken), and then sue the trustee to force the trustee to turn over trust assets that were “fraudulently transferred” as to that claimant. In this hypothetical example, the foreign court would probably rule that such a transfer was made fraudulently and would order the trustee to turn over the assets that were fraudulently transferred. Note that if in the same scenario the client had established and funded the offshore trust before the accident instead of the day after the accident, all of the assets in the offshore trust would remain in the trust and would be available to support the client and the client’s family. Note also that there is a short two-year statute of limitations for claimants to sue trustees in the Cook Islands. Another possible outcome in the hypothetical example is that following the accident and the establishment of the trust, the claimant waited more than two years to file suit in the Cook Islands because the claimant could not afford to hire an attorney and prepay the required legal fees, expenses, bond, etc.; the claimants’ claims would be barred after the expiration of two years from the date the trust was established. Obviously, the best approach to maximize one’s asset protection is to establish an offshore trust before trouble arises. Even if the hypothetical case were to play out where some assets were turned over to one creditor, the remaining trust assets would still be protected from all other future creditors.
If during the course of the litigation or during any post-judgment collection proceedings you are asked to provide information under oath (usually via a notarized written response) concerning your being a beneficiary of any trust, then you should honestly answer the question. Do not commit perjury! Oftentimes, by the time a lawsuit reaches a trial date, and the appeal is completed, and a final judgment is rendered against you, more than two years will have elapsed and the claimant will have no realistic chance of obtaining your assets held in trust. If your offshore trust was established and funded before the claimant’s cause of action arose, then you will probably want to tell the claimant’s attorney very early in the litigation process to inform him that he has virtually no chance of seizing your non-exempt assets, as they are held in a foreign asset-protection trust in a jurisdiction that will not recognize any U.S. judgment he can ever obtain. Oftentimes, the mere existence of an offshore trust prompts early settlements that are very favorable to the client. Sometimes, the client chooses to fight the lawsuit as a matter of principle, and the claimant’s trial lawyer spends years trying to obtain a judgment only to later realize that the judgment is unenforceable against assets held in an offshore trust. The advantage that offshore financial institutions have over institutions located in the U.S. concerning secrecy is that the foreign jurisdictions (e.g., Cook Islands, Switzerland, et al.) have strict banking secrecy laws that would prohibit (under criminal penalty) any offshore bank or trust company from disclosing your account information to a creditor who might show up with a subpoena requesting such account information. Unlike here in the United States, offshore jurisdictions do not allow trial lawyers to go on "fishing expeditions" in an effort to locate assets. While confidentiality is a terrific benefit of an offshore asset-protection plan, never conceal the existence of your foreign bank and/or trust accounts from the IRS or others who have a legal right to know about such accounts.
From a litigation standpoint, remember that a trial lawyer who is suing you is worried about two things: (1) winning and (2) collecting on the judgment. An offshore trust means that the odds of his being able to actually collect any assets that are offshore are slim to none. This means that the lawyer is much more open to discussing a small settlement to make the case “go away” rather than spending years pursuing a judgment that the lawyer can’t collect upon. If you have to go into battle (and litigation is just that), never fight on your opponent’s home turf and never fight using your opponent’s rules/laws. By establishing and funding an offshore asset-protection trust, you move any possible fight to seize your assets to a jurisdiction where your opponent is not even licensed to practice law, where the foreign lawyers rarely, if ever, take cases on a contingency fee, where the permitted causes of action against a trustee are limited, and where the burden of proof is “beyond a reasonable doubt” and not the much lower “preponderance of the evidence” standard used in civil cases in the United States. You are now fighting on your terms! Multi-million-dollar cases are often settled for less than a penny on the dollar that otherwise would have dragged on for years and cost clients all they owned. In cases where the claimants’ trial lawyers were not especially astute, they sued, won their cases, and unsuccessfully tried to collect their judgments. In one case an individual who had established an offshore trust and who was later sued had a certified copy of a court’s judgment against him matted and beautifully framed and shipped to the claimant's lawyer for an addition to the lawyer's conference room’s art collection, as that was all the judgment was worth – art.
