Anne Fasbee was a senior tax partner in the Los Angeles office of a national accounting firm. She was a proud professional who was
thorough and ethical in her work. She was also extremely hard working and successful. By the time she was in her early forties, she was
earning a hefty salary and had managed to accumulate a sizable net worth.
Anne was as diligent with her personal affairs as she was with her clients' affairs. Her and her spouse's estates
were as planned as they could be (or at least so they thought), with pour-over wills, revocable living trusts, durable springing powers of
attorney, living wills, a recently funded irrevocable insurance trust, a trust for each of their three children, burial instructions, and a
charitable remainder unitrust. The Fasbee financial plan was also finely tuned, with net after tax returns for the previous several years
averaging well into the upper reaches of ten something. Unfortunately, as well-planned as the Fasbees were, one very important form of
planning soon became quite conspicuous by its absence.
The first of a series of lawsuits was served upon Anne's accounting firm in September of 1987, shortly after the
Fasbee family returned from three weeks in Spain and Italy. This suit was a class-action suit alleging, among other things, that fraudulent
and misleading financial statements were prepared by the firm's Houston office in connection with a public offering of subordinated
debentures. The next two suits involved allegedly faulty tax opinion letters rendered by the firm through its offices in Denver and Chicago.
Several other suits followed as well. After failing to have two adverse judgments reversed on appeal and following the tremendous drains on
the firm's cash and other resources due to the strains and expenses of "fighting the battles," the partners voted to seek federal
bankruptcy protection for the firm. As a consequence, many of the firm's partners had no choice but to do the same. This included Anne, and as
a consequence her spouse as well, due to the Fasbees residing in a community property state wherein community assets were available to satisfy
the separate debts of either spouse.
At last report, Anne was a single parent and solo practitioner sharing office space with a number of other
professionals. By this most unfortunate personal experience, Anne learned that all of her sophisticated estate and financial planning was of
little value to an estate that was itself of little value. Had the Fasbees included appropriate asset protection planning as part of their
overall planning, the ultimate outcome of their misfortunes would more than likely have been much more favorable. It certainly would not have
been any worse.
Definition of Asset Protection Planning
Asset protection planning may be simply described as the process of organizing one's assets and affairs in advance so
as to guard them from loss by reason of some future fiscal calamity. The phrase "in advance" warrants strong emphasis, for one
(including the planner) must be cautious and avoid the negative implications which may follow from planning to protect assets other than in
advance, that is, when there are creditors who are entitled to remedies under applicable fraudulent conveyance and similar laws.
Asset protection planning concepts may be applied to protect every type of asset, whether cash, stocks, bonds,
business interests, insurance proceeds, jewelry, art, antiques, real property, and so on. While asset protection planning is typically applied
in the context of protecting individually accumulated wealth, a number of applications exist for the operating business or professional
practice.
Why Asset Protection Planning
The idea of guarding in advance against the potential of a future legal liability is not a new one. Indeed, today an
attorney who fails to advise a client to incorporate a business to protect the business owner against the personal risks of owning and
operating a business would no doubt wish his or her own asset protection planning was in place. A number of factors have evolved through the
course of the 1980's, however, that make persons with wealth not only more aware of the need to engage in some form of protective planning,
but which in fact leave those who fail to plan more exposed than ever before. These factors are as follow:
1. Expanding Theories of Liability—By definition, a system whose legal decisions are based on legal
precedent will be subject to expansion of its theories of liability, for each decision in the chain will set the stage for the next step of
expansion. This, coupled with the increasing willingness of judges and juries to expand a theory of liability, leave a tremendous amount of
uncertainty and exposure for the person who has relied on traditional forms of planning.
For example, a recent Colorado case held that an accounting firm was liable to pay an employee's surviving spouse the
employee's salary for the rest of the surviving spouse's lifetime, when the employee was attacked and killed as she left work one evening. The
court stated that "[t]his death arose out of and was in the course of her employment," as if being brutalized was part of her
duties, and totally ignoring the fact that the person who committed the crime was entirely to blame. Is the next step for a court to hold a
company liable if the employee chokes on a sandwich in the lunchroom?
