There are many risks and few advantages to using offshore trusts. There are two methods for employing offshore trusts:
1.) exporting the assets and
2.) Importing the foreign law.
Many of the advantages of offshore trusts can now be achieved by using domestic asset protection trusts without the exposure to unnecessary risk and volatility.
Asset Protection Trust
A domestic asset protection trust is an irrevocable trust an individual creates during his or her life to shelter and protect valuable assets. The domestic asset protection trust contains spendthrift provisions to prevent creditors, predators, judgments, and liens from attaching the trust property.
A domestic asset protection trust is unique from simple irrevocable trusts because the grantor of a domestic asset protection trust is permitted to also be a beneficiary, where the grantor of a simple irrevocable trust may not be the beneficiary and receive the same protection as an asset protection trust. The grantor of a simple irrevocable trust may shelter assets in the irrevocable trust, but will not have the same opportunity to benefit from the assets of the trust like the beneficiary of an asset protection trust would.
Individuals wanting the protection of these trusts must employ an attorney in his or her home state as well as an attorney in the state where asset protection trusts are allowed by legislation. Texas does not have a domestic asset protection trust law. There are twelve states that do: Missouri, Alaska, Delaware, Nevada, Rhode Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Oklahoma, and Hawaii.
Domestic asset protection trusts do not shelter individuals from fraudulent transfers. In Texas, a fraudulent transfer is defined as "a transfer made by a debtor if the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor of the debtor."
Transfers to an asset protection trust are considered to be gifts for federal gift tax purposes. This year there is a five million dollar lifetime gift tax exemption. Following a transfer, preparation of a federal gift tax return is mandatory even if the exemption applies.
For a comparison of state laws that permit domestic asset protection trusts, see your attorney.
Assets Exempt from Seizure (Texas)
One strategy for protecting assets is to purchase assets that are exempt from seizure under state law. Texas Property Code Section 42.001 et. Seq. provides a list of property that is exempt from creditors.
1.) Homestead (your primary residence), except taxes, the mortgage company or the builder;
2.) $60,000 in personal property (for a married couple) such as:
3.) A person's right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, and under any annuity or similar contract purchased with assets distributed from that type of plan, and under any retirement annuity or account described by Section 403(b) or 408A of the Internal Revenue Code of 1986, and under any individual retirement account or any individual retirement annuity, including a simplified employee pension plan, and under any health savings account described by Section 223 of the Internal Revenue Code of 1986, is exempt from attachment, execution, and seizure for the satisfaction of debts.
4.) The following types of college savings plans:
You must take affirmative steps to protect your property. You must contact an attorney of your choosing if you receive any correspondence from any court or any attorney, or any other person claiming that you owe money.
Warning: this list is full of exceptions. If you have a question about a specific type of asset, please ask. Do not rely on this webpage.
Even if you own property that is exempt from creditors, you still must defend yourself if a lawsuit is filed against you. You may even be required to disclose which assets you claim are exempt.
Many business owners and successful heads of household tell me that they don’t need to protect assets because they aren’t millionnaires. They say, “I pay my bills,” “I don’t have creditors,” and “I treat my employees and customers right.” I feel blessed to work with such good people. If you have experienced as much “life” as I have in the short amount of time that I have walked the earth, you know, as well as I that sometimes bad things happen to good people. You have probably also seen a friend or family member suffer an economic downturn or medical catastrophe through no fault of their own. I’ll share two additional reasons that you should have started protecting your assets already in this short article.
Sometimes Bad Things Happen to Good People
New Mexico establishments are 66% more likely than establishments in other states of facing equal employment opportunity commission charges from employees. https://www.hiscox.com/shared-documents/The-2015-Hiscox-Guide-to-Employee-Lawsuits-Employee-charge-trends-across-the-United-States.pdf New Mexico may be higher than Texas, but Texas businesses suffer too. “Small businesses bore 81% of business tort liability costs but took in only 22% of revenue.” “Tort Liability Costs for Small Business,” U.S. Chamber Institute for Legal Reform, July 2010, available at http://www.instituteforlegalreform.com/uploads/sites/1/ilr_small_business_2010_0.pdf
It is Less Expensive to Protect Assets than to Defend Lawsuits
Hiring a good attorney with experience protecting assets is worth the legal fees. Establishing trusts or business entities will cost money but will save you stress, anxiety, and is usually a deterrent to frivolous lawsuit filers. According to a representative of the National Federation of Independent Businesses (NFIB), “Frivolous lawsuits are often filed just to harass small business owners but they still cost owners’ legal fees and time which could range from $2,000 to $5,000...Our typical member averages $50,000 a year...If you take $5,000 out that’s a significant hit.” Stephen Parezo, “Frivolous Lawsuits: A serious Threat to Nation’s Small Business,” Smartpros, April 2005, available at http://accounting.smartpros.com/x47861.xml. If you multiply the number of frivolous lawsuits that could be filed over the life of the business, it easy to see how one planning session with a good attorney and follow up checkups through a lawyer on retainer will be well worth it. The average total cost of claims that resulted in a defense and settlement payment nationwide in 2015 was $125,000. https://www.hiscox.com/shared-documents/The-2015-Hiscox-Guide-to-Employee-Lawsuits-Employee-charge-trends-across-the-United-States.pdf
Protecting Your Assets Too Late Might Result in a Court Finding a Fraudulent Transfer
Although courts have ruled that the simplest type of asset protection, i.e. setting up a company, is legal, there are instances when setting up a company purely for asset protection is ipso facto a fraudulent transfer.
Fraudulent transfers (also called fraudulent conveyances) come up in asset protection planning because creditors often claim that the property was transferred after the claim arose. The definition of a fraudulent transfer is fairly broad. A fraudulent transfer is usually a transfer that is made before or after the claim arose with the intent to defraud, hinder, or delay a known or likely creditor. Intent is generally presumed, leaving the defendant with the burden of proof that there was no fraudulent intent, and it is extremely difficult to prove a negative such as this. Courts look at “badges of fraud” including the transfer of non-exempt assets, a transfer for less than full and fair consideration, and insolvency following the transfer. Where the court determines that there was a fraudulent transfer within the applicable statute of limitations the court can set aside the transfer. That is, the court can order the transactions to be reversed so that the creditors can make claims on the assets.
The key to avoiding fraudulent transfer problems is the timing of transfers to an asset protection entity. An asset protection system must be in place before a claim arises in order to get the best possible result. This is not to say that estate and asset protection planning cannot be done under threat of a claim, just that additional design and planning issues will arise.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney
Call Marquardt Law Firm, P.C. to find out whether we are the right law firm for you. We work with clients who are motivated to tax-efficiently protect and preserve assets, reduce family conflict, and maximize government benefits. Our mission is to be the preeminent regional asset protection and wealth preservation law firm.