Yes. With a pre-marital offshore trust, you can avoid many issues concerning “equitable distribution” of property in the event of a subsequent divorce. Once you fund your offshore trust with your pre-marital separate property, the assets will continue to be yours, as will all interest income from the assets, regardless of any contrary state divorce laws. Using an offshore trust after marriage in order to prepare for a possible divorce may also be useful, but you need to be very careful in doing this and make sure you are consulting with an expert in offshore planning as well as with an attorney who is an expert in family law. By establishing an offshore trust prior to marriage, you can protect your assets in the event of future adverse events. If your new marriage works out as planned, then you will have protected your assets for both you and your wife for the duration of your lives, and even beyond for your children. If things do not work out as planned (as can happen in any marriage), then you will have protected your assets from being subject to a divorce proceeding wherein a court could take your assets (or a large percentage of your assets) from you. Either way, you are much more secure by keeping your assets within an offshore trust. Also, there is no "full disclosure" requirement or any "informed consent and agreement" requirement with offshore planning as there is with a pre-nuptial agreement that is governed under state law. With any regular domestic pre-nuptial agreement, you are still at the mercy of a state divorce court judge interpreting and enforcing the agreement (which may or may not be favorable to you). Essentially, pre-nuptial agreements can be very useful in creating an agreement that characterizes future income and future acquired property following a divorce, whereas offshore trusts serve to protect the assets that are held in trust at any given time. A pre-nuptial agreement can serve to eliminate or reduce alimony, while an offshore trust is designed primarily for asset protection. A pre-nuptial agreement may serve to protect your assets that you own prior to marriage and/or other "marital property" assets acquired during marriage, but only if the state divorce court judge respects the pre-nuptial agreement. An offshore trust provides absolute protection for the assets held in the trust (assets that were deposited prior to marriage and assets that were deposited during marriage as well). For example, in Hawaii, a state divorce court judge could decide to award even your "separate property" that you owned prior to marriage to your ex- spouse if the judge felt your former spouse deserved the assets. That result can be avoided with offshore planning. Offshore planning allows you to focus on your fiancee and not on your finances! Basically, an offshore trust is the ultimate “pre-nup,” as it is not subject to any court order rendered by any divorce court judge in the U.S. Whether your fiancee is from Montana or Moscow, the strongest asset-protection planning possible would involve a well-drafted pre-nuptial agreement combined with an offshore trust. If a pre-nuptial agreement seems just too unromantic, then an offshore trust that can be discreetly established and funded is an absolute must.
Let me explain why an offshore trust is an excellent vehicle to use to protect one's wealth -- especially if one is about to marry. This is true regardless of whether the successful American traveling overseas for the purpose of marriage is a man or a woman. For purposes of brevity and for this discussion, let us assume that the client is an affluent man wanting to marry a woman. Simply stated, a pre-nuptial offshore trust will provide the security and peace of mind for a successful person to focus his energy and attention on his fiancee and not be concerned about their finances. Such a trust could even make the difference in an individual's decision as to whether or not to seek a younger bride in a foreign country, especially if he may be concerned about her true intentions (i.e., does she really want a happy marriage, or is she merely interested in the money or U.S. citizenship). Many individuals have had a bad experience previously with someone who went from loving to leaving (and desired to take everything upon departure).
A person can protect his or her assets held in an offshore trust from creditors, including creditors who have filed -- and won -- a lawsuit against the person who established the trust. For doctors, lawyers, architects, and business owners, this protection means that a huge malpractice/liability suit will not affect the financial assets that were placed into the offshore trust prior to the lawsuit. It also means that one's assets owned prior to marriage and assets lawfully transferred into the trust during marriage are immune from the judgments of any divorce court in the United States. For a successful person about to marry, these combined facts make pre-nuptial planning quite meaningful. If Hank is about to go overseas to bring his bride, Wanda, to America, he may have two serious concerns. His concerns center around whether the new marriage will be successful or not, and how to best plan for either eventuality.
