Asset Protection Planning (With Audit Checklist) · Asset Protection Planning (With Audit Checklist) Gideon Rothschild A. Introduction 1. Litigation environment creates greater exposure

ALI-ABA Estate Planning Course Materials Journal | 25

Asset Protection Planning (With Audit Checklist)

Gideon Rothschild

A. Introduction

1. Litigation environment creates greater exposure to risk of loss.

a. Expanded theories of liability (such as McDonald’s coffee spill);

b. Higher jury awards;

c. Unpredictable judges.

2. Traditional forms of protection have become inadequate.

a. Insurance:

i. Exclusions;

ii. Policy limits;

iii. Solvency of insurer;

iv. Policy lapses.

b. Incorporation:

i. Piercing corporate veil;

ii. Shareholderandofficerliability.

3. Candidates For Asset Protection Planning

a. Professionals;

Gideon Rothschild, J.D., CPA, is with Moses & Singer LLP, in New York, New York.

26 | ALI-ABA Estate Planning Course Materials Journal April 2009

b. Officers,directors,andfiduciaries;

c. Real estate owners with exposure to environmental claims;

d. Individualsexposedto lawsuitsarisingfromclaimsallegingnegligentacts, intentionaltorts (dis-crimination,harassment,andlibel),orcontractualclaims;

e. Prenuptial alternative.

4. Asset protection concepts are not new:

a. Incorporation of business activities;

b. Formationof LLCs,LLPs,andLPs;

c. Offshore trusts used traditionally to avoid forced heirship or government expropriation;

d. Exemption and pre-bankruptcy planning.

5. Assetprotectionispartof anoverallwealthpreservationprocess,including:

a. Investmentdiversification;

b. Insurance adequacy;

c. Income tax planning;

d. Estate tax planning;

e. Wealth protection.

B. Fraudulent Conveyance Issues

1. Law Varies By Jurisdiction.Transfersproperinonestatemaybeheldimproperelsewhere,butcertaingener-ally accepted principles govern creditors. Common law usually divides creditors into three categories:

a. Present Creditors. Those persons of whom the transferor has notice when making transfers.

b. Subsequent Creditors. Those persons against whom the transferor harbored an actual fraudulent intent whentransferringassets,includingcreditorswhoserightsaroseafterthetransfers,if thetransferorthen intended to proceed with his or her affairs in a fraudulent manner or with reckless disregard for the rights of others.

c. Potential Future Creditors.Those“nameless,faceless”personsof whomthetransferorhadnoawarenesswhen transfer was made.

2. Other statutory restrictions on transfers:

a. IRC §§7206 and 7212 (crime to conceal or hinder collection of tax);

b. MoneyLaunderingControlActof 1986,18U.S.C.§1956and§1957(transferof proceedsof speci-fiedenumeratedactivities,suchasMedicarefraud,arecriminaloffenses);

c. CrimeControlActof 1990,18U.S.C.§1032.

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C. Traditional Forms Of Asset Protection

1. Transferstospouse.“Poorman’s”assetprotection.

2. Corporate ownership.

3. Family limited partnerships.

4. Limited liability company.

5. Joint ownership of property. Tenancy by the entireties.

6. Exemption Planning:

a. Homestead;

b. Retirement plans;

c. Life insurance;

d. Annuities.

D. Domestic Trusts In General

1. Trustsseparatelegalownershipfrombeneficialownership.Sinceatrustbeneficiarydoesnotgener-allyhavelegalownershipof trustproperty(untiladistributionismade),thepropertyisfreefromtheclaimsof thebeneficiary’screditors.

2. Advantagesincludeavoidanceof probate,moreefficienttransferof assets,confidentiality,andprotec-tionfrombeneficiary’screditors(includingspousalclaims).

3. Disadvantages.Undermoststatelaws,thesettlor’screditorscanrecoveragainsttrustassetsif:

a. The trust was funded as a result of a fraudulent conveyance;

b. The settlor retained too much control (such as power to revoke or appoint property);

c. Thesettlorretainedabeneficialinterest;or

d. The trust is a sham.

4. Moststatesrecognizethevalidityof spendthriftclausesthatprotectabeneficiary’sinterestfromcredi-tors’claims.Suchclauses,however,aregenerallynotenforceablewithrespecttoasettlorwhoisabeneficiary,totheextentof suchsettlor’sinterest.Moststateshavestatutesagainstself-settledtrustswhich provide that a settlor cannot create a trust to protect himself or herself from creditors. See, e.g., Restatement (Second) of Trusts§156(1959).Assetprotectionavailabletobeneficiariesof domestictrustsis dependent on three factors:

a. Level of settlor’s retention of control over trust.

b. Extentof powerof appointmentavailabletobeneficiaries.

c. Extentof withdrawalorinvasionrightsprovidedtobeneficiaries.

5. Maximumassetprotectionwouldbeavailabletotrustbeneficiarieswheretrustprovidesthefollowing:


a. Independent trustees.

b. Right to receive income or principal distributions only in trustee’s discretion.

c. Trusteegivenpowertomakepaymentonbehalf of beneficiariesratherthandirectlytothem.

d. Trusteeauthorizedtoacquireassetsforuseof beneficiaries(forexample,homeandart).

e. Trusteegivenpowertoholdbackdistributionsif distributionswouldbeadversetobeneficiary’sinterest.

f. Powerof appointmentgiventobeneficiariesislimited.

g. Inclusionof additionalsprinklingbeneficiaries.

h. Inclusion of spendthrift provision or use of a trust situs that automatically provides for a spendthrift trust.

i. Assets that may create liability exposure to other trust property should be segregated into separate trusts or entities (such as LLCs). Trustees should be given authority to create separate trusts and entities to isolate such property. See, e.g., Matter of Heller,161Misc.2d369,613N.Y.S.2d809(N.Y.Sur.Ct. 1994).

6. Limitations On Spendthrift Trust Protection

a. Internal Revenue Service. See, e.g., Bank One Ohio Trust Co. v. United States, 80F.3d173 (6thCir.1996).

b. Potentially involuntary tort creditors.

c. Child or spousal support.

d. Reciprocal trusts ineffective.

e. Self-settled trusts.

7. Specific Trusts With Asset Protection Aspects

a. Discretionary trust.

b. Supporttrusts.Distributionslimitedtohealth,support,andmaintenance.

c. Credit shelter discretionary trusts.

d. Marital trusts limiting principal invasions.

e. Splitinteresttrusts(suchasCRTs,GRATs,andQPRTs).

8. Althoughtrustsmaynotbeprotectedfromthesettlor’screditorsif thesettlorretainsabeneficialinter-esttherein,planningopportunitiesshouldnotbeoverlooked.

a. Trustsforthebenefitof spousesandchildrenwillbeprotectedfromthesettlor’screditors(providedthatthetrustfundingwasnotafraudulentconveyance)aswellasthebeneficiaries’creditors.If thereisadivorceorthespousepredeceases,thesettlorcanthereuponbecomeadiscretionaryben-eficiary.


b. The settlor can retain a power of appointment over the trust to prevent the transfer from being a completed gift.

c. Thesettlorcanretainanincomeinterestonly,whichwouldprotecttheprincipalfromcreditors.

d. The settlor can give the trustee limited discretion to distribute principal to the settlor only for emergencyneedsorwherethesettlorhasinsufficientresourcesforsupportandmaintenance.See DiMaria v. Bank of Cal. Nat’l Ass’n, 46 Cal.Rptr. 924 (Cal. Ct. App. 1965).

e. In some states a revocable trust may be used to avoid a spouse’s right of election claims. See, e.g., Cherniack v. Home Nat’l Bank and Trust Co. of Meriden, 198 A.2d 58 (Conn. 1964).

E. Domestic Asset Protection Trusts

1. Tenstateshaveenactedlegislationprovidingspendthriftprotectiontoasettlor-beneficiaryof adiscre-tionary trust (provided the transfer is not a fraudulent conveyance).

a. Alaska;

b. Delaware;

c. Nevada;

d. Missouri;

e. Rhode Island;

f. Utah;

g. South Dakota;

h. Tennessee;

i. Wyoming;

j. NewHampshire(effectiveJanuary1,2009).

2. Okalahoma,pursuanttotheFamilyWealthPreservationTrustActof June9,2004(Okla.Stat.tit.31,§10),permitsanindividualtocreateatrustwithabankortrustcompanylocatedinOklahoma(butnotanindividualresidentof Oklahoma)forthebenefitof hisorherspouse,descendants,andanyoneor more IRC §501(c)(3) charities and to retain the right to revoke the trust without causing the trust to therebybeavailabletocreditors.Inaddition,thelawprovidesthatnocourtshallhavetheauthoritytocompelthesettlortoexercisehisorherpowertorevokethetrust.Thelawdoes,however,limitto$1 million of transferred assets plus any subsequent growth thereon as the amount that can thus be protected.Thecorpusof thetrustmustconsistof assetsinOklahoma-basedbanks,realestatelocatedinOklahoma,andsecurities issuedbyOklahoma-basedcompanies (includingcorporations,LLCs,and LPs formed or domiciled in Oklahoma and having a principal place of business in Oklahoma).

3. Summary Of Alaska Trust Law

a. TheAlaskaTrustAct(effectiveApril2,1997)modifiedAlaska’spreviouslyundistinguishedcom-mon-law body of trust law in an effort generally touted as making Alaska a domestic alternative to foreignsitusassetprotectiontrusts.AsignificantamendmentwasenactedonJuly10,2003.


b. In contrast to Restatement (Second) of Trusts§156(2),Alaskalaw(AlaskaStat.§34.40.110)permitsasettlortocreateatrustforhisorherownbenefit,whichwillbeprotectedfromthesettlor’sfuturecreditors so long as:

i. The settlor does not retain the right to revoke or terminate the trust.

ii. The settlor was not in default by 30 days or more in making a child-support payment.

iii. The settlor’s ability to receive distributions from the trust is within the discretion of the trust-eesratherthanmandatory.Thetrustee,however,maypermitabeneficiarytheuseof property,and the settlor may retain an annuity or unitrust interest in a charitable remainder trust. The set-tlor may also retain a right to receive a percentage of the trust each year not to exceed the unitrust amount provided under §643(b).

iv. Thetransferof propertytothetrustwasnotintendedtodefraudcreditors(thatis,afraudu-lent conveyance generally subject to a four-year statute of limitations under Alaska law).

v. Under Alaska Stat. §34.40.110 a creditor existing at the time the trust is created must bring suitwithinthelaterof fouryearsfromthetransferoroneyearafterthetransferis,orreasonablycouldhavebeen,discoveredbythecreditorif thecreditorcandemonstratebyapreponderanceof evidencethatthecreditorassertedaspecificclaimagainstthesettlorbeforethetransferorfilesanother action within four years after the transfer against the settlor that asserts a claim based on an act or omission of the settlor that occurred before the transfer.

c. Alaska law (Alaska Stat. §13.36.310) prohibits a challenge to a trust (except as otherwise provided above)onthegrounds“thatthetrustortransferavoidsordefeatsaright,claim,orinterestcon-ferred by law on a person by reason of a personal or business relationship with the settlor or by way of amaritalorsimilarright.”

d. TheAlaskaTrustActalsomodifiedAlaska’scommon-lawRuleAgainstPerpetuities toprovidethat,solongasthetrusteeshavediscretiontomakecurrentdistributionstoatrustbeneficiary,thetrust will not be invalid because it fails to vest within the normal perpetuities period.

e. Amerechoiceof lawclausewillnotbesufficienttoestablishatrustasan“Alaskatrust.”Alaskalaw(AlaskaStat.§13.36.035)setsforthdefinitivestatutoryrequirementsforestablishingatrustasatrust subject to Alaska’s trust law:

i. Atleastonetrusteemustbea“qualifiedperson”underAlaskaStat.§13.36.390(3),meaningthat at least one trustee must be either a trust company or a bank with trust powers with its princi-palplaceof businessinAlaska,oranindividualresidentof Alaska.

ii. Someof thetrustassetsmustbedepositedinAlaska,eitherinacheckingorbrokerageac-count,orothersimilaraccountlocatedinAlaska.

iii. The Alaska trustee’s duties must include both the obligation to maintain the trust’s records andtoprepareorarrangeforthepreparationof thetrust’sincometaxreturns,althoughneitherof these requirements must be exclusive to the Alaska trustee.

iv. Partorallof thetrust’sadministrationmustoccurinAlaska,includingthephysicalmainte-nance of the trust’s records in Alaska.


f. Consistentwith the foregoingrequirementsof AlaskaStat.§13.36.035,anAlaska trustmaybe

settledbyanyperson,regardlessof whetherheorsheisdomiciledinAlaska.

g. Alaska Stat. §§13.36.70 and 13.36.375 provide for the appointment of third-party trust protectors

andtrusteeadviserswithoutimposingfiduciaryliability.

h. Thesettlormustprovideanaffidavitof solvency.

i. The Act (Alaska Stat. §34.40.110(e)) precludes a claim against a “trustee of the trust or against

others involved in the preparation or funding of the trust for conspiracy to commit fraudulent con-

veyance,aidingandabettingafraudulentconveyance,orparticipationinthetrusttransaction.”It

further provides: “Preparation or funding of the trust includes the preparation and funding of a

limited partnership or a limited liability company if interests in the limited partnership or limited

liability company are subsequently transferred to the trust. The creditor and other person pre-

vented from asserting a cause of action or claim for relief are limited to recourse against the trust

assetsandthesettlortotheextentallowedunder[Alaska’sfraudulentconveyancestatute].”

