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Offshore Versus Domestic Asset Protection

7/5/2017 | By: Asher Rubinstein, Esq. | GDB 2017 Summer Newsletter

Offshore Asset Protection

There has been much publicity over the last few years on the erosion of Swiss banking secrecy and the IRS offensive against “secret” foreign accounts, including jail sentences for Americans with non-compliant accounts at UBS and HSBC.  Against this background, it is important to question whether protection of assets by moving them offshore is still viable.  The answer is that offshore asset protection is not only still viable but remains extremely effective against civil creditors, provided that the offshore structure is tax compliant.

Americans can legally invest in foreign markets, own foreign real estate, own foreign businesses, and deposit their assets into foreign bank and brokerage accounts, provided that they disclose their foreign accounts to the U.S. government and pay U.S. tax on foreign income.

Placing assets in a foreign asset protection trust is legal and effective against future creditors.  At the same time, it is crucial to recognize that while the assets are outside of the reach of creditors, they are not outside the reach of the IRS.  Settling a foreign trust, for example, is legal and will safeguard your assets from creditor attack, but the IRS still considers trust assets to be your assets, and you will be obligated to declare and pay income tax on any gains in the foreign trust.  Going offshore for asset protection is a legitimate strategy; going offshore to hide income from the IRS is foolish.

There exist effective, tax compliant offshore strategies to accomplish tax minimization.  These strategies utilize tax-favorable treatment of foreign annuities and foreign life insurance.  Preferential tax treaties between the U.S. and foreign countries are also utilized for tax minimization.  Asset protection is also a byproduct and additional benefit of these offshore tax strategies. 

Domestic Asset Protection

In other cases, domestic asset protection is more appropriate than an offshore approach. 

Domestic asset protection can be totally effective if implemented by individuals with no current claims against them.  Domestic asset protection is also usually used to protect real estate which cannot be moved offshore.

As an added bonus, some structures for asset protection, like the family limited partnership, also offer excellent tax minimization and estate planning benefits. 

The family limited partnership is probably the most beneficial structure available for wealth preservation via asset protection, estate planning and tax minimization.

Who Needs Asset Protection

People sometimes have the misconception that in order to engage an asset protection attorney, they need to have significant wealth.  In fact, many different people, of diverse backgrounds and all levels of affluence, already protect their assets. 

For instance, young entrepreneurs seeking to protect their assets from the risks of their next business ventures; small business owners trying to discourage “deep pocket” or “nuisance” law suits; retirees seeking to preserve their assets for their children and grandchildren; people seeking to protect their home from mounting medical bills; and high net worth individuals with various assets and holdings (personal and business) should consider protecting their assets.  

All types of people, with all types of assets, need asset protection.  You need asset protection if:
  • you are facing a current or expected lawsuit
  • you are in a profession with a high degree of liability (real estate investor, real estate developer, landlord, doctor, lawyer, financial advisor)
  • new laws may impact your business or create new liabilities (e.g., the Fair Labor Standards Act and the proposed “sweat” law in New York state)
  • you are a debtor and/or a guarantor
  • you face a potential tax or other government liability
  • you have accumulated, or are about to receive, significant wealth (e.g., inheritance; investment or business success; vesting event; business buy-out, etc.)
  • you (or your children) are going to get married or divorced
  • you are concerned about the financial viability of your business

Asset protection is an effective legal strategy that can safeguard wealth and assets from attack by future, unsecured creditors.  Proper asset protection is the best pre-emptive defense, and often discourages lawsuits in the first place.  Proper asset protection strategies offer peace of mind and provide the protection needed to withstand the inevitable attacks.