What if the marriage does not work out and Wanda files for divorce (and seeks everything)? In such a case, Hank's assets that are held in his trust located in the Cook Islands are (1) not legally owned by Hank (even though he has complete and full access to them) and are therefore not subject to the jurisdiction of local U.S. divorce courts to begin with; and (2) even if a divorce court awarded "everything" to Wanda, she could not collect the assets in Hank’s trust, as the Cook Islands do not recognize U.S. judgments. The assets remain in trust for Hank's benefit for his lifetime and will then go to Hank's heirs according to Hank's instructions. Secondly, if the marriage is a happy one and Hank wants to provide for his family and secure their future, he needs to be concerned about planning ahead, especially given our hyper-litigious society. Interestingly, one study sponsored by the U.S. government (INS) indicated that the divorce rate among "foreign bride" marriages was only about 20% -- less than half the normal domestic U.S. divorce rate! Couple this fact with the fact that culturally speaking, many foreign women gladly marry men several years older than themselves, as they see an older man as more stable and better able to provide for a family than a great-looking twenty-something guy who has yet to finish his education or obtain meaningful professional employment (and is currently waiting tables hoping for an acting career or waiting for his band to be discovered); such a potential beau just doesn't cut it, as these guys are available everywhere. In most former Soviet countries, women outnumber men as well -- and by the millions. Additionally, given the disparity of life-expectancy rates of men and women, it is easy to foresee a successful man in his 40's or 50's or older needing to plan to provide for his bride and children for decades beyond his life expectancy. An offshore trust can provide for the lifestyle of the wife long after her husband dies and can also provide for the education and support of their children and grandchildren for generations yet to come. Such a trust can provide asset protection and maintain the wife's lifestyle even if she is sued because of an automobile accident, business dispute, or any other type of legal action, regardless of whether the husband is living or not. The trustee can make arrangements for a permanent regular income stream to be payable monthly to the wife for as long as she lives, in addition to having additional funds available for emergencies. Even if one can no longer be there in person, you can make provisions today for your family and their future lifestyle and ensure that the wealth that generates that lifestyle will be protected from lawsuits, creditors, and others who may attempt to seize your family's assets.
The offshore trust can protect the assets that are deposited into in the trust, while a pre-nuptial agreement is good (assuming it is upheld) at reducing future alimony obligations. Pre-nuptial agreements may be drafted in most states that can address issues concerning future alimony, support, and division of assets (not otherwise held in an offshore trust) in the event of divorce. The most advanced pre-nuptial planning involves a combination of a pre-marital agreement and the establishment of an offshore trust. In cases where clients feel that they do not want to present their fiancees with pre-nuptial agreements (understandably, as pre-nups are not the most romantic of issues to raise while planning a wedding), such clients do need to protect their current assets from the hazards of potential divorce litigation. An offshore trust can be established with or without the fiancee's knowledge and can be used effectively to ensure that one's assets are protected against the financial ruin of divorce, lawsuits, and other legal actions.
Offshore trusts are legal and fully disclosed to U.S. government agencies according to U.S. federal law. Offshore trusts are used effectively to ensure that one's assets are protected against the financial ruin of divorce, lawsuits, and other legal actions and may provide for one's lifestyle and for the lifestyle of one's family for generations to come.
