Use of Offshore Asset Protection Trusts in the USA

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.

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