December 16, 2017

Asset Protection Trusts (OAPTs)

 

We would like to preface this material by stating that this is not intended to make you an expert in offshore asset protection trusts.  We have put together material on offshore asset protection to give you the basics as to why it works and why you might want to consider finding an APS™ rated advisor who a can help you. There are several of the APS™ advisory board who have written books on offshore planning that we recommend you read to learn more about offshore asset protection.

Why Offshore?

We a better question to start with is: why not to go offshore.

Caution: You should not be thinking of offshore because you think you can “avoid” tax (income, capital gains, etc). Advisor who preach this, as a general rule of thumb, are ones you want to stay away from.  Now having said that, there are tools which can be used onshore and offshore to mitigate taxes, but those are outside the scope of this web-site.

Many clients who do not have significant wealth can accomplish many of their asset protection goals by using domestic planning. As a general rule of thumb, offshore planning is for clients who have $500,000 or more liquid in a brokerage account, CDs, or a bank account.  If you have now or are approaching this threshold number, you are a candidate for offshore planning.

Why offshore?  Simply put, to date there has never been a situation where an offshore asset protection trust (OAPT) has been broken and where the money in such a trust has been forced to return to the U.S. and returned to a creditor.

In English what does that mean?  It means that moving money to an OAPT is the most secure place you can put your money.

Why does offshore work?

Because of one fundamental reason, when using the proper offshore jurisdictions, those in that jurisdiction (where your money is located) will not recognize or enforce a U.S. judgment.

As is the case most of the time, an example is the best way to learn a new topic.

Example:

Mr. Smith, who lives in California, is not married, has a home he recently paid off worth $500,000, several other miscellaneous assets and a $1,000,000 in a brokerage account.  His home and other assets are owned in his own name.  Mr. Smith decided to be proactive not reactive when it comes to protecting his wealth.  Mr. Smith found and used an APS™ rated attorney with an “AOG” rating to setup an OAPT to own his $1,000,000 brokerage account.

Six months after setting up the trust, Mr. Smith went to watch his favorite football team on TV at the local bar. At the bar, he had several beers.  After the game and his team losing on a last second field goal, Mr. Smith jumped angerly in his car and drove home.  On the way home, Mr. Smith dropped his cell phone when talking to his bookie.  When picking up the phone off the floor, Mr. Smith swerved into traffic and hit an oncoming car.  The driver in the oncoming car happened to be a local cardiologist who made $750,000 a year. The cardiologist sustained severe injuries which resulted in him becoming a paraplegic.

Mr. Smith was sued by the cardiologist for $10,000,000:  $2,000,000 for medical bills current and future, $2,000,000 for pain and suffering and $6,000,000 million for future loss of income.

Mr. Smith went to trial and lost the case and a jury verdict came down in the amount of $8,500,000.

The cardiologist obviously wanted to be paid and after receiving $1,000,000 from Mr. Smith’s auto insurance carrier, he drug Mr. Smith to court for a creditor’s exam.  During the exam, Mr. Smith disclosed that he had $1,000,000 in an OAPT and a house with no debt on it worth $500,000.  The cardiologist asked the judge to have Mr. Smith turn over all of his assets to satisfy the judgment.

What did the judge do?

The personal residence:  The judge told Mr. Smith that he had to have to sell his home and give the proceeds, except for the pathetic homestead protected amount, to the cardiologist.

The brokerage account:  The judge told the cardiologist, after reviewing the trust language, that there was no legal way to compel Mr. Smith to bring back the $1,000,000 from his OAPT to satisfy the judgment.

Why? Because Mr. Smith had no legal power of the assets in the trust.

Further explaining offshore

An OAPT is simply a trust setup in a foreign jurisdiction with “special” language.”  The client might or might not be a trustee of the OAPT.  Assume that the trustee is the ONLY person, or persons if co-trustees, who has the power to make distributions from the trust.

We want you further to assume that the trust document says that if Mr. Smith ever has a claim or judgment against him by any creditor, the trustee is forbidden from taking money out of the trust to satisfy a judgment.

