Foreign Trust Survives Creditor Challenge
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Foreign Trust Survives Creditor Challenge

02/25/2013

Offshore Asset Protection Sound, Legal and Effective

Two recent news stories have led to hasty and unfounded pronouncements of the “death of offshore asset protection”. The first was the theft of confidential banking information from a foreign bank and its sale to German tax authorities. The second was the subsequent exposure of banking giant UBS as a promoter of U.S. tax fraud. Both stories have at their core tax fraud involving strategies based on “hiding assets”. We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection. The following actual case study proves that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective.

In 2004, one of our clients established an irrevocable asset protection trust in Liechtenstein with funds totaling $1.2 million. The client filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income.

In 2006, a U.S. creditor obtained a New York state judgment of more than $1 million against the client. Shortly thereafter, the judgment creditor served a restraining notice against the client’s U.S. assets. However, the client had minimal attachable assets in the U.S.

Frustrated with the lack of attachable U.S. assets, in 2008 the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. The creditor argued that because the client had established the trust, and because the client was a beneficiary of the trust, our client had a right to trust assets which was attachable by the U.S. creditor.

A lower Liechtenstein court temporarily restrained the trustee from transferring trust assets while that court considered the U.S. creditor’s claim. However, an appellate-level Liechtenstein court quickly determined that our client had no “right” to trust assets that was attachable because the trust was a discretionary trust. Therefore the Liechtenstein courts lacked jurisdiction over our client. The appellate court cancelled the restraint on trust assets. Thus, the trust assets were protected from the creditor’s U.S. judgment. Incidentally, the U.S. creditor was required to deposit $100,000 with the Liechtenstein court to cover our client’s legal costs.

The Supreme Court of Liechtenstein affirmed the decision of the appellate court, effectively dismissing the creditor’s challenge against the trust. Our client’s assets remain safe and secure in Liechtenstein. In addition, the creditor was ordered to pay the legal fees of the trust and our client.

This case is instructive in a number of ways. First, the ultimate lesson here is that despite the legal challenge by a U.S. creditor, the Liechtenstein trust assets remain safe and protected. The U.S. creditor was forced to commence a new action in a foreign jurisdiction, pay legal fees in advance (contingency fees are not allowed in good offshore jurisdictions), and overcome short statutes of limitations and prohibitive burdens of proof. With the odds so strongly stacked against him, the U.S. creditor lost and also paid our client’s legal fees.

Second, the trust was impenetrable because distributions to the U.S. client were completely discretionary by the Liechtenstein trustee. This was the basis for the appellate court’s ruling that the U.S. client had no claim to trust assets. This demonstrates that for effective offshore asset protection, the U.S. client must part with legal control of the assets. However, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who will, in fact, be sympathetic to the client’s needs and wishes.

Third, clients who protect their assets offshore must still disclose those assets, and all gains thereon, to the IRS. Clients cannot expect their assets to be “hidden” – neither from their creditors nor from the IRS. The assets will be protected offshore, but taxes are still due and reporting requirements must be met in order for the asset protection to be effective.

Finally, this case demonstrates that offshore asset protection is very much alive and 100% effective, provided that it is done properly and tax compliantly. “Hiding” assets does not work; “protecting” assets does.