Ten years ago, the idea that a smoker who developed lung disease would sue a tobacco company seemed ludicrous, while
today we have become familiar with this theory of legal liability. Is it possible that in 10 years we will become familiar with carnivores
with heart disease suing the corner store where they had over the years purchased their red meat?
2. Result-Oriented Judges and Juries—A recent survey conducted by the American Bar Association concludes
that the personal opinions of judges often enter into the decisions rendered, to the (at least) partial exclusion of what the law provides the
result should be. Furthermore, a "someone must pay" attitude seems prevalent in our society today.
Political reasons are another factor. To quote a justice of a state's highest court from his recent book: "As long
as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my
sleep enhanced when I give someone else's money away, but so is my job security, because in-state plaintiffs, their families and their friends
will reelect me,"
3. Outrageous Jury Awards—Consider the case of a man who was hit by a subway train and lost an arm after he
fell drunk onto the tracks. A jury awarded him $9.3 million. The plaintiff, a Mexico citizen who had been in the United States for six months
working as a dishwasher before the accident occurred, responded by exclaiming "God bless America."
Another example involves a $55.7 million jury award against Woodmen of the World Life Insurance Company whose representative
"improperly persuaded" the plaintiff to invest her life's savings in insurance products.
4. Concerns with Traditional Forms of Protection—The corporate veil is seemingly more piercable than ever
before. Concerns with insurance coverage exist as well, whether it is with the solvency of the carrier, its continued willingness to write
coverage, the existence of policy exclusions (e.g., punitive damages or damages which result from acts of gross negligence) or the like.
5. Jury of One's Peers—Those of means who have ever considered the question generally feel that there would
probably never be such a thing as a jury of their peers. Few litigators could claim lo have ever tried a case before a jury comprised of
individuals the average net worth of whom even approached that of the wealthy defendant.
6. Deep-Pocket Syndrome—An ongoing advertising campaign by an asset search firm shows two lawyers huddled
over a table with one of the lawyers commenting to the other that "the defendant has assets, so let's proceed." The converse to this
would be that "the defendant doesn't have much, so let's not bother."
The golden rule used lo be that "he with the gold, rules." The new golden rule may well be "he with the
gold, pays."
Many good arguments may be advanced on behalf of the contingency fee system. At least as many good arguments may be advanced
against such a system, including the manner in which it fuels litigation and otherwise often results in groundless or frivolous suits being
brought by a plaintiff's counsel whose hope is to roll the settlement dice with the client rather than to proceed to a trial on the merits.
7. Once You've Been Sued You've Lost—Imagine a scenario wherein a defendant is found not liable five years
and hundreds of thousands of dollars in legal fees after the initial complaint was filed. In the interim, the defendant has had many sleepless
nights and has suffered tremendously both in terms of anxiety and inconvenience. The business and marriage have also suffered from absences
and distractions. But ... he won!?! Perhaps it would have been preferable to have either discouraged the suit in the first
place, or to have been in a position to encourage an early and cheap settlement.
In his book, The Litigation Explosion, Walter Olson argues that "[a] litigator can come around, dump a pile
of papers on your front lawn and you can go literally broke trying to respond to it." Speaking of which . . .
8. The Litigation Explosion—It is unfortunate that efforts at tort reform have done little to curb the ever
increasing spiral of lawsuits. It was reported by The Wall Street Journal on May 7, 1991. that "[nearly 100 million new cases were
added to the dockets of the nation's state court system in 1989. with new filings of civil damage suits up sharply from the year before."
This number does not include the numerous new cases that were added lo the federal dockets that same year.
Goals of Asset Protection Planning
Having defined asset protection planning, and having analyzed the reasons why this form of planning is increasingly
becoming of interest to persons of means, the goals that are sought to be achieved through asset protection planning will be reviewed next.
1. Create a User-Friendly Plan—Planners sometimes too easily forget that most clients are lay persons who
must live within the confines of a plan of whatever nature that may be designed for them. Asset protection plans that consist of a myriad of
entities designed to obfuscate and confuse third parties may also serve to confuse and frustrate the client. A properly designed structure
that works because it is sound in legal theory and operation, rather than because it is complex, is not only better for the client but
ultimately more protective as well.
