Worldwide: New Reality In Asset Protection Offshore: How Trusts And Foundations Compare To Asset Protection Insurance™ (API™)

Traditionally, trusts and foundations were often used as tools to obscure the ownership of assets as tax shelters thereto. Often the motivation for seeking an offshore account or foundation to hold assets was for the purpose of tax evasion rather than asset protection. The term "off shore" for most, conjures images of some palm tree laden sandy beach island in the tropics. In reality, it also includes many mountain enclaves and former breakaway and newer rouge states thousands of miles from the nearest beachfront.

Can Offshore Accounts And Structures Prevent Being Taxed On Assets Placed There?

In the past it was relatively easy for financial advisors and experts to help clients move their assets to offshore centers in order to avoid being taxed on those assets. Because of the lax reporting rules that surrounded some of these offshore transactions, it provided an easy platform for abuses like money laundering and tax evasion which, in turn, have also supported terrorism and other criminally motivated organizations. In the post-911 world, the application of The Patriot Act and other similar legislation, like the OECD mandate on offshore jurisdictions and financial reporting of transactions, an atmosphere of collaboration and transparency exists across borders, between financial institutions and governments. More recent legislation has attempted to also make the intermediary agent as responsible for their actions as the rightful owner of the obscured and illegally placed assets. In spite of the risk of culpability, some unscrupulous agents who craft trust and foundation structures in far off jurisdictions still continue to act in this manner and willingly, take on the joint liability of their clients for remuneration.

How Can One Know If An Offshore Jurisdiction Is Safe And Legitimate?

Clearly, the only places that remain a possible haven for such illegal structures would be second rate, off shore jurisdictions. These jurisdictions are second rate from the standpoint of commercial and legal recognition, but obviously first rate to money-hiding, tax-avoiding clients and their "professionals". Would honest, law-abiding clients be interested in such risky environments to put their assets for safe keeping or to pass on these "tainted" assets to next and subsequent generations decades later? Not likely. Sadly, many honest clients who happen to have hired an aggressive (marginally dishonest) advisor or representative to secure their assets, have lost assets and have been left criminally exposed. A slightly altered Warren Buffet quote captures this well, "If you are unwilling to invest your assets in that jurisdiction for five years (and buy and hold), why would you think of it for five minutes?" Unless, of course, you are looking for tax avoidance (which will result in an extended stay in small rooms with bars all around them) only a premium, law abiding and established jurisdiction can offer you the safety needed for asset protected estate planning. Clearly, it is time for the legal and accounting community to stop advising their clients that there are legal ways to avoid taxes and protect assets by simply going offshore through a structure. It is simply not true (unless you plan to live in this jurisdiction as a resident or give up citizenship for Americans). All known ways to protect assets have to incorporate transparent methodologies that are protected by the application of the law, not the avoidance of it. If you cannot legally use the full access and benefit of the judicial system, how do you propose to legally defend your assets? The law will not defend an illegal transaction (the legal axiom is "you can't come to the court with dirty hands"). To insure that assets are protected, they also must be transferred by way of an irrevocable and declared disposition on behalf of the owner for value.

Today, in response to the need for legal, secure, transparent, offshore asset protection, there are several variations of asset protection products (also referred to as "structures") such as trusts and foundations that can offer limited legal protection. These structures can work effectively if there has been an irrevocable, declared disposition of the asset transfer from the owner and the management of the asset is not a sham trust or foundation (essentially a "sham" is where the assets are controlled or influenced by the owner through a third party trustee or nominee who controls the structure). Assets transferred into Trusts and/or foundations are not securely protected and have far less recourse in terms of being supported (or defendable) by the legal system if they are non-declared, revocable, or influence is still held by the person who set it up. This type of trust is still a just a hiding place for assets and may be only partially legal. The structure only works based upon obscuring the ownership, influence and/or control of the assets, and it's always a concern as to who knows the secret and will they protect it? In the case of revocability, there is no protection of the asset from predators, as judges will simply decree that if it's revocable than it shall be revoked and attachable (subject to a contempt of court action for not abiding).