4. Review Of Delaware Trust Law

a. The synopsis of Delaware’s Act notes the purpose of the legislation is to allow settlors to reduce

estate tax by excluding creditors’ claims against self-settled trusts. The Act notes recent legislation

in Alaska and “is intended to maintain Delaware’s role as the most favored jurisdiction for the es-

tablishmentof trusts.”

b. Delawarelaw(12Del.CodeAnn.tit.12,§3570etseq.)appliesto“qualifieddispositions”madeon

orafterJuly1,1997.

c. Aqualifieddispositionisadispositionbyorfromatransferortoatrusteewho(i) isaDelaware

resident,bank,orinstitutionauthorizedbyDelawarelawtoactasatrusteeand(ii)maintainsor

arrangesforcustodyinDelawareof someorallof thetrustcorpus,maintainsrecords(onanex-

clusiveornonexclusivebasis),preparesorarrangesforthepreparationof fiduciarytaxreturns,or

otherwise materially participates in the trust’s administration.

d. A trust must be irrevocable but can include one or more of the following provisions:

i. Settlor may retain power to veto distributions.

ii. Settlor may retain a special power of appointment.

iii. Settlor may retain the right to:

(1) Current income distributions;

(2) Payments from a charitable remainder trust;

(3) Annual payments of up to 5 percent of the initial value of the trust or of its value as de-

termined from time to time; or


(4) Principal distributions under an ascertainable standard (for example, health,mainte-nance,education,orsupport).

iv. Settlormayreceiveincome,principal,orbothinthesolediscretionof atrustee.

v. Settlor may remove a trustee or adviser and appoint a new trustee or advisor (other than a person who is a related or subordinate party with respect to the transferor within the meaning of §672(c)of the InternalRevenueCodeof 1986,26U.S.C.§672(c),andany successorprovisionthereto).

vi. Settlormayretainuseof aresidenceheldinaqualifiedpersonalresidencetrust(“QPRT”).

e. Providedthetransferof propertytothetrustwasnotintendedtohinder,delay,ordefraudcreditors(thatis,afraudulentconveyance),noactiontoenforceajudgmentshallbebroughtforattachmentagainstsuchqualifieddisposition.

i. Under§3572(b)of Del.Codetit.12,acreditorexistingatthetimeatransfertoatrustismademust commence an action to enforce a judgment within the later of four years or one year after the transfer was or could reasonably have been discovered by the creditor.

ii. If thecreditor’sclaimaroseafterthetransfer,theactionmustbebroughtwithinfouryearsof the transfer.

(1) Subsection(a)of §3572providesthatacreditorwhoseclaimaroseafteraqualifieddis-position can set the transfer aside only if that creditor proves that the transfer was made with actual intent to defraud (not merely to hinder or delay).

f. The Act provides that no action of any kind shall be brought against the trustee or against “any personinvolvedinthecounseling,drafting,preparation,executionorfunding”of atrustthatisthesubjectof a“qualifieddisposition.”

g. Certaincreditorsmay,however,avoidqualifieddispositions:

i. Any person to whom the settlor is indebted on account of an agreement or court order for support,alimony,orpropertydistributioninfavorof aspouse,formerspouse,orchildren.Forpur-posesof thisrule,however,apersonistreatedasaspouseorformerspouseonlyif thepersonwasmarriedtothetransferorat,orbefore,thetimeof thequalifieddisposition.Thereforeif thedebtorcreatesaDelawareassetprotectiontrustpriortothemarriage,heorshewillbeprotected.

ii. Anypersonwhosuffersdeath,personalinjury,orpropertydamageonorbeforethequalifieddisposition,whichdeath,personalinjury,orpropertydamagewascausedbytransferororanotherperson for whom transferor is liable.

h. In2003,section3572wasamendedbytheadditionof anewsubsectionthathastheeffectof im-mediately terminating a trustee’s authority upon the occurrence of another state court’s attempt to exercise jurisdiction over a trustee if the court declines to apply Delaware’s law with respect to the validity,construction,oradministrationof thetrust.If thetrustinstrumentdoesnotprovideforasuccessortrustee,theDelawareCourtof Chancerywouldappointasuccessortrustee,presumablyone who would be subject to the Delaware court’s jurisdiction only.


i. OnJune30,2005,theActwasamendedto(i)permitthegrantortoretaintherighttoreceivean-nualpaymentsof afixeddollaramountnottoexceed5percentof theinitialvalueof thetrustcor-pus;(ii)clarifythataqualifiedpersonalresidencetrustmayincludeprovisionsrequiringconversionto an annuity trust in the event the residence is sold; (iii) permit the grantor to receive reimburse-mentforincometaxespaidontrustincome,providedsuchpaymentsareinthediscretionof thetrustee or trust adviser; (iv) permit a trust being redomiciled to Delaware to tack on the time during which it was located elsewhere for purposes of the statute of limitations regarding creditor claims (provided,however,thatanygeneralpowerof appointmentthatthesettlorretainedintheoriginaltrust is curtailed to a limited testamentary power); and (v) clarify that a creditor seeking to recover distributionsmadetoabeneficiary,ortopreventatrusteefrompayingitsfeesandcostsoutof thetrust,mustprovebyclearandconvincingevidencethatthebeneficiaryortrustee,asthecasemaybe,actedinbadfaith(exceptthat,inthecaseof abeneficiarywhoisalsothesettlor,thecreditorneed only prove bad faith by a preponderance of the evidence).

5. Review Of Nevada Trust Law

a. EffectiveOctober 1, 1999,Nevadabegan allowing spendthrift protection for self-settled trusts,providedthattheymeetthefollowingrequirementsassetforthinNev.Rev.Stat.§166:

i. Trust must be irrevocable.

ii. Settlorisonlyadiscretionarybeneficiary.

iii. Transferwasnotintendedtohinder,delay,ordefraudknowncreditors.

iv. Settlor may retain a veto power over distributions or hold a testamentary special power of appointment.

v. Allorpartof thepropertyisinNevada.

vi. Allorpartof theadministrationof thetrustisperformedinNevada.

vii. AtleastoneNevadaresidentisatrusteeandhaspowersthatincludemaintainingrecordsandpreparing tax returns for the trust.

viii. A creditor may not bring an action with respect to property transferred to a spendthrift trust unless brought within two years after the transfer or six months after he or she discovers or reason-ablyshouldhavediscoveredthetransfer,whicheverislater.If apersonbecomesacreditorafterthetransferismade,heorshemustbringtheactionwithtwoyearsafterthetransfer.

6. Review Of Missouri Legislation

a. Missourilawprovidesthatwherethesettlorisnotthesolebeneficiaryof atrustanddoesnotretainthepowertorevokeoramendthetrust,oraportionof theincomeorprincipal,thetrustwillbeprotected from the settlor’s creditors.

b. Section456.5-504.1provides:“Abeneficiary’sinterestinatrustthatissubjecttothetrustee’sdis-cretion does not constitute an interest in property or an enforceable right even if the discretion is expressedintheformof astandardof distributionorthebeneficiaryisthenservingasatrusteeor cotrustee. A creditor or other claimant may not attach present or future distributions from such


aninterestorright,obtainanorderfromacourtforcingthejudicialsaleof theinterestorcompel-lingthetrusteetomakedistributions,orreachtheinterestorrightbyanothermeans,evenif thetrustee has abused the trustee’s discretion.

c. Section456.5-504(3)provides that,“[e]ven if a trustcontainsa spendthriftprovision,abenefi-ciary’schild,spouse,orformerspousewhohasajudgmentagainstthebeneficiaryforsupportormaintenance,orajudgmentcreditorwhohasprovidedservicesfortheprotectionof abeneficiary’sinterestinthetrust,mayobtainfromacourtanorderattachingpresentorfuturetrustincome.”

d. Section456.5-505.3provides:Withrespecttoanirrevocabletrustwithaspendthriftprovision,aspendthrift provision will prevent the settlor’s creditors from satisfying claims from the trust assets except:

i. Where the conveyance of assets to the trust was fraudulent as to creditors pursuant to the provisions of chapter 428 Mo.Rev.Stat.; or

ii. Totheextentof thesettlor’sbeneficialinterestinthetrustassets,if atthetimethetrustbe-came irrevocable:

(1) Thesettlorwasthesolebeneficiaryof eithertheincomeorprincipalof thetrustorre-tained the power to amend the trust; or

(2) Thesettlorwasoneof aclassof beneficiariesandretainedarighttoreceiveaspecificportion of the income or principal of the trust that was determinable solely from the provi-sions of the trust instrument

e. According to theCommitteeReport, “[t]he incorporation and reenactment of these statutoryprovisions giving settlor’s [sic] a limited protection from creditors by virtue of a spendthrift clause in Section [456.5-505.3] is intended to overrule any holding that would render that portion of the statute meaningless . . . . MUTC section 456.5-505 altered the [Uniform Trust Code] provisions to incorporate Missouri’s exception for protection of a settlor’s retained discretionary interest as one of aclassof beneficiariesthatiscurrentlycontainedinR.S.Mo.456.080.3.”CommitteeReportat94.

7. Review Of Rhode Island Legislation

a. R.I.Gen.Laws§18-9.2appliesto“qualifieddispositions”madeafterJune30,1999.Aqualifieddisposition is a transfer to a trust that is:

i. Irrevocable.

ii. Incorporatesthelawsof RhodeIslandtogovernthevalidity,construction,andadministrationof the trust.

iii. Contains a restriction on assignment of income or property.

iv. Wherein the transferor retains only:

(1) Power to veto distributions.

(2) Testamentary special power of appointment.


(3) Right to receive distributions in the sole discretion of trustee who is neither related nor subordinate.

b. The trustee must be a resident of Rhode Island (in the case of an individual) or authorized by Rhode Island law to act as a trustee (in the case of a nonindividual).

c. Acreditormaynotbringanactiontoavoidaqualifieddispositionif:

i. The creditor’s claim arose before the transfer was made unless the action is brought within fouryearsafterthetransferor,if later,withinoneyearafterthetransferwasorcouldreasonablyhave been discovered by the creditor; or

ii. Thecreditor’sclaimaroseafterthetransfer,unlesstheactionisbroughtwithinfouryearsafterthe transfer is made.

8. Review Of Utah Legislation

a. TheUtahlegislation,whichiseffectivefortrustscreatedonorafterMay5,2003,issetforthinUtahCodeAnn.§25-6-14,etseq.

b. The trust must meet the following requirements:

i. At least one trustee must be a trust company resident in Utah.

ii. Applies only to transfers of personal property or interests therein.

iii. The settlor does not retain the right to revoke the trust.

iv. The settlor may only receive income or principal at the discretion of the trustee.

v. The settlor was not in default by 30 days or more under a child-support order.

c. A creditor existing at the time the trust is settled must bring suit within the later of three years after the transfer is made or one year after the transfer is or reasonably could have been discovered. A creditor arising after a transfer has two years from the transfer date to bring suit.

d. The Act provides protection from a claim against a trustee or adviser for conspiracy to commit a fraudulent conveyance or aiding and abetting a fraudulent conveyance.

e. A trust will be subject to Utah’s governing law if:

i. Someorallof theassetsaredepositedinthestateinabank,brokerage,ortrustcompany;

ii. The trust has at least one resident trustee; and

iii. Someadministration(forexample,maintainingtrustrecordsorarrangingfortaxreturnprep-aration) occurs in the state.

f. TheActmodifiesthestate’sRuleAgainstPerpetuitiestoprovidefora1,000-yearperiod.