One specific issue that may arise when a man marries a woman from another country is the issue of her ability to fully understand documents written in English. Regular pre-nuptial agreements signed by both parties presume that both parties have read and fully understand the agreement. In the event of a divorce, it would be expected that the foreign bride's divorce attorney will assert that the pre-nup is not legally binding because the bride did not fully understand the language of the document (even if a certified translation of it was supplied to her before it was signed). While written and signed pre-nuptial agreements may be better than nothing, they are a far cry from being 100% effective in protecting the wealthy party's assets. An offshore trust will protect your assets, and there is no mandate for the person establishing the offshore trust to disclose its existence to his-spouse-to-be. Perhaps later on the person who establishes the offshore trust will inform his spouse that there is a trust in the Cook Islands, and the assets in the trust are protected from lawsuits. The assets will be there for us to enjoy, and the trust will become a part of our estate plan when that time comes. An offshore trust can therefore be a win-win undertaking.
While I have never had a client do this, you could merely request a large distribution from the trustee to provide for your lifestyle (perhaps you are considering flying lessons in a new private jet). Basically, you could use the trust to pay for all of your living and business expenses and spend all the trust assets completely. Of course, if you do this and there is a lawsuit due to a terrible automobile accident or other cause and you lose, you will have made one U.S. trial lawyer very happy when it is discovered that you have depleted the assets in your offshore trust and that you now own numerous assets beyond the level of assets your state law protects from creditors.
Yes, absolutely. Your assets are insured for far more than the mere $100,000 per account or account holder as they are commonly insured in the United States. Accounts in the Cook Islands with Southpac Trust Company and/or Capital Security Bank are independently insured for $5 million. If you elect to use a Swiss bank account as a part of your offshore plan, there is a limitless amount of backing by the full faith of the Swiss government for amounts deposited in Swiss banks that are not held in Swiss currency (e.g., all amounts on deposit in U.S. dollars are fully backed 100% without limit). Along these same lines, even if there were an overthrow of the government where the trust is located (e.g., Cook Islands, Bahamas, Cayman Islands, etc.) or a huge natural disaster (a volcanic eruption followed by a tsunami followed by an asteroid), when a client deposits the assets with a Swiss bank, the assets will be unaffected by any unfortunate events occurring elsewhere. A common planning technique is to establish a foreign LLC and transfer client assets into the LLC (with the LLC being managed by the client who keeps the checkbook) with the LLC shares being held (owned) by an offshore trust. This way, for a majority of clients, the clients never have to ask for funds, as they control and manage the assets directly, as they hold the checkbook to a bank account located in Switzerland or the Cook Islands. A foreign bank account is used because clients want quality banking services, fully insured/backed protection beyond that available in the United States, and in a foreign jurisdiction where a U.S. judge cannot order a bank manager in Switzerland or the Cook Islands to turn over account assets. Even should an individual lose a huge lawsuit, the individual will not lose the benefit and enjoyment of his/her assets when an offshore asset-protection plan has been properly implemented.
Yes. Some people have an existing relationship with a foreign bank or trust company and desire to keep their business there. Clients can choose from a number of fine offshore jurisdictions and trust companies to use. You should also know that I do not receive any compensation from any foreign governments or financial institutions. My recommendation of a foreign jurisdiction and/or financial institution is based solely upon what is in my client's best interest.
Generally speaking, no. In most instances the name on your current account (i.e., the legal owner of the account) can merely be changed from being in your name to being owned in the name of your offshore trust. [Note, I am referring to accounts other than your IRA, 401k, or other qualified retirement accounts. I am referring to accounts for your investments that are outside your retirement accounts. While in rare instances it may be advisable to "cash out" a retirement account (and pay the taxes and penalties) and move the assets offshore, in most instances this is not necessary or even desirable, as qualified retirement accounts are generally exempt from creditors' claims.] In essence, it is a mere change of ownership of the account. Your offshore trust document will contain language permitting the offshore corporate trustee to hold assets anywhere in the world and for the trustee to delegate account management to qualified professional financial institutions and managers (such as your current brokerage company).