How Can A Client Prevent Assets From Being Moved Into An Illegal Structure?

Firstly, if the motivation for seeking some exotic, offshore structure is to evade taxation, it is likely not secure nor legally defendable; if this structure cannot be defended in a court of law, as stated, it is usually somewhat illegal or questionable in purpose. Secondly, it is important to find and hire a fastidious, principled advisor or representative. If an advisor or representative has advised the creation of a complex system of nominees obscuring ownership, or if the offshore jurisdiction where assets are held is so exotic or foreign that normalized relations with other countries do not exist, then the structure will not be effective in protecting assets, let alone an intergenerational transfer of those assets. Sophisticated forensics, technology and cooperation by global regulators are such that it's simply a matter of time before such illegal structures are found.

So, What Makes An Asset Protection Structure Effective?

Effective asset protection structures must be as defendable and as easy to access as a domestic structure while providing all the benefits of an offshore structure. To begin, a transfer of the assets by way of an irrevocable disposition into the structure must occur regardless of whether it is an insurance product, trust or foundation. There is no court that would defend an illegal structure. In order to seize any asset (in a law abiding country) the process must go through the court system at some point. Thus, the legal system must recognize and embrace the structure and the status of the assets within it. The laws of that jurisdiction in which the structure is placed must also be predictable to insure that they will defend those assets if they are challenged. This is precisely why an exodus to a new rouge regime or island in Micronesia makes little sense. Where there is no recognizable court system with an observed and steeped legal case law tradition to defend the assets, a lack of any predictability and/or international acceptance by the financial and legal global community of any outcome or decision, there is little ability to use the judicial system to protect the assets

Is There A Completely Legal And Secure Way To Protect Assets?

What is unique and in fact one of the best ways to legally provide asset protection that is defendable and works is Asset Protection Insurance or API^TM. Allied Sovereign and Equitable Assurance Company Ltd. created API^TM and has made this insurance product available through select, limited providers internationally. API^TM can easily replace the use of an offshore or domestic trusts and foundations in application and is an ideal tool in asset protection and estate planning. API^TM is not a tool for evading taxation or hiding assets. In fact, it works only because it is transparent and declared. There are tax advantages in some applications in business; however, generally, API^TM in application, remains tax-neutral.

What Makes API^TM Such An Effective Tool In Asset Protection?

API^TM addresses most of the issues regarding the legitimacy of asset protection, like those presented in the use of some offshore trusts and foundations previously. In the case of a properly formed trust or an API^TM policy, a domestic judge will have difficulty seizing assets if they have been irrevocably transferred, are fully disclosed and with their pertaining taxes paid. The most critical aspect of any asset protection structure is that it must be an irrevocable, declared structure because only then can the law be used to defend it. In this case, the ownership of the assets has changed - and therefore is unassailable (assuming no undisclosed liabilities).

There is an inability to deal in a deceitful manner with an API^TM policy, as it could and would invalidate the policy. The API^TM format derives all of its strength from the fact that the assets are irrevocably transferred and declared, and thus the policy is defendable in a court of law. This is not to imply that foundations or trusts cannot go to court to defend their assets. Unfortunately, a court will not uphold an illegal contract or sham proposition against creditors. In the case of the API^TM, even if creditors gained access to the assets held in the policy, the insurance component will replace the asset at book value, making it a guaranteed asset protection structure. Thus, API^TM is approaching asset protection from the standpoint of insuring the assets (similar to a property casualty insurer protecting the loss to an asset from theft or fire as an example), and not by trying to hide its existence or fake that it's changed hands from a transfer of title standpoint.

The Application Process

Failure to report any liability (including taxation) while filling out the API^TM policy would likely invalidate it. As a result, the application information provided must be detailed and correct and can only protect fully disclosed assets and liabilities. The API^TM policy application specifically requires a full accounting and disclosure of all assets and liabilities, real or contingent. The application process is far more detailed than the current anti-money laundering standards and is designed to capture the full profile of the assets to be protected.

Who Oversees And Protects The API^TM Structure?