2. Deter Litigation—Avoiding the Deep Pocket Syndrome by reducing the size of the target may itself
accomplish much in the asset protection context.
3. Provide Incentive for an Early and Cheap Settlement—Economics drives the legal system. Personal
experience proves that much can be achieved by knocking the "profit" out of the pursuit and by being able lo demonstrate to a suitor
that being paid is not the given it was expected to be. Any seasoned litigator would confirm that it is one thing to win a judgment and
another thing to collect a judgment.
4. Level the Litigation Playing Field—A defendant who has no asset protection planning in place will have
fewer strategies and defensive maneuvers available at critical points during the course of litigation. A properly designed asset protection
plan will, by its nature, create numerous issues with which some future adversary would have to contend.
5. Enhance One's Bargaining Position—Throughout the course of litigation, one who has a well designed plan
in place will have the benefit of a vastly improved negotiating posture that will result from the mere fact that the planning was properly
conceived and implemented.
6. Provide Options as the Game Is Played—A well tailored plan will not tie the client's hands or lock the
client into a course of action that must be followed regardless of what happens. Rather, it will provide a series of options that would not
otherwise exist, whether the client's seas are calm or stormy.
7. Win the Game—Proper planning will create a series of hurdles that the opponent must clear. Realizing
that an angry, deep-pocket and emotional plaintiff may have the stamina and strength to clear the hurdles, the planning must ultimately work
because it is legally sound. Therefore, a proper plan will build a brick wall on the other side of the last hurdle.
Finally, it is important to note that the plan should be designed to ultimately protect against any potential
adversary. Life is more random and less lineal than we would like to think. Thus, a client may have some sort of free-floating anxiety over
the possibility of a professional malpractice claim being filed at some point in the future. However, a problem of a completely different
nature (e.g., a dispute resulting from a future business transaction) could certainly develop. By definilion, the proper plan must protect
against future perils of whatever source or nature.
What Asset Protection Planning Is Not
It is as important to know what asset protection planning is not as it is to know what it is. In this author's view, asset
protection planning is:
1. Not Based on Hiding Assets—Hiding assets can be dangerous and, therefore, an asset protection plan that
is based on such an approach is dangerous. The dangers arise from the likelihood that the client will have to make a choice between protecting
assets and committing perjury if the client becomes involved in litigation. Whether or not the client ever becomes embroiled in litigation,
the client may face some difficult decisions each year when the client's Form 1040 is filed, for full disclosure on a tax return is certainly
inconsistent with planning based on secreting assets. Further, depending on whom the creditor turns out to be, hiding assets may carry with it
certain criminal implications. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a
user-friendly plan.
While many clients appreciate the confidentiality that can be obtained through an asset protection plan, a properly
devised plan will not rely on secrecy to be successful.
2. Not an Excuse to Defraud Creditors—Uncertainty appears in the planning community as to when asset
protection planning can be implemented, and the extent to which it can be implemented at a given point in time. The "while" cases
are easy to identify as those that involve an individual with neither pending nor threatened claims nor any reason to believe that a legal
problem will develop in the future, but who nevertheless wishes to protect against the "what if." The "black" cases are
also easy to identify as those that involve an individual who is on the brink of bankruptcy (although pre-bankruptcy planning may offer some
hope for such a person). In between are the many shades of gray.
Fraudulent conveyance law varies by slate. A statutory body of fraudulent conveyance law applicable to certain
situations exists at the federal level as well. For the good of the client and the planner, an asset protection plan must be implemented
within the bounds of propriety as defined by reference to applicable fraudulent conveyance law.
Our common law system favors the free alienability of property. As a result, one who is free from creditor concerns is
absolutely free to dispose of his or her property as he or she sees fit. The person may see fit to make gifts to charities or to his or her
children. Gifts to a spouse, whether outright or in trust, are also well within the realm of the ordinary as are gifts in trust for the
benefit of members of the client's immediate family. Fraudulent conveyance laws tend to focus not on who is the transferee but rather on the
intent of the transferor at the time of the transfer.