NO! A Family Limited Partnership (FLP) is a good tool for reducing federal estate taxes, but it is NOT a good tool for asset protection -- especially in Texas. A Family Limited Partnership can be a useful tool to reduce the value of a large taxable estate (and thereby reduce the applicable estate tax). The valuation discounts average about 35% and can potentially turn a taxable $6 million estate into a tax-free $4 million estate (saving about $900,000 in estate taxes). Unfortunately, however, about half of the FLPs that are challenged by the IRS in court (challenging the allowance of any valuation discounts) do not stand up to close scrutiny. FLPs are partnerships – that is to say, they are a business entity that must be run and treated like a business entity with many formalities. Courts generally have no trouble granting the IRS’s determination that for one or more technical reasons, the FLP discounts should not be allowed because the entity was not respected.
One additional benefit of having assets in an FLP that many attorneys tout is “asset protection.” Basically, under Texas law (like most states) if a creditor sues and gets a judgment against you and your assets are held in an FLP, the creditor cannot seize the actual assets or seize your partnership interests. The creditor is limited to a “charging order” against your partnership interest. This means that the creditor now stands in your shoes, so when the FLP issues a distribution of cash or property to the members of the partnership, the creditor will receive your share due to the charging order. An interesting tax event can occur at this point under current partnership tax rules because it is possible for the FLP to declare a distribution, use the cash for other purposes (reinvestment into other partnership ventures, etc.), and the partnership interest holders are required to pay tax on the “distribution” even though no actual cash was distributed. The FLP could declare such a distribution to you, not send any cash, and send a notice (Form K-1) to the IRS and the judgment creditor holding the charging order that a large distribution of partnership income was “distributed,” and the judgment creditor holding a charging order now must declare that income and pay income tax on the “distribution.” This is what is referred to as “phantom income.” (For more specifics, see IRS Revenue Rule 77-137.) The charging-order remedy limitation is a bit of a poison pill to discourage judgment creditors from attacking partnership assets.
Unfortunately, in Texas, the “asset protection” benefits of an FLP are more illusory than real. One reason is that for a limited period of time while the charging order is in place and while the judgment creditor who sued you can’t get the cash, securities, or other property in the FLP – neither can you without probably being in contempt of court for violating the charging order. Clients are seldom happy when they learn that they cannot readily obtain or benefit from their own assets that they placed into an FLP! Additionally, it is a common practice for other family members to participate in the management of the FLP and to be involved in making distributions or otherwise allowing people to use the FLP assets. There have been situations where a wife was paying for her husband’s expenses from the FLP assets and the judge held her in contempt of court for failing to comply with the charging order. Please note that a state district court judge in Texas can place someone in jail for up to six months for each charge of contempt of court. Another weak spot that FLPs have from an asset-protection standpoint is that in Texas, while there is a statute (a law written “on the books”) that says a creditor is limited solely to a charging order as his remedy to satisfy his judgment against a person who holds partnership interests (see Tex. Rev. Civ. Stat. Ann. art. 6132a-1), we now have case law wherein our Texas courts allow a judgment creditor to obtain a judicial foreclosure of the partnership interest with partnership assets being turned over to the creditor (see Equitable Trust v. Roland, 644 S.W.2d 46 (Tex. Ct. App. 1982). As an aside, in federal bankruptcy proceedings, a judicial foreclosure of a partnership interest may be obtained in a case pending in federal Bankruptcy Court (see In re Priestly, 93 B.R. 253 (D.N.M. 1998)(memorandum opinion). These avenues of attack are in addition to the usual “pierce the corporate/partnership veil” attacks that are always available to a person desiring to obtain assets held in the name of a corporation or a partnership (including a Family Limited Partnership). The “pierce the veil” attacks are usually based upon an assertion that the entity is a sham, an alter ego of the person who was successfully sued, or that the entity was a mere agent of the person who was successfully sued. Regardless of the nature of the attack, an FLP governed by any state law in the U.S. is subject to potential litigation brought by the IRS or a plaintiff’s attorney who makes a living filing lawsuits on a contingency-fee basis.