9. Review Of South Dakota Legislation

a. The“ActtoAuthorizeQualifiedDispositions,”S.D.CodifiedLaws§55-16-1etseq.,iseffectivefortrustssettledonorafterJuly1,2005.

b. The trust must meet the following requirements:


i. Governing law must be South Dakota.

ii. Trust must be irrevocable.

iii. Trust must prohibit voluntary or involuntary assignment.

iv. Grantormayretainthefollowing:

(1) Power to veto trust distributions;

(2) Limited testamentary power of appointment;

(3) Current income distributions;

(4) Payments from a charitable remainder trust;

(5) Annual payments of up to 5 percent of the initial value of the trust or of its value as de-termined from time to time;

(6) Principal distributions under an ascertainable standard (for example, health,mainte-nance,education,orsupport);

(7) Therighttoreceiveincome,principal,orbothinthesolediscretionof atrusteewhoisneitherthesettlornorarelatedorsubordinatedpartyof thetransferor,IRC§672(c);

(8) Power to remove and appoint trustees; and

(9) Retaineduseof residenceinaQPRT.

c. The trustee must be a resident of the state or a bank or trust company that maintains or arranges forcustodyinthestateof someorallof theproperty,maintainsrecordsonanexclusiveornonex-clusivebasis,preparesorarrangesforthepreparationof thetaxreturns,orotherwisemateriallyparticipates in the administration of the trust.

d. TheActpermitstheappointmentof anonresidenttrustadviser,includingatrustprotector,whomay hold one or more trust powers. The settlor may be designated as a trust adviser.

e. TheActprovidesprotectiontotrusteesandanypersoninvolvedin“counseling,drafting,prepara-tion,executionorfundingof atrust”fromclaimsof creditors.

f. Transfers are subject to provisions of the Uniform Fraudulent Transfer Act.

g. Certaincreditorsmay,however,avoidqualifieddispositions:

i. Any person to whom the settlor is indebted on account of an agreement or court order for support,alimony,orpropertydistributioninfavorof aspouse,formerspouse,orchildren;or

ii. Anypersonwhosuffersdeath,personalinjury,orpropertydamageonorbeforethequalifieddisposition,whichdeath,personalinjury,orpropertydamagewascausedbytransferororanotherperson for whom transferor is liable.

10. Review Of Tennessee Legislation

a. EffectiveJuly1,2007,theTennesseeInvestmentServicesActof 2007,Tenn.CodeAnn.§35-16-101etseq., began permitting the creation of self-settled spendthrift trusts (called Investment Ser-vices Trusts in Tennessee) under Tennessee law.


b. AnInvestmentServicesTrust(“IST”)meansaninstrumentappointingaqualifiedtrusteeorquali-fiedtrusteesforthepropertythatisthesubjectof adisposition,whichinstrument:

i. Expresslyincorporatesthelawof Tennesseeasgoverningitsvalidity,construction,andad-ministration;

ii. Is irrevocable; and

iii. Provides that the interest of the transferor in trust property or the income from trust property maynotbetransferred,assigned,pledged,ormortgaged,whethervoluntarilyorinvoluntarily.

c. A“qualifiedtrustee”isanaturalpersonwhoisaresidentof Tennessee(otherthanthesettlor)ora person authorized by the law of Tennessee to act as a trustee and who maintains or arranges for custodyinTennesseeof thepropertyof thetrust,maintainsrecordsforthetrustonanexclusiveornonexclusivebasis,preparesorarrangesforthepreparationof requiredincometaxreturnsforthetrust,orotherwisemateriallyparticipatesintheadministrationof thetrust.

d. The settlor is permitted to retain one or more of the following rights in an Investment Services Trust:

i. Direct the investment of the Investment Services Trust’s assets;

ii. Receive trust income;

iii. Request up to 5 percent of trust principal annually;

iv. Receive additional distributions of principal based on the discretion of the trustee or another appointed adviser;

v. Live in a home owned by the trust;

vi. Vetodistributionstoanyotherpermissiblebeneficiary;

vii. Direct the distribution of the trust assets upon death to any one or more persons other than thesettlor’screditors,estate,orcreditorsof thesettlor’sestate;and

viii. Removethetrusteeandothertrustadvisersandappointtheirsuccessors,providedtheyarenot related or subordinate to the settlor.

e. Atthecreationof theInvestmentServicesTrust,thesettlorisrequiredtoprovideanaffidavitunderoaththatmustinclude,amongotherthings,astatementthatbycreatingthetrustheorshedoesnot intend to defraud a creditor and that he or she does not have any pending or threatened court actionagainsthimorherotherthanthoseidentifiedintheaffidavit.

f. The Investment Services Trust does not provide asset protection for assets transferred to it until fouryearsafterthetransfer.Atthattime,thesettlor’screditorsarepreventedfromseizingtheassetsof the IST to satisfy claims against the settlor.

11. Review Of Wyoming Legislation

a. WyomingStat.Ann.§4-10-510providesforthecreationof a“qualifiedspendthrifttrust”(thatisaself-settledspendthrifttrust)witha“qualifiedtrustee”for“qualifiedtrustproperty.”


b. A“qualifiedspendthrifttrust”requires:

i. Thetrustinstrumenttostatethatthetrustisaqualifiedspendthrifttrustunder§4-10-510.

ii. Thetrustinstrumenttoexpresslyincorporatethelawof Wyomingtogovernthevalidity,con-struction,andadministrationof thetrust.

iii. Thetrustinstrumenttoprovidethattheinterestof thesettlorinthetrustincomeorprincipal,orboth,isheldsubjecttoaspendthriftprovision.

iv. Thetrusttobeirrevocable,butatrustinstrumentwillnotbedeemedtoberevocablebecauseof the inclusion of one or more of the following:

(1) The settlor’s power to veto trust distributions;

(2) An inter vivos or testamentary limited or general power of appointment held by the set-tlor;

(3) The settlor’s potential or actual receipt of income;

(4) The settlor’s potential or actual receipt of income or principal from a charitable remain-der trust;

(5) The settlor’s receipt each year of up to 5 percent of the initial value of the trust or of its value as determined from time to time;

(6) The settlor’s potential or actual receipt or use of principal under an ascertainable stan-dard(forexample,health,maintenance,education,orsupport);

(7) Thesettlor’srighttoaddorremoveatrustee,trustprotector,ortrustadviserandtoap-pointanewtrustee,trustprotector,ortrustadviser,otherthanthesettlor;

(8) Thesettlor’spotentialoractualuseof realpropertyheldunderaQPRT;

(9) Atrustprotectorhas thepowertoaddbeneficiaries tothetrustwhoarenot thetrustprotector,theestateof thetrustprotector,thecreditorsof thetrustprotector,ortheheirsof the trust protector; and

(10) The settlor’s service as an investment adviser to the trust.

c. “Qualifiedtrustproperty”isrealproperty,personalproperty,andinterestsinrealorpersonalprop-ertyandallgains,appreciation,andincomethereonthatarethesubjectof a“qualifiedtransfer”orareacquiredwiththeproceedsof propertyof aqualifiedtransfer.

d. Qualifiedtrustpropertyisnotprotectedunderthefollowingcircumstances:

i. Against any claim by any person to whom a settlor is indebted on account of an agreement or order of court for the payment of child support.

(1) If thequalifiedtrustpropertyislistedonanapplicationorfinancialstatementusedtoobtainormaintaincreditotherthanforthebenefitof thequalifiedspendthrifttrust.

iii. Propertyof aqualifiedspendthrift trust thatwas transferredbya settlorwhoreceived theproperty by a fraudulent transfer.

e. Transfers are also subject to provisions of the Uniform Fraudulent Transfer Act.


f. A“qualifiedtrustee”isanaturalperson(otherthanthesettlor)whoisaresidentof Wyomingorapersonauthorizedbythelawof Wyomingtoactasatrustee,whomaintainsorarrangesforcus-todyinWyomingof someorallof thequalifiedtrustproperty,maintainsrecordsforthequalifiedspendthrifttrustonanexclusiveornonexclusivebasis,preparesorarrangesforthepreparationof fiduciaryincometaxreturnsforthequalifiedspendthrifttrust,orotherwisemateriallyparticipatesintheadministrationof thequalifiedspendthrifttrust.

g. Acreditorcannotmakeanyclaimorbringanycauseof actionagainstthetrustee,trustprotector,trustadviser,orotherfiduciaryof thetrustoragainstanypersoninvolvedinthecounseling,draft-ing,administration,preparation,execution,orfundingof thetrust.

h. Thesettlormustprovideanaffidavitof solvencycontainingthestatementssetforthin§4-10-523.

12. Review Of New Hampshire Legislation

a. NewHampshireRev.Stat.Ann.§§564-D:1–D:18aresubstantially similar to theSouthDakotaprovisionsandareeffectivefordispositionstoqualifiedtrustsafterJanuary1,2009.

F. Foreign Situs Trusts

1. Overview

a. Historically used to avoid forced heirship and government expropriation.

b. Places assets out of reach by U.S. courts.

c. Requires creditors to litigate in a foreign jurisdiction under the foreign jurisdiction’s laws and sys-tem.

d. Does not rely on secrecy or concealment to be effective.

2. Similartodomestictrust,asitcanactaswillsubstituteorsupplementtoavoidprobateandmaintainconfidentiality,andtohandlethesettlor’saffairsintheeventof disabilityorunavailability.

3. Providesprocedural,substantive,andpsychologicalbarrierstocreditorsbecausemanyjurisdictionsdonothonorU.S.judgments,makingtrustassetsbeyondthepracticalreachof mostcreditors.

4. Trustsseparatelegalownershipfrombeneficialownership.Sinceatrustbeneficiarydoesnotgener-allyhavelegalownershipof trustproperty(untiladistributionismade),thepropertyisfreefromtheclaimsof thebeneficiary’screditors.

5. Carefully selected trust law provides a greater degree of substantive certainty in planning.

a. Most critical aspect in selecting a jurisdiction is fraudulent conveyance law. Formerly most English jurisdictionsfollowedStatuteof Elizabeth,passedin1571,andtherewasnoperiodof limitationwithin which to bring an action.

b. Fairlyrecentlyanumberof jurisdictionshavepassedlegislationspecificallyaddressingassetpro-tectiontrustscreatedbyforeignsettlors,whichsubstantiallyreducesthereachof theStatuteof Elizabeth.

c. Other factors to consider in selecting jurisdiction:


i. Needforastableresponsibleforeigntrusteeinstablecountry.

ii. Effect of tax laws.

iii. Existing language barriers.

iv. Availability of professional trust services and modern telecommunications facilities.

v. Solidityof reputationinglobalfinancialcommunity.

vi. Statutory frameworkof jurisdictions, includingshortstatuteof limitationsperiodforchal-lenging a trust.

vii. Provisions for protector status.

viii. Whetherandtowhatextentasettlorcanbeabeneficiaryandaprotector.

(1) Settlor’sabilitytoretainenjoymentorcontrol,whilestillprotectingassets,ismoreexpan-sive than in the United States.

ix. Whether foreign judgments are recognized.

x. Standard of proof required to succeed in a fraudulent conveyance action.

(1) Nojurisdictionwillprotecttransfersmadebyaninsolventgrantor.

xi. Access to courts and legal fees required to litigate offshore.

xii. Thefollowingjurisdictionshaveenactedfavorableassetprotectiontrustlegislation,someof-fering greater protection than others. SeeRothschild,Establishing and Drafting Offshore Asset Protection Trusts 23 Estate Planning 65 (February 1996).

