When going Offshore is Best

In the simplest form, Asset Protection works by limiting or even removing access to the assets from the legal system, courts and potential creditors.  This can be done in two ways:

The first approach is to keep the assets in the United States and attempt to limit access to those assets by putting them inside of a legal structure like an LLC or Limited Partnership and even a Trust.  These entities provide a "Corporate Shield" and limit a creditors access to a charging order.  While this is a great start and appropriate for many types of liabilities, there are limitations;

1. Courts have the discretion to “pierce the corporate veil” under several legal theories which undoes the protection offered by a domestic entity.
2. Courts may reverse a transfer to a domestic entity if the transfer has been made after or in anticipation of a creditor threat under the legal theory of fraudulent conveyance.
3. Courts may simply disregard an entity as the alter-ego of the debtor and deem the assets the property of the debtor and hence reach the assets directly to satisfy a creditor.

The second approach is to move the assets outside of the United States to a specifically designed Trust which allows the Debtor to use and benefit from the assets while removing the assets from the jurisdiction, discretion and reach of the U.S. Court system. 

While the courts may still apply all three of the same limitations as the domestic structure above, the critical difference is that since the assets are outside of the US, the courts would have no jurisdiction to actually retrieve the assets.  This leaves the debtor in a much stronger position to negotiate with a creditor and ultimately provides for true protection of the assets.

In 95% of the cases I see, leaving the assets in the United States is the best way to start.  The biggest benefit of this approach is that it leaves the U.S. person who owns the assets in direct control of those assets.  This also allows for investment in Real Estate, which is an asset class held by most asset protection clients.  This works particularly well, when combined with the ability to go offshore at a later date through the use of The Bridge Trust^®. 

However, there are cases where going directly offshore is the better choice.  The first and most important is when there is an existing judgement against a client.  The challenged posed by working with a client that has an existing judgement is that the risk of a transfer being deemed a fraudulent conveyance by a court is very high. 

If you combine the high probability of a fraudulent conveyance ruling with the fact that the assets are physically located in the United States, then the asset protection value of a domestic only structure becomes highly questionable.  In many cases, with an existing judgement, going offshore may not be advisable at all. This will depend on the specific facts of the case. 

There are mitigating factors which also must be considered such as the size of the judgement and the current amount, location and title to the assets.  If the judgement size is small compared to the overall assets, and the assets are already inside of domestic corporate structures, then adding an Asset Protection Trust but keeping the assets in the United States is a realistic option.

If, on the other hand, the size of the judgement is large compared to the overall assets, then keeping the assets in the United States becomes much more problematic.  This is true because the fraudulent conveyance, or other remedy, available to a judge in the U.S. can directly impact the safety of the U.S. based assets. In other words, a judge can directly step in and seize the assets.  This is particularly true when the assets are U.S. based real estate.

If the latter is the case, then the solution is to create a fully foreign asset protection trust, and move the bulk, or all, of the assets offshore to a jurisdiction which cannot be reached by a U.S. court and creditor.  This works exceedingly well for cash and liquid assets.  Real estate may also be held by a foreign trust, but because it cannot be physically moved offshore, if a judge ultimately disregard any of the entities, U.S. based real estate may still be at risk.  This can be mitigated by being prepared to mortgage, or liquidate the U.S. based real estate once a creditor attack becomes imminent.

Can assets still be held in the U.S., including Real Estate?  The answer is yes, at least for some period of time, assets may still be held in the U.S.  This is particularly true if the timing on the potential collection of a U.S. judgement may be several years away.  The caveat, as mentioned above, is that the debtor should be prepared to move the U.S. based assets offshore if and when the creditor attack eventually comes.  To do this, some of the assets should already be offshore to have the channel open and ready to receive the additional assets when the time comes.

The second fact pattern that calls for going offshore first is when the potential claim involves a Super Creditor, such as any U.S. Government Agency or authority.  While these cases are rare, the risk of complete loss becomes very high.  Additionally, my experience has shown that the rules that apply to mere mortal judgement creditors are often bent or suspended when it comes to a Super Creditor.  For clients who have no existing issues, but nevertheless are in a position or industry that has the potential to attract a Super Creditor, the best approach is to start with a fully foreign asset protection trust as well as a Swiss banking relationship. Super Creditors can appear with stunning speed and force and can leave little time to take further action without adding unreasonably to the risk.

The Takeaway

I have witnessed Asset Protection to be one of the most liberating steps my clients can take to increase confidence in their financial future.

For most of my clients, a combination of domestic and foreign planning using The Bridge Trust^® strikes the right balance between the mitigation of the risks, the costs, the control, the compliance and the ultimate effectiveness of the planning; however, when justified by the circumstances, the fully foreign asset protection trust can provide the ultimate protection when nothing else can.

About the Author  

Douglass S. Lodmell, J.D., LL.M., is the Managing Partner and Co-Founder of Lodmell & Lodmell, P.C. He has authored numerous articles for professional journals as well as a popular book about the explosion of lawsuits in America called The Lawsuit Lottery: The Hijacking of Justice in America.

Doug’s extensive experience in asset protection make him a frequent guest speaker at professional conferences and seminars throughout the country, as well as teaching concepts of asset protection to other attorneys at continuing legal education seminars nationwide.

A nationally recognized expert in the area of Asset Protection, Mr. Lodmell holds a Juris Doctorate from the Cardozo School of Law and an advanced law degree (LL.M.) in Taxation from NYU School of Law and is a member of both the Arizona and Florida Bar.