Let’s assume initially that Mr. Smith was a co-trustee of his OAPT (meaning that he could control the money in the trust).

When the claim was filed against Mr. Smith, he was immediately dropped as a co-trustee of his trust leaving only the trustee in the foreign trustee in charge of the money in the trust.

The question is why can’t a judge make Mr. Smith bring back the money from his OAPT?

He has no contractual ability to take money out of the trust (remember he was dropped as a co-trustee).  If the Mr. Smith has no contractual/legal ability to take the money out of the trust, the judge can’t make him do something he has no legal ability to do, i.e., take money out of the trust.  This is called the “impossibility” defense.  It is impossible for Mr. Smith to control the money and bring it back and therefore, the judge can not compel him to do so.  This is important when dealing with contempt of court issues. To read about contempt of court, click here.

Can’t the judge contact the foreign trustee and compel that trustee to bring the money back to the U.S. so it can be handed over to the creditor?

Yes and No.  The judge can get demand whatever he/she wants of the foreign trustee, but since the jurisdiction where the assets are situated does not recognize U.S. judgments, the order from the court is filed in the trash and not followed.

Changing the example (even an OAPT setup incorrectly work)

Assume that Mr. Smith wanted to do his asset protection plan on the cheap and found a non-APS™ rated attorney to setup his OAPT (say for $7,500).  Unfortunately, the trust was setup incorrectly and had Mr. Smith as the co-trustee who did not get dropped as trustee when cardiologist initially filed suit.

Assume the same outcome and now the cardiologist goes to back to the judge and asks the judge to direct Mr. Smith to bring back the money from the trust.  Now Mr. Smith does have the legal power to bring back the money because he is a co-trustee.  Mr. Smith tells the judge thanks but no thanks, he’d rather not bring the money back.

What can the judge to then?  The judge can throw Mr. Smith in jail for contempt of court.  If the judge tries to get the foreign co-trustee to bring back the money, that trustee will still ignore the judge because the judgment is not recognized in the foreign jurisdiction.

So the creditor/cardiologist wins, right? Wrong, if Mr. Smith is willing to wait out his term in jail for contempt (which will probably not last longer than 3-4 months), when he gets out the money will still be in his offshore trust.  He’ll have to go overseas to use the money, but the point to the story is simple.

Even an OAPT setup incorrectly works to protect asset from judgments issues by U.S. courts.

Does the money actually have to be moved offshore?

NO.

Classic quality planning uses a domestic LLC which will own your stocks and mutual funds or other liquid portfolio.  That LLC will be owned by the OAPT.

ONLY when and if there is a claim filed against you will the asset be removed from the U.S. and moved to the foreign jurisdiction.

Can the creditor file suit in the offshore jurisdiction and get the money?

It would be highly unlikely and very pricey.  A creditor could go to the foreign jurisdiction and re-litigate the case.  If the trust is setup in the proper jurisdiction, the creditor will have to post an expensive bond in case he/she loses.  The creditor will have to have a new trial where the burden of proof is “beyond a reasonable doubt” and not “by a preponderance” of the evidence.  The creditor will have to get the witnesses there to testify.  If the creditor does all that and happens to win, what will happen in the real world is that the trustee will move all the money from that jurisdiction to another prior to the end of the trial and when a favorable judgment comes down, there will be no money in the jurisdiction to seize.  Then what? The creditor will have to start all over when they find out which jurisdiction the money moved to.

Summary on OAPTs

Do you see our point and why an OAPT is so powerful?  It is not subject to the laws of the U.S.and the crazy/illogical things that locally elected judges can do.

What does that mean to you? If you want to have your money as protected as it can be from creditors of all kinds, you should have that money transferred and owned by an OAPT.

Other Offshore Asset Protection Tools

1) Offshore Limited Liability Companies (LLCs)

2) Closely Held Insurance Companies (CIC or Captive)

Please click on the above tools for further reading material.

To find rated APS™ advisor who can help you with your offshore asset protection planning needs, please click here.