Fraudulent conveyance law generally protects present creditors and subsequent creditors from transfers made by a person
who is or forseeably will become their debtor. The class known as subsequent creditors does not, however, include every person who becomes a
creditor at some point in the future. Accordingly, another class of creditors exists that may be labeled "future potential"
creditors. The distinctions are clarified rather simply in a recent Florida decision wherein it is stated that asset transfers are entirely
permissible as to one's possible creditors, but not as to one's probable creditors.
3. Not an Excuse for Evading Taxes—Some clients and some advisors are attracted to asset protection
planning by tax advantages they hope to find. This is particularly true when the planning approach involves the use of foreign entities. As
relatively few tax maneuvers involving foreign entities exist today for a global investor, a well designed asset protection plan will have no
particular income, gift or estate tax advantage other than familiar estate tax advantages that can be accomplished through tax-oriented
approaches found in inter vivos or testamentary trusts. Importantly, a well designed asset protection plan will have no particular income,
gift, excise, or estate tax disadvantages, either domestically or abroad. Both the planner and the client should be aware on an ongoing basis
that certain tax issues will exist, which tend to be no different or more involved than those associated with entities of the type with which
clients and their planners tend to be familiar. Tax neutrality will, therefore, prevail for the proper plan.
Domestic Family Limited Partnerships
Family limited partnerships (FLPs) have become a popular tool for protecting accumulated wealth. Assets that would
otherwise be attractive to a creditor are rendered unattractive by transferring them to an FLP in exchange for general and limited interests
therein. Following the transfers, the transferor owns the partnership interest(s) rather than the transferred assets. Most state partnership
laws provide that a creditor's remedy against a limited partnership is to obtain a "charging order," which is typically a rather
limited remedy. Moreover, a creditor who has successfully obtained a charging order against interests in a limited partnership runs the risk
of receiving phantom income from the partnership pursuant to Rev. Rul. 77-137.
FLPs are not only useful in rendering attractive assets unattractive, but are also useful in separating ownership
from control. Even though substantial value can be gifted through transfers (either outright or in trust) of limited partner's interests,
control over partnership assets as well as possession thereof can be retained by the client who retains the general partner's interest.
As useful as FLPs may be, they are not the panacea that some believe them to be. A number of disadvantages exist in
the use of FLPs:
(1) The client remains subject to the whims of the domestic system by limiting the client's planning to domestic tools. FLPs arc most
useful when the limited partnership interests are gifted to a foreign situs asset protection trust (APT), APT's are discussed in detail
below.
(2) A client will be limited in his ability to freely access partnership assets if a charging order has been obtained by
a creditor.
(3) Concern exists that a principal purpose for the creation and funding of a partnership other than protecting assets
may be imposed by a court, and as such the charging order may not be the sole remedy of the creditor.
(4) Independent of the "principal purpose" concern is the issue of whether the charging order is in fact a
creditor's "sole remedy." A recent California case (Centurion Corporation v. Crocker National Bank, 255 Cal.Rptr. 794
(Cal.App. I Dist. 1989)) held that a judgment creditor was not limited in its collection remedies to obtaining a charging order and was in
fact able to attach and sell a limited partner's interest in an FLP towards satisfaction of the judgment the creditor had obtained some
years earlier but which remained unsatisfied. Although the facts of this case are relatively narrow, the case can certainly serve as
precedent for another court's adverse FLP decision in the future.
Thus, although an FLP offers a number of asset protection planning benefits, a person of means who limits his or
her planning to an FLP will be compromising both the degree of protection and the number of options that otherwise would be available if a
legal problem were to develop.
Domestic Trusts
A trust is a vehicle by which legal and beneficial title are severed, with the trustee of a trust receiving legal title
to the property settled in trust (its "res"), which property is to be held for the benefit of trust beneficiaries who receive
beneficial (or "equitable") title. Trusts are an English common law principle. All English common law-based systems of law recognize
the concept of a trust.
For purposes of this article, references to a "domestic trust" are to a trust settled by a person resident
in the United States pursuant to the laws of one of the several states. References to "foreign trusts" are to a trust settled
pursuant to the laws of a foreign country. At this juncture it should be noted that choice of law principles would allow a settlor who resides
in one state to settle a trust to be governed by the laws of another state or another country, just as a business owner who resides in and
operates a business in New York may incorporate the business in Delaware.
