Simple LLCs have long been popular asset protection tools in the US, but their effectiveness has been curtailed by recent court decisions such as the Olmstead case – see below. Peter Macfarlane looks at how an Offshore Asset Protection Trust can increase security of ownership on US domestic assets in an LLC.

From an asset protection specialist’s point of view, protecting US-based assets is becoming more and more difficult, with judges showing less and less respect for the nominal protection offered by entities such as domestic LLCs. Both the court system and the government there show worrying tendencies to override the inviolability of private property rights, on which the country was founded.

When asked by clients how to protect assets, the only sure answer is – to use the words of the late W.G. Hill – to “get your money out of the country, before your country gets your money out of you!” That means, taken to its logical extreme, obtaining a second passport, departing US shores and renouncing US citizenship.

I’m the first to admit, however, that this is not always practical. There are still compelling reasons why someone might want to own US based assets. This article is about how to protect them.

A caveat here: if assets are physically in the US, they can be controlled by a US court. What we can do is make it more difficult, and much more expensive, for any plaintiff to claim those assets – hopefully to the point where they won’t bother trying. In my view, if you have any substantial US assets, the cost of the structure I will recommend in this article is minimal and it’s a good insurance policy to buy anyway.

LLCs have been a very popular asset protection tool over the years. LLCs are an excellent invention – simple, flexible and offering the legal protection of limited liability, even for individuals who can create single member LLCs.

An LLC on its own, however, no longer offers sufficient protection. For example, in September last year the United States Court of Appeals affirmed a lower court decision in Olmstead, et al v. Federal Trade Commission that the district court may enter an order “compelling the defendants to surrender all right, title and interest in their single member LLCs.”

Effectively, the single member can be forced to give up the ‘asset’ vested in this right, title and interest – so the judgment creditor becomes the new owner of the LLC and can therefore choose to wind it up, continue it or sell of part of its assets.

Anyone who has been relying on the limited liability offered by such LLCs is now on notice – they need to restructure their affairs urgently, with the help of a good asset protection attorney. I say urgently, because if a claim arises in the future, the court will look back a number of years in order to determine whether the restructuring was detrimental to the creditors. The longer the structure has been in place, the safer it is.

Possible Solution: Using an Offshore Member LLC and Offshore Asset Protection Trust

The ownership from offshore of such an LLC is a viable alternative in many cases. Utilizing a second member (ideally with a substantial part of the ownership) in the domestic LLC will limit the ability of a creditor to take control of the domestic LLC. In this case, the creditor will be restricted to a charging order against the ‘transferable interest’ of the judgement debtor. The transferable interest is the right to receive distributions, but not the right to become involved in management.

Where this second member is an offshore LLC, the second member will be beyond the jurisdiction of the US courts in the event of litigation affecting membership interests. This is where the ‘offshore deterrent factor’ comes in. Nevis and the Cook Islands are recognized as the best offshore asset protection jurisdictions in the world. My preference is for Nevis, with its laws specifically written by and for US lawyers and business people.

Let’s say a Nevis LLC with a Nevis manager is a member of the domestic LLC – in this case, the creditor would need to proceed with legal action in the Nevis courts. Nevis courts are, of course, notoriously friendly for asset protection purposes. There are no contingent fee lawyers in Nevis – anyone seeking to take action there would have to post a substantial bond with the court, and it is frankly unlikely that such an action would succeed. Hence, the deterrent effect. (Further details, advantages and explanations of Nevis LLCs can be found in my free report, Untouchable Wealth.)

Setting up an Offshore Asset Protection Trust (OAPT) is feasible for Americans, since the compliance requirements are relatively simple. Such a trust is not a tax avoidance device – it is typically structured as a grantor trust. The person setting up the trust must report all the trust’s income on his or her US federal tax return, and comply with certain reporting requirements. (These reporting requirements are beyond the scope of this article, but any good US tax preparer should be able to help.)

The OAPT must be a discretionary trust, so that the trustee has the legal freedom to ignore instructions given by the client. This point is very important, as it removes the possibility that the US court can instruct the grantor to give instructions to the trustee to pay over assets to a judgement creditor.  There is, however, the possibility to use a Private Trust Company as a trustee. This is a special company, based offshore, that has no assets, bank accounts or income of its own. Its only role is to serve as trustee of the OAPT. This way, the client can maintain greater control of the OAPT without compromising its offshore asset protection features, and there is no need to retain the services of an offshore trust company.