Within an API^TM structure, there are three separate parties involved in the governing process: 1) the Financial Advisor whose role is limited to investment advice; 2) the policy Ombudsman; and, 3) the Policy Trustee.

How Are Trusts And Foundations Overseen?

In the case of many so-called irrevocable trusts, there is an independent third party who works with the trustee as the proxy of the person who set up the trust and whose powers are limited to certain situations, referred to as the "Protector". The Protector's powers are limited or the trust may be viewed as an administrative sham trust and will be treated as an extension of the grantor and no protection will afforded to the asset. In the case of a foundation, the role of the Protector is served through the use of a board of directors who have almost a dual role of Protector and Trustee. Of course, legal trickery has eliminated this perceived independent buffer through the use of nominee's and nominee boards of directors. This is also the case for trust in which the Trustees or "sham Protectors" have the will of the trustee. Foundations employ similar techniques like a straw board, whereby nominees are members of the board through the use of powers-of-attorney and sometimes, even the client-beneficiary is a member in some manner. In comparison, the three-tiered accountability structure present in an API^TM structure also leads to complete cooperation and disclosure by the third-party service providers to the policy because of the nature of such thorough disclosure.

What Is The Role Of The Ombudsman In An API^TM Policy?

In the case of API^TM there truly is an independent third party, referred to as the Ombudsman, his powers are also limited, and he is truly in a third party position to the trustee and to the applicant of the insurance. In an API^TM, there is always an irrevocable disposition of the assets and an independent role exists for all three overseeing parties. These clearly defined, independent roles will not allow for the creation of evasive, illegal or sham structures. In the case of a trust or foundation, these layers of accountability and transparency are not present and, in fact, many employ the nominee layer to specifically evade and obscure ownership. This compromises the continued control over the assets presumably being protected and thus, renders it potentially a sham or, in fact, fraudulent.

Are Domestic Trusts Any More Secure In Protecting Assets?

A domestic trust or foundation is always a viable option; however, domestic solutions only work on a limited basis. In the case of a domestic foundation as well as a trust, they remain subject to and within the reach of local laws, courts and creditors and therefore minimize their function as an asset protection device. If a creditor gains access to the assets held in a domestic foundation or trust, there is no insurance to replace their value. With a trust, one must also consider the issue of the limited lifespan a trust can exist which is usually no greater than 21 years depending on the regional laws where it is held. Subsequent to the 21 years (or local laws against perpetuities) the assets will be taxable, in most cases, and also completely open and exposed to creditors. Furthermore, assets held domestically are still subject during the time period they are functional held in a structure, to (excessive) domestic taxation and are assailable if they remain in the same domestic jurisdiction as the owner of those assets. This can encourage and increase the likelihood of provoking litigation and discovery, (allowing a plaintiff the ability to easily be discovered from a legal action vantage point) and obtain leverage in a proceeding, even if unsubstantiated or dubious. API^TM is a very viable choice to the domestic trust or foundation structure, especially for business applications or for intellectual properties. This insurance format will protect assets inside a business as well, while remaining on the company's balance sheets since there is complete disclosure and taxes have been paid.

What Is The Lifespan Of An API^TM Policy?

An API^TM policy can last slightly over 100 years, which becomes great for long-term asset protection planning and inter-generational estate planning. Generally, the lifespan of a domestic trust is about 21 years depending on its jurisdiction's laws in regard to perpetuities.

In today's society, lawsuits are common and pose one of the greatest risks to the preservation of wealth. An API^TM policy will provide the ability to legally creditor-proof and pass on these assets, ensuring smooth intergenerational transfers with the security of an insurance backing should unforeseen issues arise at a later date.

In conclusion, it's time for professionals to wake up and realize that there is a huge difference between giving advice about asset protection versus tax-assisted offshore planning. To protect a client's assets, they can no longer be hidden in antiquated "secret" structures. The law must be able to serve and protect the structure to make it feasible and authentic. It's time to espouse irrevocable, declared, regulated, and legal asset protection planning because it works. API^TM provides that kind of guaranteed, ironclad asset protection planning and is therefore the superior choice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.