(1) Anguilla (11) Labuan

(2) Antigua (12) Marshall Islands

(3) Bahamas (13) Mauritius

(4) Barbados (14) Nevis

(5) Belize (15) Niue

(6 Bermuda (16) St. Vincent

(7) Cayman Islands (17) St. Lucia

(8) Cook Islands (18) Seychelles

(9) Cyprus (19) Turks and Caicos

(10) Gibraltar

6. Overview Of Cook Islands


a. General Characteristics

i. TheCookIslandsarelocatedinthesouthPacificOcean,eastof Australiaandsouthof Ha-waii.

ii. ThecapitalisRarotonga,withamoderninternationalairportandregularairservicetoLosAngeles,Hawaii,Tahiti,Fiji,andAuckland.

iii. Theislandsareremotefromtheworld’smajorfinancialcentersbuthavemoderncommuni-cationssystems.TheirtimezoneisonlythreehoursbehindPacificStandardTime.

iv. TheCookIslandsareself-governing.Theirclosest link iswithNewZealand,andtheyuseNewZealandcurrency.Theyhavebeenindependentsince1965.

v. English is theofficial language,andthere isacommon-lawlegalsystem.Appealsof courtdecisions are brought before the Privy Council in England.

b. Confidentiality. The Cook Islands’ banking laws mandate secrecy about client information with pen-alty of one year imprisonment for a violation.

c. Taxes

i. TheCookIslandsarea“no-tax”jurisdiction.

ii. SolongasbusinessesorganizedintheCookIslandsdonotconductbusinessthere,theyareexempt from tax.

d. Fraudulent Disposition And Trusts. The Cook Islands enacted comprehensive trust legislation in the InternationalTrustsAmendmentActof 1989(effectiveSeptember8,1989),whichhassincebeenamendedseveraltimes,mostrecentlyin1999.

i. Thelegislationaddresses“InternationalTrusts”(“ITs”)andtheeffectthereonof fraudulentdispositions and bankruptcy.

ii. Withrespecttofraudulentdispositions,acreditorseekingtosetasideadispositionmustprovebeyond a reasonable doubt that:

(1) The disposition was made with an intent to defraud that particular creditor; and

(2) The transferor was rendered insolvent by the transfer. If the fair market value of the set-tlor’s property after the transfer to the trust exceeds the value of the creditor’s claim at the timeof thetransfer,thereisnointenttodefraud.

iii. If thecreditormeetsthisburden,thetransferisnotvoidorvoidable.Insteadthetransferormust pay the creditor’s claim from property that would have been subject to its claim but for the transfer,thatis,frompropertyinrespectof whichtheactionisbrought.

iv. Furthermore,thestatuteexpresslystatesthatanITwillnotbevoidbyvirtueof thesettlor’sbankruptcy.

v. Recent amendments (in 1997 and 1999) also contain limitation provisions.


(1) If acreditor’scauseof actionaccruesmorethantwoyearsbeforeatransfertoanIT,thetransferwillbedeemednottobefraudulent,unlessproceedingsinrespectof thatcauseof action had been commenced at the date of the relevant transfer.

(2) Also if a creditor fails to bring an action within one year from the date the transfer to an IT,theactionisbarred.

(3) Furthermore, if the transfer (whether initial or subsequent) to an IT occurs before acreditor’scauseof actionaccrues,suchadispositionwillnotbefraudulentastothatcreditor.A“causeof action”isdefinedasthefirstcauseof actioncapableof assertionagainstaset-tlor.

(4) Forredomiciledtrusts,thelimitationsperiodcommencesatthetimeof originaltransfer,even when the transfer was to an offshore center other than the Cook Islands.

(5) Whereacreditor is successful in settingasidea transfer, thecourtmustdisregardanypunitive damage award from the creditor’s claim.

vi. Another section of the legislation sets forth certain circumstances that will not be deemed “badgesof fraud.”Fraudulentintentcannotbeimputedfrom:

(1) Transfer to an IT within two years of the accrual of a creditor’s cause of action;

(2) Retentionof powersorbenefitsbythesettlor;or

(3) Designationof thesettlorasabeneficiary,trustee,orprotector.

e. Trusts

i. Retainedpowersandbenefitsareexplicitlyaddressedbystatute.AnITcannotbe“declaredvoidorbeaffectedinanyway”becausethesettlor:

(1) Hasthepowertorevokeoramendthetrust,todisposeof trustproperty,ortoremoveorappoint a trustee or protector;

(2) Retains,possesses,oracquiresanybenefit,interest,orpropertyfromthetrust;or

(3) Isabeneficiary,trustee,orprotector.

ii. TheRuleAgainstPerpetuitieshasbeenrepealed.Alternatively,anITmayuseaperiodattheoption of the parties.

iii. Other provisions of the legislation make selection of Cook Islands law binding and conclu-sive,ensurethatanITisnotsubjecttoforcedheirshiplawsof othercountries,requirenonrecogni-tionof aforeignjudgmentagainstanIT,itssettlor,trustee,andprotector,recognizethepowersof atrustprotector,andpermittrusteestodelegatecertainpowerstoothers.

iv. The Act also provides that community property transferred to an IT retains its character as community property.

f. Other Consideration


i. Basedontheauthor’sreviewof commonlyselectedoffshorejurisdictions,theCookIslandshave one of the most comprehensive bodies of statutory law governing trusts and fraudulent con-veyances. The level of comfort one obtains with such statutory certainty should be a factor to weigh against the inconvenience of traveling to this venue.

7. Choice of law clause should generally be upheld if parties have minimum contacts with jurisdiction selected.

a. AnalogoustoaNewYorkbusinessincorporatedinDelawareoratrustthatchoosestoapplySouthDakota law to avoid the Rule Against Perpetuities.

b. Appointing a foreign trustee should satisfy minimum contact requirement even where assets are not physically offshore.

c. Restatement (Second) of Conflicts of Laws §273 provides that:

“Whethertheinterestof abeneficiaryof [anintervivos]trustof movablesisassignablebyhimandcanbereachedbyhiscreditorisdetermined…bythelocallawof thestate,if any,inwhichthesettlorhasmanifestedanintentionthatthetrustisto be administered and otherwise by the local law of the state to which the administration of the trust is most substantially related.”

d. See In re Renard,437N.Y.S.2d860(N.Y.Sur.Ct.1981).Cf. In re Portnoy, In Re Brooks, and In Re Law-rence,infra.Foradetailedanalysisof conflictof lawrulesastheyrelatetoself-settledtrusts,see Roth-schild,Rubin,andBlattmachr,Self-Settled Spendthrift Trusts: Should a Few Bad Apples Spoil the Bunch,”32 Vander.J.Transnat’l L. 763 (1999).

8. Foreign Trustee

a. Trust can have one or more trustees with at least one trustee resident in the foreign jurisdiction.

b. Dutiesof offshoretrusteemaybenominal initially,buttrustwouldusuallyprovidethat foreigntrustee has power to remove domestic trustees in the event of a threat to assets or against the trust were to develop.

c. Trustgenerallyallowstrusteestoinvesttrustassetsanywhereintheworld,sotrusteecandirectthatassetsbetransferredtofinancialinstitution(ascustodian)inanotherjurisdiction,suchasZurichorLondon.

d. Foreign trustee should have no presence in the United States to avoid jurisdiction by U.S. court.

9. “Protectors” Who Act As Watchdogs Over Trustees

a. A protector has veto powers over a trustee and can discharge a trustee.

b. In some jurisdictions the settlor may be a protector and may have certain veto powers over the trustees,includingpowertoremoveandreplacetrusteesandtovetoinvestmentanddistributiondecisions without such powers affecting creditor protection status. But vesting the settlor with such powers may expose the settlor to contempt. See Federal Trade Comm’n v. Affordable Media,infra.

c. Since protector’s power to veto certain trustee decisions is a negative power (as opposed to an af-firmativepowertoinitiateaction),protectorcannotbecompelledbyacourttosubmitassetstoitscontrol.


10. Nonasset Protection Reasons For Offshore Trusts

a. A client may wish to create a long-term dynasty trust not limited by Rule Against Perpetuities. Some jurisdictions permit trusts to last 100 years or more.

b. Althoughthetrustistaxneutralduringthesettlor’slifetime,underthegrantortrustrulesitbe-comes a nongrantor foreign trust at the settlor’s death. This can present tax opportunities not avail-able to domestic trusts.

c. Avoidance of forced heirship rules (such as right of election provisions).

d. Properly structured foreign situs trust can invest in companies that for one reason or another do not wishtocomplywithSECfilingrequirements(andthereforeareotherwiseoff limitstoU.S.inves-tors).

i. Offshore hedge funds.

ii. Foreign variable life insurance.

e. Foreigntrustsarealsousedtodiversifyrisk,avoidexchangecontrols,avoidgovernmentexpropria-tion,andmaintainprivacy.

11. Trust Structure

a. Irrevocable to avoid possibility a creditor could have the settlor compelled to revoke it. May provide forreversiontothesettlorafteraperiodof time,providednocreditorclaimsexistthatprovideforreversion.

b. Settlor’sinterestasbeneficiaryshouldbediscretionary.

c. Settlor should retain a limited power of appointment if a completed gift is to be avoided.

d. Provision should be made for a protector and the powers of protector.

e. Givepower to remove trustees located in jurisdictionswhere certain events occur (suchas anythreat to trust or trustees).

12. Tax Issues

a. Residence Of Trust. IRC §§7701(a)(30) and (31)(B) provide that a trust is a foreign trust unless two criteria are met:

i. A court within the United States must be able to exercise primary supervision over the admin-istration of the trust; and

ii. One or more U.S. persons have the authority to control all substantial decisions of the trust.

b. A properly structured foreign situs trust should not be taxed any differently than a domestic trust. Theonlydistinction,intheend,willbethatthereportingrequirementswillbetriggered.

c. Evenif thetrustwereaforeigntrustfortaxpurposes,itwouldbetreatedasagrantortrustunderIRC§679if thesettlorisaU.S.personandthetrusthasU.S.beneficiaries(inadditiontotheregu-lar grantor trust provisions contained in IRC §§671-677). The transferor will generally be treated astheownerof thepercentageof theforeigntrustattributabletothepropertytransferred,aslongas the trust has anyU.S.beneficiariesandthesettlorisliving.


d. Gift And Estate Tax Aspects

i. Retained power of appointment renders transfer an incomplete gift. Treas.Reg. §25.2511-2(b).

ii. Incomplete gifts will be included in settlor’s estate upon death.

iii. Can contain standard credit shelter or bypass trust language and also direct trustee to qualify other property for the marital deduction.

iv. Canpreservestep-upinbasisbenefitondeathif includedinestate.

v. If clientsresideinacommunitypropertystate,considerpreservingdoublestep-upinbasisbyusingajurisdictionthatrecognizescommunityproperty,suchastheCookIslands.

vi. If itisdesiredtomakethegiftcomplete,thesettlorshouldnotretainanypowerof appoint-ment.

e. IRC §684 tax on transfers of appreciated assets is not applicable with respect to transfers to foreign grantortrusts.But,if upondeath,thetrust,whichbecomesanongrantortrust,isnotincludableinthesettlor’sestate,IRC§684willapplyimmediatelybeforedeath.

f. By structuring the trust to meet the requirements of a domestic trust for U.S. tax reporting pur-poses,onecanneverthelessprovidethatthetrustbegovernedbyforeignlawforpurposesof in-terpretation,validity,andgoverninglaw.Suchatrust,referredtoasahybridtrust,providesthataU.S.personcontrolsallsubstantivedecisions,andduringperiodsof suchU.S.person’scontrolaU.S. court has primary supervision over administration of the trust.

g. Tax Return Filing Requirements

i. Eventhoughgiftisincomplete,agifttaxreturnmustbefiled.Treas.Reg.§25.6019-3(a).

ii. Sincetrustisagrantortrust,aForm1041,UnitedStatesIncomeTaxReturnforEstatesandTrusts,mustbefiledannually.Thereturn,however,needdiscloseonlythatitisagrantortrustandthat all income and deductions will be reported on settlor’s Form 1040.

iii. If trustisdeemedaU.S.trustfortax-reportingpurposes,nootherfilingrequirements.OnForm1040,ScheduleB,taxpayermayanswer“no”toquestionof whetherheorshewasagrantoror transferor to a foreign trust.

iv. Onceatrustisdeemedtobeaforeigntrust,however,additionalformsmustbefiled.TheseincludeDepartment of theTreasuryFormTDF90-22.1 and IRSForms 56, 1040NR, 3520,3520-A,and4970.

v. Mostoffshorejurisdictionsdonotimposeincome,gift,estate,excise,capitalgain,oranyotherform of tax whatsoever if the trust is properly structured and the settlor is a nonresident of such jurisdiction.

h. SeePriv.Ltr.Rul.95-36-002(May12,1995),whichanalyzedanoffshoretrust/partnershipstruc-ture,determiningittobegifttaxandincometaxneutral.

