An outline of a presentation given by John W. Ambrecht on August 28, 2000.
I. Introduction
II. Integrated US Estate Planning with Asset Protection Trusts
A. Asset protection planning as an integrated part of the estate planning process
1. Why?
• See July 18, 2000, Santa Barbara News-Press article: Farmer sued by U.S. over wetlands.
• Insurance coverage?
• Entity protection (see article by David S. Neufeld, Esq., "Chinks in the Armor: Piercing the LLC Veil and Other Exposures of Members for LLC Obligations," Asset Protection Journal)
2. What is asset protection planning?
An asset protection plan consists of one or more lawful transfers of assets and/or establishment of structures for holding assets that are primarily undertaken by an individual for estate or business planning reasons and have as a collateral effect the reduction in risk of future and unforeseen creditors being able to reach the assets transferred or held in the established structures.
3. Is it morally acceptable?
• Alaska, Delaware, Nevada
• ABA section on asset protection
• Other standard estate planning and liability planning options (see infra)
4. How?
• Trust: English common law allowing the separation of ownership from use
• Other entities (see infra)
• Can secrecy work as an approach?
Impact on Bankruptcy: possible no discharge (18 USC 152 crimes–up to 5 years in jail; the impact of money laundering rules (see Los Angeles Times, August 25, 1999, article, "Cayman Islands Lifts Veil of Bank Secrecy")
5. Who to protect?
• Settlor(s)
• Beneficiary (children, grandchildren, others)
B. Types of trusts and other entities that can be used for asset protection planning and control implications
The Continuum of Asset Protection [PDF chart viewed in Adobe Acrobat Reader; click here to download the Reader free of charge if you don't have it.]
III. Foreign Based Trusts in Integrated Estate Planning
A. Jurisdictions
- Cook Islands
- Other Jurisdictions
B. Why offshore?
C. What does the Cook Islands have that makes it special?
D. An example of a "pre-crisis" integrated estate plan (see Tom and Ann Smith, attached)
F. What is the impact of an asset protection plan as a part of US litigation: An Event Sequence (see attached) or how an asset protection trust is administered?
1. Three general types of attacks of foreign trusts by US litigators
• Public Policy (policy against self settled trusts)
• Fraudulent transfers (Uniform Fraudulent Transfer Act)
The general principle upon which fraudulent conveyance law rests is that if a court determines that the transfer was fraudulent, a creditor can have the conveyance set aside.
Present creditors, future subsequent creditors, future potential creditors (see California Civil code section 3439.04) and the due diligence requirement (see Ca. Penal Code section 531, attached)
• Sham transactions versus the nest egg approach
2. The Anderson Case
G. Trustee fees
H. Legal fees
IV. The Income Tax Consequences of Offshore Trusts
A. The Grantor trust rules: All trust income is reported on the grantor's income tax returns.
B. What is a foreign trust?
• Effective for all trusts for trust taxable years ending after February 2, 1999, the Small Business Jobs Protections Act of 1996 as amended by the Tax Relief Act of 1997, sections 7701(a)(30(E) and 7701(a)(31(B): now a trust must satisfy two tests otherwise all trusts are foreign trusts
Test 1: The Court Test: US court is able to exercise primary supervision (i.e. a US court to determine substantially all issues regarding the administration of the trust BUT SEE if the trust has an automatic migration clause.
Test 2: The Control Test: US person(s) have the authority to control ALL SUBSTANTIAL DECISIONS.
CAVEAT: A US trust can become a foreign trust if, for example, a non US person becomes the trustee!
C. What are some of the reporting requirements for a foreign trust?
• All transfers by US persons to foreign trusts must be reported on Forms 3520 and 3520A. Note: these are not income tax forms but only informational forms.
• Failure to file the forms may be subject to a penalty of up to 35% of the trust assets!
D. What are the annual accounting fees?
E. CAVEAT: Abusive Tax Schemes and the IRS (see memo from Criminal Investigation Division, IRS, dated April, 2000)
V. Conclusion
A well designed and timely asset protection trust that is integrated within the overall estate planning structure will significantly enhance asset protection for its beneficiaries.
The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herein.
This page: www.taxlawsb.com/resources/estates/assetout.htm
Updated September, 2000
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