From an asset protection specialist’s viewpoint, safeguarding US-based properties is becoming increasingly more difficult, with judges revealing less and less respect for the nominal security offered by entities such as domestic LLCs. Both the court system and the government there reveal distressing propensities to bypass the inviolability of private property rights, on which the country was founded.
LLCs have actually been a very popular asset protection tool over the years. LLCs are an exceptional development – basic, flexible and using the legal security of limited liability, even for people who can create single member LLCs.
An LLC by itself, however, not deals sufficient security. For instance, in September last year the United States Court of Appeals verified a lower court choice in Olmstead, et al v. Federal Trade Commission that the district court may get in an order “compelling the defendants to give up all right, title and interest in their single member LLCs.”
Successfully, the single member can be required to quit the ‘property’ vested in this right, title and interest – so the judgment creditor becomes the new owner of the LLC and can therefore choose to wind it up, continue it or offer of part of its assets.
Anybody who has actually been depending on the limited liability offered by such LLCs is now on notification – they need to restructure their affairs urgently, with the help of a great asset security lawyer. I state urgently, since if a claim emerges in the future, the court will recall a number of years in order to identify whether the restructuring was detrimental to the lenders. The longer the structure has remained in place, the safer it is.
The ownership from offshore of such an LLC is a feasible option in most cases. Making use of a second member (preferably with a significant part of the ownership) in the domestic LLC will limit the capability of a lender to take control of the domestic LLC. In this case, the financial institution will be limited to a charging order versus the ‘transferable interest’ of the judgement debtor. The transferable interest is the right to receive distributions, but not the right to become involved in management.
Establishing an Offshore Asset Security Trust (OAPT) is feasible for Americans, given that the compliance requirements are fairly simple. Such a trust is not a tax avoidance device – it is usually structured as a grantor trust. The individual establishing the trust should report all the trust’s income on his/her US federal tax return, and comply with specific reporting requirements. (These reporting requirements are beyond the scope of this short article, but any great US tax preparer must be able to assist.).
The OAPT should be a discretionary trust, so that the trustee has the legal liberty to disregard guidelines offered by the customer. This point is extremely important, as it removes the possibility that the United States court can advise the grantor to give instructions to the trustee to pay over possessions to a judgement lender. There is, however, the possibility to utilize a Personal Trust Company as a trustee. This is an unique business, based offshore, that has no possessions, bank accounts or earnings of its own. Its only role is to work as trustee of the OAPT. In this manner, the client can maintain greater control of the OAPT without jeopardizing its offshore property security features, and there is no need to retain the services of an offshore trust company.
The OAPT’s trust deed need to also include some essential arrangements like a “duress clause” and a “run away stipulation”. The duress provision particularly restricts the trustee from acting under duress (ie, forcibly based on orders from a United States court). The leave stipulation require the trustee to redomicile the OAPT to another jurisdiction and automatically change the trustee in the event of an attempted action by a judgement creditor. The trustee is also prohibited to reveal to any financial institution the information of the flee provisions, or that they have actually been executed. The financial institution is therefore left with no idea where in the world the OAPT and its brand-new trustee might now lie.
In conclusion, by having the OAPT own the offshore LLC that in turn is a member of the Cook Islands LLC, you accomplish a strong degree of asset protection for a relatively low cost. The membership interest in the overseas LLC is beyond the reach of the US courts and remains in a holding structure that is not managed by the supreme beneficial owner.