Domestic trusts are as old as our common law system, and their uses are many and diverse. In the asset protection
planning context, however, domestic trusts suffer from a number of disadvantages when compared lo foreign trusts:
1. Benefit and Control—Domestic trust law will generally restrict the nature and extent of benefit and/ or
control that a settlor can retain through a trust. Domestic law generally provides that if a settlor docs not place property out of the
settlor's own reach, the trust assets will not be placed out of the reach of a creditor of the settlor, whether present, subsequent or future
potential.
Thus, a domestic trust that is settled at a time when there are absolutely no fraudulent conveyance issues may still be
successfully attacked, even years after settlement, if the settlor has retained either benefit or control. By comparison, the level of both
benefit and control over a foreign trust governed by the trust laws of certain foreign jurisdictions will represent a significant enhancement
over the rights and powers that may safely be retained by grantors of domestic trusts. Properly drafted, an APT may result in little
diminution of such attributes, and as such many more options and flexibilities exist in the course of drafting and designing an APT.
2. Automatic Target—A domestic trust may be as much a target for litigation as its settlor, particularly if
the trust holds assets of substantial value. A plaintiff's lawyer need not be particularly creative in order to craft a legal theory of
liability against a domestic trust when the principal claim is against the settlor. Due to jurisdictional and other considerations, such as
whether the judgments and orders of the domestic court will be recognized by the foreign court (comity), a foreign trust will not be such an
"automatic" defendant.
3. Lack of Practical Barriers—One of the advantages of foreign trusts over domestic trusts in the asset
protection planning arena is that the foreign element will impact a creditor's decision as to how far the creditor is willing to go in the
course of pursuing trust assets. Whether one considers the psychological barrier of dealing with foreigners and foreign systems, the cost of
pursuing litigation overseas (particularly if the matter must be litigated anew in the foreign jurisdiction in the absence of comity), the
added uncertainty of prevailing, or the increased time factor that results, the practical hurdles obtained simply through the use of foreign
entities can prove to be formidable barriers.
4. Not as Ultimately Protective—The trust law of some foreign jurisdictions is simply more protective than
domestic trust law. In fact, the past few years have witnessed a number of offshore financial centers passing legislation designed to lend
clarity to many APT issues, thus providing a substantial degree of certainty to a rapidly developing planning area. The leader in clarifying
legislation is the Cook Islands, an offshore financial center located in the South Pacific. Its International Trusts Amendment Act of 1989
addresses not only fraudulent conveyance issues but issues relating to retained control and benefit, as well. Other jurisdictions that have
recently adopted clarifying legislation include Gibraltar, the Bahamas, and the Cayman Islands. Clarifying legislation is presently being
considered by the Isle of Man, the British Virgin Islands, and a number of other foreign jurisdictions.
Domestic trusts are a valuable planning tool; however. in the asset protection context and for the reasons set forth
above they lend to offer substantially less protection than foreign situs trusts, and are otherwise not nearly as flexible as a planning tool.
Foreign Situs Trusts
A strategic advantage offered by APT’s is that differences in competing legal systems can be arbitraged to produce
more favorable and protective results for the trust, its settlor and beneficiaries. This is an important planning consideration when it comes
to matters such as the ability to force the legal battle over trust assets into the foreign court, and the ability to protect the settlor or
others who may be in some position of control with respect to the trust against the awkward position of being forced to either repatriate
trust assets or being held in contempt of court. These strategies are the foundation of the protection offered by an APT, and support the
proposition that the trust instrument itself is merely a static part of a dynamic process. It is one thing to draft an APT, and yet another to
have a full understanding of the options the APT creates and the manner in which the options may be implemented. Further, an APT may be
rendered relatively useless unless there exist committed, dedicated and proven team members in the relevant jurisdictions.