The OAPT’s trust deed should also include some important provisions like a “duress clause” and a “flee clause”.  The duress clause specifically prohibits the trustee from acting under duress (ie, forcibly based on orders from a US court). The flee clause require the trustee to redomicile the OAPT to another jurisdiction and automatically replace the trustee in the event of an attempted action by a judgement creditor. The trustee is also forbidden to disclose to any creditor the details of the flee provisions, or the fact that they have been implemented. The creditor is therefore left with no idea where in the world the OAPT and its new trustee may now be located.

By having the OAPT own the offshore LLC that in turn is a member of the domestic LLC, you achieve a strong degree of asset protection for a relatively low cost. The membership interest in the offshore LLC is beyond the reach of the US courts and is in a holding structure that is not controlled by the ultimate beneficial owner.

Once you’ve secured your assets offshore in a protected structure, what next? How do you put them to work for you? How do you really ‘create wealth offshore’?

Certainly there’s no point in keeping much cash in an offshore bank account. Interest rates are at record lows, and offshore banks typically pay lower interest rates even than what you are used to offshore. Precious metals like gold and silver are an essential part of any portfolio… but you don’t want to keep all your assets in those, either. Stock markets are good for speculation with a small amount of capital, but frankly they are so manipulated that you as a small player will depend more on luck than judgement.

That leaves one asset class that we haven’t covered for a while: alternative offshore investments, like private offshore hedge funds. I’m moved to write about these because in the last week I’ve come across a couple of interesting opportunities from people I trust.

A WARNING AND CAVEAT FIRST
Those last three words are very important: ‘people I trust.’ Offshore investments are generally subject to little or no regulation. They are intended for sophisticated investors. Unfortunately there are some people out there who are just bad investment managers, and worse are outright offshore investment scams, so you need to go with people you trust.

The good thing, however, is that with alternative investments you can have a much greater involvement with management. You can typically get to interact and meet with managers. One of the opportunities I heard about this week even includes the fringe benefit of being able to use properties owned by the fund in South America.

So it’s all about finding people you trust. The very best way to do this is to get on a plane and do your due diligence in person, seeking second and third opinions along the way. Fortunately, there are people who can point you in the right direction by providing you with the benefits of their research as you start off. In this week’s free Q Bytes newsletter that has just gone out to subscribers, I mention three such people. I won’t name them here because I want to respect their privacy, but if you don’t want to miss out in future, be sure to sign up for Q Bytes.
FOR SOPHISTICATED INVESTORS ONLY

When investing in this kind of opportunity, who you know is everything. Funds like this don’t accept investments from the public, and even less from US residents unless they can certify themselves as sophisticated investors. Fortunately, such limitations don’t apply to participations from entities like Panama offshore corporations, Panama Foundations, or offshore LLCs, though entry levels are typically six figures.

I’m keen on Latin America not least because of resource investment opportunities. And earlier this year a number of Q Wealth readers got involved via Linda Dixon, our long-time  friend from Canada who moved into the gold and silver business in Peru and few years ago, with an alternative investment in a silver mine. These investments are coming to fruition now with huge returns. I talked to Linda a couple of weeks ago and she is preparing some interesting articles and videos for us, that will be available shortly in the Members Area.

If you don’t yet have access to our Members Area, you can see a summary of benefits (in essence, a list of all the info and tools you are missing out on) right here
Another trusted friend who has made a detailed study of alternative investments in frontier markets lately founded Alternative Latin Investor. Nate has been based in Buenos Aires for quite some time, and is just back from a four-month stint in Africa seeking to expand coverage of frontier markets over there. I’m trying to persuade him to join us on our residence, citizenship and investment trip to Paraguay this coming January.