13. Combining Foreign Trust With Limited Liability Company


a. Maximizesbothflexibilityandprotection.

b. Whenfirstestablished,transferorconveysassetstoLLCinexchangeforLLCinterest,whichisthentransferredtothetrust,allowingthemanager/settlortomaintaincontroloverLLC’sassets.

c. Oncethreatappears,foreigntrusteehaspowertoremovemanager(toprotectmanagerfromanypotentialcourtorder)and,assolememberof theLLC,moveLLCassetsoffshore.

d. Amemberof theLLCcanmakeelectiontobeadisregardedentitybyfilingForm8832.SinglememberLLCselectingtobedisregardedentitiesmustfileannuallyonForm8858.

14. Asset Transfer Considerations

a. Generally,liquidassetsarebestandleastcomplicatedtotransferoffshore.

b. If client wishes to protect nonliquid assets (such as real estate and business interests) it may be possible to borrow out most of the equity using the property as collateral and moving the loan proceeds offshore.

c. Pensionassets,includingIRAs,wouldgenerallynotbetransferredsincedoingsowouldresultinimmediate income taxation and possible penalties for premature withdrawals. But ERISA-quali-fiedplansandIRAsareprotected.Inmanystatesnon-ERISAplans(suchasKeoghswithonlyoneparticipant) are protected under state exemption statutes.

d. Statutory provisions restrict transfers of professional corporation stock. To strip the equity out of thecorporation,however,thegrantorcanborrowagainstcorporateassetsandtransferthepro-ceeds to the partnership or trust.

e. “Nestegg”transferforbusinesspersonwhomustretainadequateassetstoobtainbankloansversusother clients who might transfer all their property.

f. Creation of several partnerships or LLCs so that inherent liabilities of certain assets do not taint otherassets,forexample,realestate.

15. Export The Assets v. Import The Law

a. Exporting assets to foreign jurisdiction under control of foreign trustee.

b. Importing the law:

i. Assets transferred to settlor-controlled LLC or FLP remain in United States until threat aris-es.

ii. May subject settlor to civil contempt.

iii. U.S. court may have jurisdiction over foreign trust due to situs of assets remaining in United States. See Nastro v. D’Onofrio,263F.Supp.2d446(D.Conn.2003).

16. Foreign v. Domestic

a. Foreign trusts offer more substantive barriers to creditors since a U.S. judgment may not be en-forceableoffshore,whereastheU.S.Constitutiongenerallyrequiresstatecourtstoenforceotherstates’ judgments.


b. Will settlor’s designation of what state or foreign country’s laws govern the trust be respected? Or willacreditor’srightsbedeterminedbythestate’sgovernmentalinterestor“significantrelation-ship”withthesettlor?See, e.g., In re Portnoy,201B.R.685(S.D.N.Y.Bkrtcy.Ct.1996),infra,andB.V. Brooks,217B.R.98(D.Conn.BkrcyCt.1998).

c. Consider appointment of a domestic trustee resident in a state that recognizes self-settled trusts to act with a foreign trustee.

17. How Much Protection Is Necessary?

a. Some client situations warrant greater sophistication and complexity resulting in higher costs.

b. Continuum beginning with transferring assets to a spouse (at minimum cost) and proceeding throughaseriesof alternativesofferingmorecertaintyandflexibilityuntilreachingoffshoretrustor foreign LLC contribution (at greatest cost).

18. Costs

a. Inadditiontolegalfees,clientwillincurannualfeestooffshoretrusteeof $1,500to$4,000de-pending on jurisdiction. Once trust is created only other ongoing costs are those for preparing the trust income tax returns.

b. Feespaid toestablishassetprotection trustandadministrative feespaid tooperate it should, if reasonable,bedeductibleunderIRC§212as“ordinaryandnecessaryexpensespaidorincurred...(1)fortheproductionorcollectionof income[or](2)forthemanagement,conservation,ormain-tenanceof propertyheldfortheproductionof income.”

c. Client should assess level of protection desired and consider annual cost to be similar to that of a single premium liability policy.

i. Cost/benefitanalysis.

ii. Typical client has at least $1 million in assets to protect.

iii. Clients who place great value on peace of mind will be better able to justify more sophisti-cated techniques.

iv. Offshoretrustonastand-alonebasis,wheresettlorisneitheraprotectornorabeneficiary;butclientmustgiveupcontrol,whichasapracticalmattermostclientswouldprefernottodo.

v. Nature And Location Of Assets Owned By LLC Or Trust. If clientuses theLLC/trust techniquegenerallythereisnoneed,initially,totransferassetsoffshore.

vi. Intheauthor’sexperience,fewerthan5percentof clientscreatingsuchvehicleshavebeentargetedbycreditors,andthereforethesestructuresmerelyserveasimilarpurposetothatof insur-ance policies.

vii. Whenacreditorattackisimminent,however,adecisionwillhavetobemadetoremoveassetsfrom danger of being seized. At this time assets can be liquidated and moved to another jurisdic-tion.

19. Other Practical Concerns


a. Possibility that a creditor may bring legal action against planner under various theories. Possibility that a client may have misrepresented his or her liabilities or that an aggressive creditor may name planner as a co-conspirator to gain some leverage in litigation. See, e.g., Morganroth & Morganroth v. Norris, McLaughlin,331F.3d406(3dCir.2003).Plannermustprotecthimself orherself byproperlyadvisingclientsthattherearelimitstoprotectingassets,demandingfulldisclosure,obtainingaf-fidavitsof solvency,andmostimportantlyknowingtheclient.

b. Similarly,aNewJerseyCourtheldthatanattorneywhoadvisedhisclientthatitwaslawfulif theclient transferred his property to his wife prior to defaulting on a loan was subject to a civil conspir-acy claim. Banco Popular N. Am. v. Gandi,(N.J.Super.Ct.App.Div.2003),aff ’d in part, rev’d in part,876A.2d253(N.J.2005).Theissuewaswhethertheattorneyparticipatedintheconspiracybyofferingdefendantlegaladvice.Generally,anattorneymaybechargedwithconspiracyif heorsheisanactiveparticipantintheclient’sunlawfulactivity.Ingeneral,alawyerisnotliableforaclient’stortunless the lawyer assisted the client through conduct itself tortious or gave substantial assistance to the client knowing the client’s conduct to be tortious. Restatement (Second) of Torts §876.

c. Since asset protection planning must be implemented when there are no legal claims on the hori-zon,theplannerhasthedifficulttaskof motivatingaclienttotakeactionbeforeafearbecomesanightmare.

d. Howwillthefilingof bankruptcyaffectthecreditorprotectionof self-settledtrusts?

i. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added a provision that will deem a transfer to a self-settled trust to be a fraudulent transfer if made within 10 years of filingabankruptcypetitionif thetransferismadewithfraudulentintenttohinder,delay,ordefraud existing or future creditors.

ii. Shouldthesettlor’sinterestasabeneficiary“springup”onlyafter10years?Alternatively,shouldthetrustbesettledoffshoreforthefirst10yearsandthenberedomiciledonshore?

iii. Does the Act legitimize self-settled trusts that have been existent for more than 10 years? Or will the forum state still apply its own laws?

G. Summary Of Provisions Of New Bankruptcy Act Affecting The Wealthy

1. Thepassageof theBankruptcyAbusePreventionandConsumerProtectionActof 2005(the“Act”)hassignificantlychangedthelandscapeof wealthpreservationstrategiesinthebankruptcycontext.Thesechangesareprimarilyintheareasof thehomesteadexemption,retirementplanassets,fraudu-lenttransfers,andself-settledtrusts.

a. Homestead Exemption

i. Responding to some bankruptcy debtors’ abuses of the liberal homestead exemptions allowed byanumberof states,theActattemptstocurbtheavailabilityof theexemptioninthebankruptcycontext.

ii. Underpriorlaw,domicileforbankruptcyexemptionpurposeswasdeterminedbasedonwherethedebtorresidedduringthe180dayspriortofilingthepetition.TheActexpandstheperiodgen-


erallytotwoyears.Furthermore,thehomesteadexemptionwillnowbelimitedto$125,000if thedebtoracquiredthehomesteadwithin40monthspriortothefilingof thepetition.Thislimitation,however,doesnotapplytoanyamounttransferredfromthedebtor’spreviousprincipalresidence,whichwasacquiredbeforethe40-monthperiod,if itwaslocatedinthesamestateasthecurrentresidence.

(1) Inthefirstreportedcaseinvolvingthehomesteadexemption,theBankruptcyCourtinArizonaheldthatthe$125,000limitationwherethedebtoracquiredhisresidencewithinthe40-month period only applies in states that allow an election to opt out of the federal exemp-tions,notingthatCongressmayneedtoamendthisprovisiontoapplyto“non-opt-out”states.In re McNabb,2326B.R.785(D.Ariz.Bkrtcy.Ct.2005).

iii. The Act also provides that the value of the homestead exemption is reduced to the extent that such valueisattributabletononexemptpropertythatthedebtor“disposedof ”inthe10-yearperiodpre-cedingthepetitiondatewiththeintenttohinder,delay,ordefraudacreditor.Of course,thequestionof whether or not there is actual intent in a given situation will become an issue in many situations.

iv. Thehomesteadexemptionalsowillbelimitedto$125,000if thedebtor(a)hasbeenconvictedof afelony,whichunderthecircumstancesindicatesthatthebankruptcyfilingwasabusiveor(b)owesadebtarisingfrom(i)aviolationof securitieslaws,(ii)fraud,deceit,ormanipulationinafiduciaryca-pacityorinconnectionwiththepurchaseorsaleof registeredsecurities,(iii)RICOviolations,or(iv)acrime,intentionaltort,orwillfulorrecklessmisconductthatcausedseriousphysicalinjuryordeathtoanotherindividualintheprecedingfiveyears.Significantly,thislimitationdoesnotapplytotheextentthat the amount of the relevant property interest is reasonably necessary for the support of the debtor and any dependent of the debtor.

b. Retirement Plan Assets

i. Althoughasageneralrule,theActattemptstocurtailabusesof thebankruptcylawbydebtorsand is generally pro-creditor; in the area of retirement plan assets the effect of the Act is decidedly “pro-debtor.”Indeed,itsignificantlyexpandsthepotentialforuseof exemptionsforretirementplan assets.

ii. The Act provides an express exemption for retirement accounts that are tax-exempt under IRC§§401,403,408,408A,414,457,or501(a).This includesnotonlyERISAplanaccounts(which have been held by the Supreme Court to be exempt) but also traditional IRAs and Roth IRAs. Inaddition, theexemptionapplieswhether thedebtorelects stateexemptionsor federalexemptions.Averysignificantexception,however,isthattheexemptionislimitedto$1million,notincludingamountsattributabletoqualifiedrollovers,withrespectto(a)RothIRAsand(b)tra-ditionalIRAsotherthansimplifiedemployeepensions(“SEPs”)underIRC§408(k)andSIMPLEretirement accounts under IRC §408(p). Thus an individual may claim as exempt up to $1 million intraditionalIRAandRothIRAaccounts,andtotheextentthattheIRAswerefundedthroughqualifiedrolloverstheexemptionisunlimited.

iii. The Act further provides that a rollover from one exempt account to another exempt account willnotcausealossof exemption.Inaddition,adistributionthatisaneligiblerolloverdistribution


under Code §402(c) or that has been rolled over into another exempt plan within 60 days does not lose its exemption. There is apparently no such continuing exemption for minimum required distri-butionsoncetheyarepaidout.TheAct,whilenotrepealingtheneed-basedexemptionlimitationprovidedforunderBankruptcyCode§522(d)(10)(E),ineffectrendersitapplicableonlyinlimitedsituations.

