One of the most interesting and esoteric of the planning problems which we deal with is the area of asset protection.  Asset protection is often done in the context of estate planning.  Whether the primary goal is to protect assets or to plan for protecting an estate from probate and taxes, there is always an element of asset protection which is inherent in every estate plan.  Essentially, estate planning is an attempt to avoid the predations of creditors and predators, including the court system and most especially the taxman.

Asset protection as a discipline is, in fact, quite well developed.  There are basically four levels of asset protection around which a competent estate planner can plan.  The first and most basic level deals with those inherent protections which are part of the ownership of property in certain forms.  Examples of these types of property which enjoy some or, in some cases, extremely good asset protection are holding property jointly with right of survivorship, as tenants by the entirety for a married couple, assets which are held within a retirement plan or IRA account, and assets which are held in trust for the benefit of a third party.  With appropriate planning, significant protection can be achieved as, in part, a byproduct of the estate plan.

The second level of asset protection involves the use of the normal estate planning instruments, including trusts, but will also typically involve the use of entities such as family limited partnerships and family limited liability companies.  In the context of family limited partnerships and family limited liability companies, while there is no absolute protection, the assets in the hands of the entity are usually not subject to the debts of the individual owners and a creditor of an individual owner may only be able to avail themselves of distributions made from the entity for the benefit of that owner rather than attacking the assets directly in any fashion.

It is important for this discussion that it be understood that asset protection planning is best done when there are no pending claims or other troubles on the horizon.  This is so because the chief attacks which are leveled against the asset which is sought to be protected are the twin state law theories of voluntary and fraudulent conveyance.  These laws provide a creditor who believes they have been wrongfully deprived of the benefit of the assets of their debtor, the remedy of seeking to undo an asset planning transaction.

One clear trend that is seen when moving from the first to the second level of planning is the involvement of the twin concept of ownership of assets by entities such as trusts, limited partnerships or limited liability companies as well as the concept of control of, rather than ownership of assets.

In the third level of asset protection, we begin to use specialized trust instruments in addition to entities such as family limited partnerships in an attempt to import the law of a favorable jurisdiction.  The law imported might be the law of a state, such as Delaware, that has favorable laws with respect to the ability of trust to protect assets as well as very favorable laws with regard to the sanctity of entities, or the jurisdiction for whom the law is imported could be a foreign jurisdiction in a tax haven country such as Bermuda, Liechtenstein, The Isle of Man, Nevis, etc.  There are approximately 25 jurisdictions around the world which have some combination of favorable laws with respect to foreign judgments as well as in days gone by, affording a certain amount privacy from everyone, including governments.

At this late stage, it is fair to say that the days of secrecy for foreign jurisdictions are effectively coming to a close.  Laws in the United States require taxpayers to disclose ownership or control of foreign accounts, and in addition there is an extensive regime for controlled foreign entities as well as foreign trusts.  However, the compliance with these regimes, while complex, still permits asset planning where the laws of either a favorable state within the United States or a favorable foreign jurisdiction’s law will be imported for assets which otherwise are intended to stay in the United States.

The fourth and highest level of asset protection involves exporting the assets to the foreign jurisdiction.  At this level we would expect to see liquid and investment assets held entirely offshore, outside of the United States, although several jurisdictions such as Delaware and Alaska purport to have laws that are extremely favorable for this planning.  Thus, in tiers three and four, we are asking questions with respect to the planning which needs to be done such as:

Do we wish to have a favorable State in the United States or a foreign jurisdiction with the foreign jurisdiction usually creating greater complexity for a United States citizen or permanent resident?

Do we wish to use entities which will be owned by one or more trusts which are likely to be irrevocable?

To what extent are our clients willing to gain asset protection by relinquishing ownership of the assets themselves and in addition, on occasion, the entities which own the assets while preserving, in a legitimate fashion, control over the assets which is often indirect?

In the case of the first and second tiers of asset protection, the expense and the complexity of the arrangement are typically not very much greater than would be the case if asset protection were not an element which was folded into an overall estate plan.  Customary expenses for a tax-sensitive estate plan, for example, is oftentimes in the range of $3,500 – $6,000, and planning which involves one or more family entities would likewise be in the range $5,000 – $10,000.

In tier three where we import the law or tier four where we export the assets, clients can anticipate that there will be a substantial increase in both the complexity of the arrangement and the cost of setting up and maintaining the arrangement.  As a consequence, this sort of planning is only appropriate where clients believe they have significant risks as well as significant assets to protect and more conventional means are either inadequate or do not afford our clients with what they believe to be an appropriately low level of risk.

In the case of tier three planning where domestic trusts would be strongly considered as well as possibly foreign trusts, and where we would anticipate that two to three irrevocable trusts owning two to three family limited liability entities would customarily involve an expense of $20,000 to $30,000 to set up with annual maintenance of several thousand dollars on an ongoing basis.  For asset planning which involves exporting the assets, which by definition will always involve one or more foreign trusts, a foreign trustee and foreign accounts in tax haven jurisdictions, we can anticipate that the expense will be commensurately larger and an export-the-assets plan would involve planning and implementation costs of $50,000 or more, and in addition to its advantages, such a plan carries with it an annual compliance cost which can be significant.

In each of these planning tiers, however, the level of protection for assets and therefore the level of assurance provided to the clients increases.  It is safe to say that asset protection does not deal in absolutes.  Rather, it deals with making assets as unattractive as possible to creditors by either increasing the complexity of attacking the assets or the expense of doing so, or both.  Asset protection, as you can see from this article that barely scratches the surface of this highly interesting and sometimes extremely important field, is complicated and involves judgments about better and worse rather than absolutes.  We have significant experience in helping our clients navigate the landscape of asset protection.  Please call us if you have an interest in obtaining greater security for your assets.