Nate is putting on a very interesting webinar with some big-name experts on alternative investments in Latin America. It is scheduled for November 10th and requires advance registration – with an early bird discount before November 2nd.
NEW PETER MACFARLANE INFO SITE
Finally, just a notification that the new Peter Macfarlane & Associates site is finished. It’s nothing flashy or exciting, but explains a little more about why my consulting firm does in terms of corporate structuring, precious metals and second citizenships. Feel free to check it out at http://www.petermacfarlane.info

A guest post by the Editors of BIG GOLD for The Q Wealth Report

(NB: we understand that many of our readers are not US persons and so this article may not be directly relevant to them, but there are other similar options for Individual Savings and Retirement Type accounts in other countries, so maybe this could apply to you too. If you are American – this is for you. If you’re already offshore, you don’t need this…)

In a recent article Gold in IRAs – a Safe Haven Nest Egg for Americans? at petermacfarlane.net we considered the pros and cons of putting gold bullion into a self-directed IRA and detailed how to do it. But the arrangements we covered were entirely domestic.

What about having your IRA hold gold offshore? It can be done, but before you go to the trouble, ask why. Your IRA would still be subject to U.S. law, and your IRA custodian would still be in the U.S., regardless of where the assets are.

One possible reason is protection from future creditors, especially of the lawsuit variety. If your IRA exceeds a million dollars, or if you live in the wrong state, or if you inherited the IRA, it may be available to anyone who successfully sues you. There are some rather complex arrangements that can move IRA assets (gold or anything else) offshore and make them far more difficult for a creditor to reach. But if that’s your motive, we’d think twice about the loss of control that such programs involve.

An entirely different reason would be to sidestep some future legal interference with gold ownership – if, for example, you think President Obama may become FDR Redux and embrace draconian measures, such as prohibition of ownership, penalty taxes, confiscation, or forced sale at an official price, as in 1933. No preparation for these possibilities can be completely reassuring, since we can’t anticipate exactly what the new rules might be. But something as simple as wrapping the gold in an IRA and storing the metal in a different jurisdiction could allow you to be one of the few remaining Americans who lawfully owns gold.

One easy way to go about this is for your IRA to hold the metal in the form of a Perth Mint certificate. Not all IRA custodians will do this, but some will.

The more sophisticated approach is to use an offshore limited liability company (LLC). Your IRA would own all of the LLC, while you would be the company’s manager and have direct control over its affairs. The LLC, having but one owner, would be eligible for establishment as a “disregarded entity,” so that its assets are treated, for income tax purposes only, as being owned by the IRA. As manager of the LLC, you would file such an election with the IRS, then open an account for the LLC with a suitable foreign institution, and use the account to buy gold.

Is that worth doing? If you want to have gold in an IRA, perhaps because your IRA dominates your financial picture, or if you’re worried about the possibility of gold confiscation, it may be. The costs are the homework you’ll need to do, and annual expenses of $2,000 or so, depending on how good you are at shopping.

To start, you’ll need an IRA custodian (which will be a U.S. institution — it’s your company that’s offshore, not the custodianship), one that specializes in such arrangements. We’ve identified some possibilities, and while we don’t know any of them well enough to give our wholehearted endorsement, you can begin by looking into Sovereign International Pension Services in Palm Harbor, Florida (www.sovereignpensionservices.com) or the Entrust Group in Paoli, Pennsylvania (www.theentrustgroup.com).

The custodian will get the offshore LLC formed for your IRA. Then you can convert all or a portion of your IRA assets to cash and transfer the money to the new custodian, who will invest it as a capital contribution to the LLC. From there on, you, as manager of the LLC, will run the show. You can buy Perth Mint certificates for the LLC or you can have the company purchase bullion from Kitco, Asset Strategies, GoldMoney, or any other seller of your choice. They will then help arrange storage with a vaulting company such as Via Mat International in Zurich, one of the oldest and most reputable.

Probably not many investors will want to go this route. But if you’re one of the few for whom it makes sense, these are the steps to follow.

***

In light of the demise of fiat currencies and the general stock market, more and more investors are flocking to gold as a safe-haven investment. And no one knows more about the hows, wheres, and whys of buying and owning physical gold than the editors of BIG GOLD, Casey Research’s monthly newsletter for the prudent investor.

One caveat: gold is certainly a safe haven and much preferable to some of the unstable investments around, but the fact is, it’s a non-interest-bearing investment. But there’s a strategy that smart investors – like Steven Lehman, the Federated Investors fund manager who beat 99% of his peers last year – are following now… and you can too. If you want to know how to squeeze up to four times more gains out of gold, click here to learn more.