iv. The Act provides additional statutory protection to retirement plans that are exempt from taxation under certain Code sections. If the plan has received a favorable determination letter that isineffectonthepetitionfilingdate,theplanfundswillbepresumedtobeexempt.If therehasbeennodeterminationletterreceived,thefundsareexemptprovidednopriordeterminationtothe contrary has been made and (i) the plan is in substantial compliance with the Code or (ii) the fundfailstobeinsubstantialcomplianceandthedebtorisnot“materiallyresponsible”forsuchfailure.

c. Fraudulent Transfers And Transfers To Self-Settled Trusts

i. Priortotheenactmentof theAct,theBankruptcyCodeallowedabankruptcytrusteetoavoidanyfraudulenttransferof thedebtorthatwasmadewithinoneyearpriortothefilingof thepeti-tion.TheActextendsthatperiodtotwoyearspriortothefilingof thepetition.

ii. The Act creates a new rule with regard to transfers to self-settled trusts by adding Bankruptcy Code§548(e),whichprovidesforalongerclaw-backof anytransfermadebythedebtortoa“self-settledtrustorsimilardevice”if thedebtorisabeneficiaryandmadethetransferwithactualintentto“hinder,delayordefraudanyentitytowhichthedebtorwasindebtedortowhichthedebtor...became...indebted[thereafter].”Asaresultof theperceivedabusebythoseengagedinsecuritiesfraud,theActspecificallyprovidesthatatransfer“includes”atransfermadeinanticipationof amoneyjudgment,settlement,civilpenalty,equitableorder,orcriminalfineincurredby,orwhichthedebtorbelievedwouldbeincurredby,anyviolationof stateorfederalsecuritieslawsorsecuri-ties fraud.

iii. The intent-to-defraud language is virtually identical to the language permitting the avoidance of generalfraudulenttransfers.Thus,courtsmayinterpretthemeaningof thenewprovisionbasedon existing case law.

iv. Although the legislative history of the provision indicates that the intent of this provision was to target fraudulent transfersby thosepersons involved in securitiesviolations, theprovisionasenactedisnotlimitedtosuchtransfers.Inaddition,theAct’suseof thephrase“self-settledtrustorsimilardevice”wouldseemtosignificantlyextendtheprovision’sreach.Conceivably, itmayincludeentities,suchaslimitedliabilitycompaniesandevenretirementplans,inwhichthesettlorretainsabeneficialinterest.

H. Effectiveness Of And Challenges To Offshore Trusts

1. Theeffectivenessof anyassetprotectionplanisdeterminedbytheresultsultimatelyachieved.Thatis,inthefinalanalysis,howlongandatwhatcostwilltheclientbesubjecttolitigationandtowhatextenthas the client protected the assets from loss.


2. In the real world plaintiffs must weigh the heavy costs of litigation against the likelihood of successful recovery.If,asaresultof availingoneself of certaintechniques,thedebtorisinabetterpositiontosettle the dispute at considerably lesscost,thenthebenefitsof assetprotectionarerealized.

3. The few reported decisions that involve settlors who have created offshore trusts offer insight into how thecourts,bothintheUnitedStatesandabroad,viewthesestructures.

a. In re 515 South Orange Grove Owners v. Orange Grove Partners,broughtintheCookIslandsin1994,in-volved a California real estate developer against whom a suit was brought in 1992 in California and a judgment of $5 million was awarded in 1994. During 1993 and 1994 the defendants settled a trust in the Cook Islands and transferred assets thereto. The creditors obtained a Mareva injunc-tion (similar to a TRO) ex parte. The author has been advised that this case settled. It may not have beendifficult,however,forthecreditortohavesatisfieditsburdentoproveafraudulentconvey-ance beyond a reasonable doubt under the timing stated.

b. In In re Brown,1996WL33657614(D.AlaskaMar.11,1996),thecourtdeterminedthattheBelizetrustcreatedbythedebtorwasasham,andthereforetheassetsof thetrustwereincludedinthedebtor’s bankruptcy estate. The court’s decision was based on several factors including the failure to execute any trust documents and the debtor’s retention of control over the trust assets.

c. In In re Portnoy,201B.R.685(S.D.N.Y.Bkrtcy.Ct.Oct.7,1996),Mr.Portnoytransferredover$1milliontoaJerseytrust“whenheknewhispersonalguaranteewasabouttobecalled.”JudgeBroz-mannotedthatthetrustwascreatedafterMr.Portnoysignedtheguaranteeandmisrepresented,duringsettlementdiscussions(priortobankruptcyfiling),thathehadincurredlargeexpensesforcancer treatments and had no assets remaining to satisfy the debt. Mr. Portnoy also disclosed that hissalarywasbeingdepositedintohiswife’saccount.Thecourtdeniedadischarge,notingthatthe debtor’s actions demonstrated intent to defraud his creditor. There are reports that this matter settled.

d. In the case of In re B.V. Brooks,217B.R.98(D.Conn.Bkrtcy.Ct.1998),theissuebeforethecourtwas again whether to apply domestic (in this case Connecticut) law or foreign law to the spendthrift trust exemption under the Bankruptcy Code. Citing Portnoy as precedent and following another seeminglyresult-orientedanalysisof conflictof lawrules,thecourtfoundtheassetsof thedebtor’stwo trusts includable in the debtor’s bankruptcy estate notwithstanding the fact that the trusts were validspendthrifttrustsunderthelawsof BermudaandJersey,ChannelIslands.Althoughverylittleof thecase’sfactualbackgroundwasactuallyreported,theBankruptcyCourtdidnotethatthedebtor/settlorwastheprimarybeneficiaryof eachof thetrustsandhadtherighttoreceiveallof theincome.Inaddition,theunreportedfactsapparentlycausedthecourttoperceivethefundingof the trusts as fraudulent since the court twice characterized the debtor’s acts in creating the trusts asa“scheme.”Thisperceptionwaslikelybuttressedbythetimingof thecasesincethetrustswerefundedin1990,andaninvoluntarybankruptcypetitionwasfiledagainstthedebtorthefollowingyear.

e. In re Stephan Jay Lawrence,227B.R.907(S.D.Fla.Bkrtcy.Ct.1998),followinga42-montharbitra-tionandjust66daysbeforeanawardinexcessof U.S.$20millionwasenteredagainsthim,thedebtorfundedanoffshoretrust,citingfirstthelawof Jersey,ChannelIslands,andaboutamonth


laterthelawof Mauritius,asgoverning.CitingbothPortnoy and B.V. Brooks, the Bankruptcy Court found that the sole purpose of the trust was to shield the debtor’s assets from a creditor that “was abouttoobtainastaggering$20Millionarbitrationawardagainsthim”andthat“[t]hetimingof thetrust’screationisfurtherevidenceof thisintent.”Thecourtalsofoundthedebtor’stestimonybefore the court to have not been credible (and on several occasions perjurious) and that the debtor was“shockinglylessthancandid”withthecourt.Thecourt,therefore,enteredjudgmentagainstthedebtor,therebydenyinghimadischargeinbankruptcy.Subsequentlythebankruptcytrusteemoved to hold the debtor in contempt if he did not repatriate the funds. In September 1999 the court found Lawrence in contempt (In re Lawrence,238B.R.498,500(S.D.Fla.Bkrtcy.Ct.1999),whichfindingwasaffirmedbytheU.S.DistrictCourtinadenovoreview.In re Lawrence,251B.R.630(S.D.Fla.Bkrtcy.Ct.2000),aff ’d, 279 F.3d 1294 (11th Cir. 2002).

i. Generally, impossibilityof performance isacompletedefensetoachargeof coercivecivilcontempt. United States v. Rylander,460U.S.752(1983).Certainlowercourts,however,havesug-gested that an exception exists where the impossibility is self-created within a nexus of time of the anticipatedjudgment.Accordingly,thecourtinIn re Lawrenceaffirmedthecivilcontemptorder.

f. Federal Trade Comm’n v. Affordable Media LLC, 179 F.3d. 1228 (9th Cir. 1999). Although the facts in this case (colloquiallyknownasthe“Anderson”caseafteritsindividualdefendants)wereasbadas,if notworsethan,thoseinanyof theforegoingcases,thecourtneverreachedanyissuesof trustvalidityorconflictof laws.Insteadthecourttangledwiththesettlors’allegedcontemptof courtinfailing,pursuanttoapreliminaryinjunction,torepatriatetrustassetsthathadbeeninvestedinthetrust’snameoffshore.Specifically,thesettlors,whowerealsoco-trusteesof theirowntrust,aswellasthetrustprotectors,wereorderedtoinstructtheirforeignco-trusteetorepatriatemorethan$6millioninprofitscollectedunderanallegedPonzi-typeinvestmentscheme.The“anti-duress”clause in the trust agreement resulted in their removal as trustees and ensured that the assets would notberepatriatedpursuanttothecourt’sorder.Whentheassetswerenottimelyrepatriated,thesettlors were held in civil contempt for failing to comply with the court order and jailed pending repatriationof theassets.AftertheFTClostseveralroundsintheCookIslands,thecasewasulti-mately settled for $1.2 million.

i. InfindingtheAndersonsincivilcontempt,thedistrictcourtrejectedtheAndersons’impos-sibilitydefense,specificallyfindingthattheAndersonsinthejudgmentof thecourtwereincontrolof the trust since the trust instrument provided the protectors with the exclusive power to deter-mine what constituted an event of duress.

g. YetanothercaseinwhichthetimingwassuspectisBank of America v. Brian Weese,No.03-C-01-001892 (Cir.Ct. Baltimore County 2001). After the creditor commenced litigation in the Cook Islandswithintheirstatuteof limitations,thesettlorssettledthematterduetotheCookIslandsCourt’srulingthattheirattorneys’fileswerenotprotectedbyprivilegeunderanexceptiontoprivi-lege relating to fraudulent transfers.

h. Breitenstine v. Breitenstine,62P.3d587(Wyo.2002).Afterthesaleof hisfamilybusiness,Htookhisshareof theproceedsanddepositedthemintomaritalaccountsforthebenefitof bothparties.Hwantedtomoveoffshoretoprotecttheassets,sothefamilymovedtotheBahamas.Theparties


separatedforatimeandthenreconciled.Thefollowingmonthafterthereconciliation,Hreceivedanothersumof moneyfromhismother.Laterthatsameyear,HcreatedtheBreitenstineFamilyTrustandtransferredasubstantialportionof themaritalassetstothetrust.Ayearlater,thepar-tiesseparatedagain,andWfiledfordivorce.Shewithdrewthedivorce,butseveralmonthslaterthepartiesseparatedforthefinaltime.Duringthattime,anduptountiltheequitabledistributionhearing,Hcontinuedtomaketransfersof propertytotheFamilyTrust.Therewasnoquestionthat the source of the funds was H’s inherited property and gifts from his parents. Those monies accountedforsubstantiallyallof themaritalestate.Nevertheless,itwasheld(andaffirmedonap-peal) that the monies deposited into the Family Trust were assets subject to equitable distribution. While H contends the court should not have awarded a 50 percent distribution of those assets to Wbecausethesourcefundswereinherited,thecourtfoundthatitwasauthorizedtolooktootherfactorstodistributeinheritedassets;includedare:respectivemeritsof theparties’cases,fullandfairdisclosurebytheparties,andtheparties’ownhandlingof thefundsoncetheywereinherited.Here,Hliedabouthisassetsandfailedtoproduceanaccountingof thetrust;Hsecretedotherassets,settingupprotectiontrustsanddummycorporations;andWandchildrenwerelivinginadiminished lifestyle while H continued to live well.