A number of factors should be considered when analyzing whether a particular jurisdiction should be selected as the
domicile for an APT. These factors include whether the jurisdiction has favorable APT legislation in place, and, if so, the particular
provisions thereof; the jurisdiction's political stability; its economical and social environment; whether language barriers exist; the
jurisdiction's tax laws; the availability and quality of professional services; whether modern telecommunications facilities exist; the
jurisdiction's reputation in the global financial community; and its accessibility (or its inaccessibility to the extent such may be a
factor).
An APT, when properly drafted and properly integrated with the client's estate plan, can accomplish everything a
typical inter vivos living trust can accomplish, including avoiding probate, providing confidentiality, providing asset administration in the
event of the settlor's disability, providing a smooth transition of property upon the settlor's death, and estate tax planning. Of course, the
major goal that an APT can accomplish that a living trust does not accomplish is the protection of assets during the settlor's lifetime, which
is, of course, when estate protection counts the most.
APTs and FLPs
The best of both worlds can be accomplished when APTs and FLPs are combined. The combination can be achieved merely by
one or more gifts to the APT of limited partners' interests in the FLP. As a result of this combination, value (in the form of the limited
partner interests) can be gifted away during a period when the client's legal seas are calm. The client, however, can retain control over the
FLP's assets as the general partner of the FLP. Should the legal seas become choppy, a number of options are available that would otherwise
not exist for the client, including the foreign trustee removing the domestic trustees and forcing a liquidation of the FLP. In such an event,
FLP assets would flow to the APT based on the percentage of ownership the APT has in the FLP. Then, in the exercise of the foreign trustee's
fiduciary duty to protect assets in the interests of the beneficiaries, the foreign trustee would likely reinvest the distributed assets out
of the jurisdiction in which the settlor resides, which is the first step in forcing the battle over those assets into the foreign court.
A derivation of a typical APT/FLP structure involves the use of several underlying FLPs, each of which owns assets
of a certain character or class. For example, FLP No. I might own cash and other liquid assets. FLP No. 2 might own an apartment building, and
FLP No. 3 might own various works of art and antiques. In this fashion, assets and the risks of ownership associated with each of them can be
segregated from each other. Accordingly, should some form of liability develop with respect to the apartment building, the liquid assets and
art and antiques would not be owned by the same entity that owns the problem asset and as such would be safely isolated.
Other derivations include the use of underlying domestic corporations, foreign companies, or limited liability
companies, typically in combination with one or more FLPs,
The typical APT/FLP structure is tax neutral in that it does not alter the federal income, gift or estate tax
situations of most clients. For income tax purposes, all tax attributes of the trust flow through to the client's personal income tax return
because the trust is a "grantor" trust for federal income tax purposes, pursuant to the 1986 Internal Revenue Code (Code) Sections
671 through 678, and because the FLP is also a pass-through entity.
Transfers can be made free of federal gift tax through the settlor of the trust retaining one or more powers of
appointment, pursuant to Reg. §25.2511-2.
Incomplete gifts that are not otherwise "completed" prior to the settlor's death will be included in the
settlor's estate for federal estate tax purposes, and typical estate tax oriented planning options remain available.
The Code imposes an excise tax on transfers of appreciated property to foreign trusts and other entities. The tax is
imposed on the excess of the fair market value of the property transferred over its adjusted basis in the hands of the transferor. Although
the line of distinction between domestic trusts and foreign trusts is unclear, careful draftsmanship should yield a trust that is a domestic
trust for federal tax purposes and a foreign trust for purposes of its validity, interpretation, administration and matters of applicable law.
An excise tax safety net is provided by Rev. Rul. 87-61, which states that the excise tax is inapplicable so long as the trust is treated as a
grantor trust for federal income tax purposes.
Practical Applications of the APT/FLP Structure
With the foregoing in mind, in the experience of the author, the various practical applications of an APT/FLP structure
may be summarized as follows:
(1) The structure has been used as a replacement or supplement to liability insurance, whether professional malpractice insurance,
tail coverage, errors and omissions insurance, or directors and officers liability coverage. For example, a number of physicians who for
various reasons were not required to carry coverage opted to go bare once the structure was in place. Other physicians as well as other
high-profile professionals have found it advisable to reduce the amount of coverage otherwise in place, with the structure providing
self-insurance in the event of a large judgment. Under this application, the insurance premium savings can be substantial.