No. Generally, corporations are liable for their own actions, and the shareholders who merely own shares of stock are not liable for corporate misdeeds. If you own shares of XYZ, Incorporated, which lost a lawsuit, the judgment creditor cannot track you down and make you pay the judgment, even though you "own" the company because you own shares of stock in the company. This is good news for those of us who own shares of stock in different companies. Please note that if YOU were the executive in charge of XYZ and you were personally involved in the malfeasance, it is a different analysis. Let us change the facts and say that XYZ is a great stock to have (and you own your shares outside of your qualified retirement accounts) and that XYZ is a great company that found a cure for cancer. If you are sued for any reason (malpractice, automobile accident. etc.) and you lose the lawsuit, the trial lawyer who sued you can seize the shares you own in XYZ (after all, your shares in XYZ are just another non-exempt asset subject to being seized in order to satisfy a judgment).
Now let us apply these results to your forming your own company (e.g., S-corporation, C- corporation, LLC, etc.). You incorporated yourself (in Delaware nonetheless) and you transfer assets to your new company, You, Inc. Next, you lose a lawsuit. You laugh at the smiling trial lawyer because you think that because you no longer own the assets (You, Inc. owns them all) that the assets are protected. After all, the ads all said that you could protect your assets by incorporating. The smiling trial lawyer smiles even more, and in accordance with a routine seizure order, the trial lawyer seizes your shares of You, Inc.! Now that the lawyer owns and controls You, Inc. (remember that he who owns the shares owns the company); he liquidates the corporation and takes all of its assets and distributes them to his client (or sells them and distributes the cash to his client) while taking his fee out of the proceeds, of course. Note the lawyer will get paid his contingency fee for winning the lawsuit (probably around 35-50%), and he will be paid an additional fee for his time to collect on the judgment (another 35% or so). Now you know why the trial lawyer was smiling when you proudly told him that you didn't own anything because all of your assets were owned by your company.
There are some excellent asset-protection benefits provided by using a corporate entity such as an LLC, provided that all of the shares of the LLC are owned and held by an offshore trust! The trial lawyer cannot seize the assets because you do not own them (the LLC owns them, and at this point the assets are outside the U.S. as well), and the lawyer cannot seize the shares of the company (in order to get at the assets owned by the company) because the shares are owned by a trust and not you. You are the mere beneficiary of the trust, and the trustee must use the trust assets for your benefit and lifestyle. Of course, both the company and the trust are located and registered in a foreign jurisdiction that does not recognize any U.S. judgments. Now who is smiling? It certainly isn't the contingency-fee trial lawyer!
This is not to say that there aren't good reasons to use corporations and LLCs. I use them all the time, but those reasons are beyond the scope of this question (FAQ #20) concerning incorporating oneself for asset-protection purposes.
Just call me or send me an email and give me your mailing address and other information, and I will send you an estate-planning questionnaire that you will complete and return to me. We will discuss your unique situation and goals, and I will recommend an estate plan that provides for tax planning as well as asset-protection planning. Most of my clients are professionals (doctors, lawyers, business owners, etc.) and are quite busy; therefore, I will gladly meet with you at your home or your office at a time best suited to your work schedule. If you are in the Houston metropolitan area, I do not charge for our initial in-person consultation. If you are outside the Houston metropolitan area, I will charge you $500 plus my travel expenses to meet with you in person and will pre-bill you for these expenses. In either case, I do not charge for our initial telephone conference to discuss your situation, so feel free to call me at your convenience. I am always glad to meet with your advisors as well (attorney, CPA, financial planner, etc.). Once we agree on a specific plan that best meets your needs and you decide to implement the asset- protection plan, I will explain how much the specific offshore/estate plan would cost and will pre- bill you a flat fee that will cover all attorney’s fees, costs, and expenses so that you will not have to worry about calling me in the future with a question – the flat fee includes all the future time you might need from me in order to properly implement your plan. I look forward to hearing from you.