i. United States v. Grant, 2005U.S.Dist. LEXIS 22440 (S.D.Fla. Sept. 2, 2005). In 1983 and 1984RaymondGrantcreatedaBermudatrustandaJersey,ChannelIslands,trust.Raymondwasthebeneficiaryof theBermuda trust,andhiswife,ArlineGrant,was thebeneficiaryof theJerseytrust.In1991and1993theIRSassessedmillionsof dollarsinbacktaxesagainsttheGrantsfortheyears1977through1982,and1984through1987.In2003judgmentwasenteredagainsttheGrantsformorethan$36million,andamotionwasmadetoorderArlinetorepatriatethetrustfunds. Arline had the power to remove and replace any acting trustee. The court set forth its query insimpleterms:“[I]sthisatrustoverwhichthebeneficiarylacksanycontrol,suchthatthebenefi-ciaryissimplythatandnothingmore,andregardlessof whatshedoesorsays,shelacksthepowertorepatriatetheseassetstotheUnitedStates?—or,doesthebeneficiaryretainsuchcontrolthatshe has the power vested in her in some way by the terms of the trust to repatriate the corpus? If shehassuchpower,thenthisassetisnodifferentfromanyotherasset.”Althoughthecourtfoundthat“bygivingArlineGranttotalunreviewableauthorityoverdischargeandappointmentof theTrustees,sheinactualitycontrolsthecorpusof thetrust,”ina2008decisionreviewingevidencethatArlinetookstepstohavethetrusteesremitthefundsorresigninfavorof aUStrustee,whichwereunsuccessful,thecourtdeniedthegovernment’smotiontoholdArlineincontemptasherimpossibility to comply was a complete defense to contempt. See United States v. Raymond Grant and Arline Grant, 2008U.S.Dist.LEXIS51332(S.D.Fla.May27,2008).

j. Federal Trade Comm’n v. Ameridebt, Inc.,373F.Supp.2d558(D.Md.2005).Inthiscase,thedefendantsallegedlyoperateda“nonprofit”creditcounselingservicebutdefraudedconsumerswithdebtprob-lems by offering to fashion debt payment plans for them and then deducting fees from payments the consumers made under the plans without disclosing those deductions to the consumers. The FederalTradeCommissionsoughtapreliminaryinjunctionappointingareceiver,freezingthede-fendants’assets,requiringanaccounting,anddirectingthedefendantstorepatriatetothereceiverassets that were transferred offshore. The FTC alleged that since the time when the defendants be-


came aware of the investigation that led to the lawsuit the defendants had been actively dissipating theirassetsbymakingtransferstoclosefriendsandrelatives,totrusts(bothdomesticandoffshore),andbylivingalavishlifestyle.Inparticular,lessthantwomonthsaftertheFTCservedtwoof thedefendantcompanieswithCivilInvestigativeDemands,oneof theindividualdefendantssetupdomesticandoffshoreassetprotectiontrusts.Presentedwiththissetof egregiouscircumstances,thecourtgrantedthemotionforpreliminaryinjunction,appointingareceiver,freezingthedefen-dants’assets,requiringanaccountingof assets,anddirectingthedefendantstorepatriatetothereceiverassetsthatweretransferredoffshore.Withregardtothelatteraspectof theinjunction,thecourtnotedthatif thedefendantviolatestheorderand“failstorepatriateassetsinthetrusts,theFTCmaymoveforcontempt,atwhichpointDefendantswillbefreetoarguetheimpossibilityof performance,anargumenttheCourtmayormaynotfindpersuasive.”

k. Nastro v. D’Onofrio,263F.Supp.2d446(D.Conn.2003).Theplaintiff obtaineda$2.1millionjudg-ment against the defendant for misappropriation of their formerly co-owned company’s funds. Twoweekslater,thedefendanttransferred$650,000worthof stockandmembershipinterestsinConnecticut companies (of which he was either the 100 percent owner or 50 percent owner) to anirrevocablespendthrifttrustinJersey,ChannelIslands,forthebenefitof hiswifeandchildren.Theplaintiff asserted, interalia, that the transferwas fraudulentunderConnecticut’sUniformFraudulent Transfer Act. The plaintiff also argued that the defendant’s attorney and the attor-ney’sfirmshouldbeheldliableforparticipatinginthefraudulenttransfer.ThecourtdismissedtheclaimsagainsttheJersey,ChannelIslands,trustee,holdingthattherewasnobasistoexercisepersonaljurisdictionoveritbecausetheJersey,ChannelIslands,trusteehadinsufficientcontactswithConnecticut.Further,thecourtruledthattherewasnobasistoexercisejurisdictionoverthetrustassetssincetheyconsistedof “certificated”securitiesand,underConnecticut’sversionof theUniformCommercialCode,thesitusof acertificatedsecurityistheplacewherethecertificateislocated(hereJersey,ChannelIslands).Thisisthecase“[e]venthoughthecompaniesand,presum-ably, thecompanies’assetsare located inConnecticut.”Thecourt,however,grantedplaintiff ’spreliminaryinjunction,enjoiningtheConnecticutcompaniesfromregisteringanyfurthertransfersof stockheldbythetrustandfromtransferringanyassetstothedefendant,hisfamily,orthetrustduringthependencyof thelitigation.Thecourtfoundthattheplaintiff satisfiedhistwinburdensof showingthathewillsufferirreparableharmandthattherearesufficientlyseriousquestionsonthemerits.Thefirstprongwassatisfiedsincetherewasthepossibilitythatthedefendantcouldtakefurtheractiontoplacetheassetsbeyondthereachof thecourt.Thesecondprongwassatisfiedsince there was evidence that the defendant transferred his interests in the Connecticut companies withoutconsiderationandwastherebyrenderedinsolvent(which,underConnecticut’sUniformFraudulentConveyanceAct,wouldrenderthetransfersfraudulent).Thecourtalsodismissedtheclaimsagainsttheattorneyandhislawfirm,notingthatthereisnoConnecticutauthorityforthevalidity of a cause of action against an attorney for aiding a fraudulent transfer. The court further observedthat,inconnectionwithliabilityundertheConnecticutUnfairTradePracticesAct,theConnecticut Supreme Court stated that providing a cause of action under that Act for the actions of an opponent’s attorney “would stand the attorney-client relationship on its head and would compromise an attorney’s duty of undivided loyalty to his or her client and thwart the exercise of theattorney’sindependentprofessionaljudgmentonhisorherclient’sbehalf.”


l. Banco Popular N. Am. v. Gandi,876A.2d253(N.J.2005).SureshGandioperatedtwoBurgerKingfranchises and one Arby’s franchise. He held each of these franchises through separate hold-ing companies of which he was the sole shareholder. One of the holding companies took out a $500,000loanfromBancoPopular.Gandiexecutedapersonalguarantywithregardtotheloan.InconnectionwithanunrelateddisputewithArby’s,Gandiretainedanattorney,RichardFreed-man,torepresenthim.FreedmanallegedlyadvisedGanditotransferallhisassetstohiswifesothat they would be beyond Arby’s reach. Freedman prepared the transfer documentation. A few monthsafter the transfer,BancoPopular issued twomore loans toGandi’sholdingcompanies.Thefirstwasa$15,000 loanforwhichGandiexecutedaguaranty.Inspiteof theearlierassettransfer,Gandirepresentedintheguarantythathe“hasnot...dispose[d]of allorsubstantiallyallof Guarantor’sassets.”Healsostatedthat“noeventhasoccurredwhichmayadverselyaffectGuarantor’sfinancialcondition.”Thesecondloanwasfor$750,000forwhich,again,Gandiex-ecutedaguaranty.Theguarantystatedthathemustmaintainaminimumnetworthof $950,000.Inadditiontonegotiatingtheguarantyandloan,Freedmanissuedanopinionletterinwhichhestated:“Afterdueinvestigation,weareunawareof anymaterialmattercontrarytotherepresenta-tionsandwarrantiesof theBorrowerortheGuarantorcontainedintheLoanDocuments.”AfterGandidefaultedonallof theloans,thebankobtaineda$1.25millionjudgmentagainsthim,andthenfiledafraudulenttransferactionagainsthimandhiswife.WhenGanditestifiedatadeposi-tionthatFreedmanadvisedhimtomakethetransfers,thebankjoinedFreedmantotheactionasadefendant,allegingbreachof dutytothebank,conspiracytodefraudGandi’screditors,common-lawfraud,negligence,creditorfraud,andethicalviolations.Aftervariousdismissalsandreinstate-mentsof theclaimsinthelowercourts,theNewJerseySupremeCourtheldthatfortheattorneytobeliabletothirdparties,theattorney’sactionsmustbeintendedtoinduceaspecificthirdparty’srelianceonhisorherrepresentations.Thecourtnotedthat,inaidingGandiintheassettransfer,notonlydidFreedmanmakenorepresentationtothebankseekingtocausereliance,theentiretransaction was in fact intended to be (and was) carried out without the bank’s knowledge. There-fore,therewasnodutyowedtothebank.Incontrast,Freedman’srepresentationsintheloanne-gotiations and opinion letter were intended to induce reliance. Therefore the bank’s claims against Freedman in that connection were permitted to proceed.

m. Kendall v. Turner (In re Turner),335B.R.140(N.D.Cal.Bkrtcy.Ct.2005),modified,345B.R.674(N.D.Cal.Bkrtcy.2006)Inthisapparentlyresult-orienteddecision,theBankruptcyCourtconcludedthatthebankruptcytrusteewasentitledtoavoidthetransferof thedebtor’shometoaNevadaLLCand the subsequent transfer of the home to the debtor’s wife. The court also ruled that the debtor’s discharge should be denied. The debtor was a medical school graduate who was the subject of a number of complaints related to his practice and had been convicted of a misdemeanor (while practicing medicine on probation) based on an incident involving a patient. Around the time that alawsuitwasfiledinconnectionwithaseparateunrelatedcourseof conduct,laterfoundtobetortious,relatingtotheplaintiff,thedebtorsetupaNevadaLLCthatwasowned99percentbyaBahamastrustand1percentbyaNevadacorporation.Beforejudgmentwasentered,thedebtorandhiswifetransferredtheirhometotheLLC.Aftertheplaintiff filedafraudulenttransferac-tionandattemptedtoexecuteawritof executionagainst thehouse, theLLCrecordedadeedtransferringthehometothedebtor’swife(purportedlyto“confirm”thatthehomewasthewife’s


separatepropertyandtherebyalleviateallegedmaritalproblems).Thedebtorsubsequentlyfiledforbankruptcy.Infindingthatthetransferswerefraudulent,thecourtnotedthe“badgesof fraud”that were present: all of the transfers were to insiders; the debtor retained possession and control of the home after the transfers; the debtor had been sued before most of the transfers took place; no consideration was received for the transfers; and the debtor was rendered insolvent by the transfers. Mildlydisturbing,however,wasthecourt’sdismissalof theNevadaLLC,althoughitwaslikelypersuaded by the particularly egregious facts of the case. After noting that “‘Asset Protection’ is not illegalandishonoredbythelawif doneforalegitimatepurpose,”thecourtstated:“[A]nentityor series of entities may not be created with no business purpose and personal assets transferred to themwithnorelationshiptoanybusinesspurpose,simplyasameansof shieldingthemfromcredi-tors.Undersuchcircumstances,thelawviewstheentityasthealteregoof theindividualdebtorandwilldisregardittopreventinjustice.”Itisunclearif thecourtwouldhavemadethatobserva-tionif thestructurehadbeensetupwith“nocloudsonthehorizon.”

n. Asmanyof thesecasesillustrate,“badfactsmakebadlaw.”Basedonthefactspresented,thetrustswerecreatedafterthedebtwasincurred,andaccordinglythecourtineachinstancereachedtherightdecision.Notwithstandingtheresultsobtained(andwithoutcondoningsuchtransfers),thedebtorsapparentlybenefitedbytheirwrongful transfers.Intheend,thebestresultswillbeob-tainedwheretrustsaresettledsufficientlyinadvanceandproperlystructuredandadministered.

i. A decision recognizing the validity of a foreign trust arose in the context of a divorce proceed-ing. In Riechers v. Riechers,679N.Y.S.2d233(N.Y.Sup.Ct1998),aff ’d,701N.Y.S.2d113(N.Y.App.Div.1999),defendanthusbandsettledanirrevocabletrustintheCookIslandsin1992asaresultof threemedicalmalpracticelawsuitsfiledagainsthim.Hiswifesuedfordivorcein1994.Thecourtinitsdecisionwrote:“Assumingarguendo,thatthisCourthadjurisdictionoverthecorpusof theRiechersFamilyTrust,whichitdoesnot,acauseof actionwouldnotlietosetasidethetrustsincethetrustwasestablishedforthelegitimatepurposeof protectingfamilyassetsforthebenefitof theRiechersfamilymembers.”

o. Attheendof theday,however,anoffshoretrust’seffectivenessasatooltothwartfuturecreditorswill most likely not depend on whether a U.S. court gives credence to the application of foreign trust law when adjudicating a claim against the settlor. Provided that the trust’s assets are located offshore(whetherthatbeinthejurisdictionof thetrust’sgoverninglaworanestablishedfinancialcentersuchasSwitzerlandorLuxembourg),acreditorwithaU.S.judgmentwillstillbefacedwithsignificanthurdlesbeforeactuallybeingabletolevyonanyof thetrust’sassets.Infact,sincesomejurisdictionswillnotrecognizeforeignjudgments,thecreditormaybeforcedtorelitigateitsentirecaseagainstthetrust.Moreover,insomejurisdictionsthestatuteof limitationsonfraudulentcon-veyance claims may be as little as two years (which period is likely to have already expired by the timesuitisbroughtinthatjurisdiction).Finally,asidefromtheUnitedStates,mostcommon-lawjurisdictions (such as those jurisdictions that recognize the trust concept) (i) do not allow attorneys to take matters based on a contingency fee and (ii) provide that the losing party to a lawsuit must payallthevictor’sexpenses,includingattorneys’fees.Combinedwithanevidentiarystandardinsomejurisdictionsrequiringproof beyondareasonabledoubtonfraudulentconveyanceclaims,assetsheldinaforeigntrustmay,intheend,beunreachablenotwithstandingthefactof aU.S.


judgment.Attheveryleast,theprocessmayproveprohibitivelyexpensiveforacreditorwhenthepotential reward is so uncertain.