Also, a number of people are of the view that a large insurance policy serves as a magnet for litigation. The
structure has allowed individuals who are of this thinking to either go bare or to reduce their coverage to a lower level.
(2) The structure is useful in covering periods of time during which there is, for whatever reason, a lapse in
insurance coverage.
(3) Recognizing that many insurance policies are quite porous, and recognizing that the insurance carrier could
itself suffer economic reversals, the structure is useful in providing a means of backup insurance coverage.
(4) Many business people and professionals are often involved in business or investment activities that are
outside the scope of their main area of work. The structure affords protection against risks that can arise from these other activities. For
example, a CPA or surgeon who is a one percent partner in a general partnership may be unpleasantly surprised to learn that he is 100
percent liable (or all partnership debts, of whatever nature. This sort of a risk may pose a greater problem for this investor than his or
her professional activities may pose.
(5) The structure has been used as a means to rebuild wealth that is free from the client's past or current
financial problems. This is often referred to as a "business opportunities trust."
(6) Many people with wealth believe that their financial profile may encourage litigation against them. Statistics
support this belief. The structure has accordingly been used as a means to reduce one's financial profile so as to discourage lawsuits.
(7) The structure has been used as an alternative or as a supplement to a prenuptial agreement. It is particularly
attractive to a client who is facing a second (or so) marriage and does not wish to broach the issue of a marital agreement with his or her
spouse-to-be.
(8) When an individual or a business signs for a loan or otherwise takes on a financial obligation, the individual
or the business is, generally speaking, subjecting all owned assets to the loan or obligation. To avoid this problem, the structure has been
used to segregate wealth into various pockets so that not all is at risk for one particular transaction.
(9) The degree of protection the law now affords retirement benefits is in a tremendous state of flux. Given the
uncertainty of the legal protection, certain applications of the typical structure have been applied to protect retirement benefits.
(10) Asset protection planning is often done in connection with an overall estate plan for the client. As the
structure's foreign trust accomplishes everything a typical living trust accomplishes (e.g., probate avoidance, privacy, estate tax
planning) yet has the additional advantage of protecting assets while the client is alive, the foreign trust often serves as the main
dispositive instrument under the client's estate plan.
(11)A person who is suffering creditor problems may be able to use the structure as a means to increase his or her
strategic position with respect to creditor negotiations. This application must, however, be applied cautiously given the fraudulent
conveyance considerations discussed earlier herein.
(12) When coordinated with the estate plans of other family members, the structure can be used lo protect
inheritances that otherwise may be at risk when distributed to the beneficiary.
(13) A number of jurisdictions have "forced heirship" laws that dictate the percentage of an estate that
certain heirs must receive, as well as perhaps the timing of the distributions to those heirs. The structure has proven quite useful for
clients carrying out their wishes as to the ultimate disposition of their property, irrespective of local law requirements.
(14) It is not uncommon for a person who sells his or her business or professional practice to be concerned with
protecting the proceeds of the sale. One concern often voiced is that the buyer may not be as successful with the business or practice as
was the seller, and as such the buyer may reappear several years later only to claim, on whatever basis, that too much was paid by the buyer
in the transaction. Protecting sales proceeds that result from transactions of this nature is, thus, another application of the structure.
(15) Increasingly, business and property owners are concerned with liability under the Comprehensive Environmental
Response, Compensation and Liability Act (commonly known as Superfund) and the Resource Conservation Recovery Act. Legislation of a similar
nature also exists at many state levels. Businesses not usually thought of as generating or using hazardous substances fall within the reach
of these laws. Moreover, under the liability net of these provisions, even persons who formerly had only an interest in the property are
subject to liability exposure. The structure is useful in protecting against these forms of risks.
Closing
Potential clients and their advisers frequently ask whether planning of the nature discussed herein "works."
The author believes that the word "works" must be defined by reference to where the client would have been had he or she not had the
benefit of the planning. Although, in the opinion of the author, the ultimate goal of asset protection planning can be considered to have been
achieved if the client weathers a legal storm at least moderately better than he or she otherwise would have had, the experiences of the
author have to date far surpassed this standard.