I. New Trends In Asset Protection With Emphasis On Estate Planning

1. Introduction

a. Underthelawof moststates,acreditorof thesettlorof atrustcanreachthetrustpropertytothemaximum extent that the trustees may distribute the property to the settlor. Restatement (Second) of Trusts §156(2).

b. Most states limit the term of a trust so that it cannot continue to exist beyond the Rule Against Perpetuities period (generally no later than 21 years after the death of an individual then living or 90 years after the trust’s creation).

c. Toattracttrustbusiness,25stateshaverepealedtheRuleAgainstPerpetuitiestherebyencouragingdynastytrusts.Of thosestates,Alaska,Arizona,Delaware,Florida,Ohio,andSouthDakotaalsodo not impose a state income tax on trust income.

d. Numerousforeignjurisdictionshaveenactedlegislationthatpreventscreditorsfromreachingthetrust’s assets unless the transfer was a fraudulent conveyance. It is reported that over $300 billion in assets have been transferred to foreign trusts by U.S. persons.

e. Recent legislation in nine states expands the turf war by providing estate planning opportunities with shades of asset protection.

2. Analysis Of IRS Rulings And Court Decisions

a. Estate Tax Inclusion

i. IRC §2036 provides that a transferor’s gross estate includes the value of any transferred prop-ertyoverwhichthetransferorretainedtherighttopossession,enjoyment,orincomeforaperiodnot ascertainable without reference to his or her life.

ii. A gift is incomplete in every instance in which “the donor reserves any power over its disposi-tion.”Treas.Reg.§25.2511-2.

iii. Since,underRestatement (Second) of Trusts§156(2),asettlor’screditorscanreachtrustpropertytothemaximumextentthatthetrusteesmaydistributethepropertytothesettlor, thesettlor isdeemed to have retained rights to the property within the meaning of IRC §2036 and §2511. See, e.g., Estate of Paxton v. Comm’r,86T.C.785(1986),Outwin v. Comm’r,76T.C.153(1981),andPaolozzi v. Comm’r,23T.C.182(1954).

b. Completed Gifts

i. “If andwhenthe[settlor’s]dominionandcontrolof thetrustassetsceases,suchasbythetrustee’s decision to move the situs of the trust to a state where the [settlor’s] creditors cannot reach thetrustassets,thenthegiftiscompleteforfederalgifttaxpurposesundertherulessetforthin§25.2511-2of theRegulations.”Rev.Rul.76-103,1976-1C.B.293.


ii. Where “the [settlor] cannot require that any of the trust’s assets be distributed to the [settlor] norcanthecreditorsof the[settlor]reachanyof thetrust’sassets,”thesettlorhaspartedwithdo-minion and control so as to have made a completed gift of the assets transferred to the trust. Rev.Rul.77-378,1977-2C.B.347.

iii. Private Letter Ruling 93-32-006 (not precedential) applies the foregoing rules to a foreign situs assetprotectiontrustof whichthesettlorandthesettlor’sfamilywerediscretionarybeneficiaries.Thesettlor’stransfertotheforeignsitustrustwasdeemedbytheIRStobeacompletedgiftand,therefore,outsideof thesettlor’staxableestatebecauseunderthelawsgoverningthetrusttheset-tlor’s creditors could not attach the trust assets.

iv. Private Letter Ruling 98-37-007 (not precedential) applies to an Alaska trust in which the settlorwasamongtheclassof beneficiaries.TheIRSheldthetransfertobeacompletedgiftbutrefused to rule on whether the assets in the trust would be includable in the settlor’s estate at death because of the possibility of an implied agreement with the trustee to make distribution upon the settlor’s demand.

3. Structuring Trusts For Estate Planning Benefits

a. Introduction

i. Basicobjectiveof estateplanningistominimizeestate,gift,andgeneration-skippingtransfertaxes to the greatest extent possible while remaining true to the client’s dispositive wishes.

ii. An estate planner’s ability to minimize transfer taxes may be frustrated by the client’s desire to retain control over or access to his or her assets during lifetime.

iii. Aproperly structured, self-settled, spendthrift trust (“APT”)providesaviable solution toaclient’s desire to be able to minimize transfer taxes without putting his or her assets forever out of reach in the event of an emergency need.

iv. Asanaddedbenefit,propertyheldintrustwillavoidthedelay,expense,andpublicityinvolvedin transferring property at death pursuant to a probate proceeding.

v. Since assets held in trust will enjoy a greater degree of creditor protection than assets retained inthesettlor’sindividualname,atransfertoanAPTwillactuallyenhancethelikelihoodthattheassets will be available to the settlor in case of some future emergency need.

b. Minimizing Estate And Generation-Skipping Transfer Taxes

i. A settlor can make an inter vivos transfer of the gift tax annual exclusion amount to an APT to gradually reduce the size of his or her taxable estate without incurring any transfer tax or reduc-inghisorherunifiedcredit.

(1) TohaveatransfertoanAPTcomeundertheIRC§2503gifttaxexclusion,thetransfermustbeof a“presentinterest”underIRC§2503(b).Thiscanbeaccomplishedbytheinclu-sionof “Crummey”powersinthetrustagreement.

ii. A settlor could make an inter vivos gift of his or her remaining IRC §2010 applicable exemp-tion amount.

(1) Nocurrenttransfertaxliability.


(2) Removal of subsequent appreciation from settlor’s estate.

(3) The loss of the IRC §1015 “stepped-up” basis ismore than compensated for by theoverall tax savings inherent in the differential between the maximum 45 percent estate (and generation-skipping transfer) tax rate and the maximum 15 percent capital gains tax rate.

iii. Giftsinexcessof theapplicableexemptionamount(inparticular,giftsaggregatingtheIRC§2631 generation-skipping transfer tax exemption amount of $2 million) are advisable if the settlor canaffordtopaythecurrentgifttaxsinceintervivosgiftsare,ineffect,one-thirdmoretaxadvan-tageous than testamentary bequests.

iv. Any gift tax paid will further reduce the settlor’s taxable estate (provided the settlor lives three years).

v. An allocation of the settlor’s $2 million generation-skipping transfer tax exemption to a trans-fer to trust will exempt the entire transfer of property and all future appreciation thereon from generation-skipping transfer tax.

c. Drafting Considerations

i. Trustee Selection.Trustmusthaveatleastaresidenttrustee,butsettlorcouldappointothers(forexample,anadvisorycommittee)tomakeinvestmentordistributiondecisions.Trusteeshouldnotbe related or subservient to settlor.

ii. Trust Protector.Settlorshouldnotbeprotector.Protectorcanhavepowertodischargetrustees,makecertaintrustamendmentsif necessary,andsoforth.

iii. Change of situs provision allows for subsequent changes if laws or circumstances change.

iv. Otherassetprotectionprovisions,suchasanti-duressclausesandfleeclauses,canbeincorpo-rated into the trust.

v. Distribution Guidelines. Consider incentive provisions conditioned on earned income and distri-butionstobeneficiary’sspousewhilemarried.

vi. Terminationpowersgiventotrusteeif continuationnotinbeneficiary’sbestinterests.

vii. Spendthriftprovisiontoprotecttrustassetsfrombeneficiary’screditorsorformerspouses.

d. Other Considerations

i. The trust agreement should maximize the trust’s ability to escape future transfer taxation by providingfortheretentionof assetsforthebeneficiaries’useandenjoymentof thepropertyintrustratherthanmandatingdistributionsuponthebeneficiariesattainingsetages.

ii. All subsequent appreciation on the $1 million will be free from both estate and generation-skipping transfer tax for so long as the property remains in trust.

iii. Certain domestic asset protection trust jurisdictions have no state income tax. Once the settlor dies,assetsretainedintrustwill,therefore,payonlyfederalincometax.

iv. RetainingassetsinanAPTensuresthatbeneficiaries’trustinterestswillnotbeseizedbythird-party creditors or ex-spouses.


v. Inconjunctionwiththerepealof theRuleAgainstPerpetuities,thetrustcancontinuetoac-crueallof theforegoingbenefitsinperpetuity.

vi. Trustees should be independent of the settlor (optimally banks or trust companies should be used) toensure that the trustees’“discretionary”power todistribute trustassets to thesettlor isrespectedbytheIRSandnotconsideredtobea“sham”byreasonof anyprearrangedunderstand-ing between the parties.

vii. Trustshouldincludea“checksandbalances”systemviaanindependentbutreliable“trustprotector”toguardagainstinappropriateaction(orinaction)bythetrustees.Thetrustprotectorshould have the power to discharge and appoint independent trustees within the trust protector’s discretion.

e. Advanced Considerations

i. AnAPT canbe combinedwith a limited partnership (“LP”) or limited liability company(“LLC”)topermitinvestmentmanagementandcontrolof thetrustassetstocontinueinsettlorwithout jeopardizing the nature of the transfer as a completed gift.

(1) Structure may provide lack of marketability and lack of control discounts on the transfer of limitedpartnershipormembershipintereststothetrust,therebypermittingthetransferof real value in excess of the amount subject to taxation.

(2) Structure will provide an additional layer of protection between third-party creditors and the trust.

(3) Intheunlikelyeventof trustcreditors,enforcementof ajudgmentwillbelimitedtoacharging order against the trust’s limited partnership or limited liability company interest.

(4) Use of an Alaska or Delaware limited partnership or limited liability company will in-creasethesettlor’scontactswiththatstate,furtherjustifyingtheapplicationof thatstate’slawto the claims of any creditor of the settlor.

ii. AnAPTcanbecombinedwithanysplit-interestgiftintrust(suchasaQPRT,GRAT,orCLT)in order that the settlor may continue to have discretionary access to the transferred property after the initial term of the trust has expired.

iii. An APT can be used to own the settlor’s life insurance policies in the same manner as an ir-revocable life insurance trust. So long as the settlor does not retain incidents of ownership in the transferredpoliciesheorshecanbeadiscretionarybeneficiary,therebypermittingdistributionsof cash value to the settlor. See Priv.Ltr.Rul. 94-34-028.

f. Domestic v. Offshore

i. Introduction

(1) Althoughhighlytoutedasanassetprotectionvehicle,domestictrustsaregenerallyinfe-rior to foreign situs asset protection trusts because of legal distinctions between domestic and foreigntrustlawaswellasthepracticaldifficultiesencounteredinproceedingagainstatrust(and its underlying assets) situated abroad.


(2) Selected foreign asset protection jurisdictions will not honor judgments rendered by courts intheUnitedStates,therebyrequiringacreditortorelitigateitsclaimsoffshore.Incontrast,a U.S. court is required by the Full Faith and Credit Clause of the U.S. Constitution to honor thevalidlyrenderedjudgmentsof itssisterstates(U.S.Constitution,ArticleIV,Section1).

(3) The statute of limitations for fraudulent conveyances in selected foreign asset protection jurisdictions may be as short as one year from transfer.

(4) The standard of proof for a creditor on a fraudulent conveyance claim in selected foreign assetprotectionjurisdictionscanbeashighas“beyondareasonabledoubt”(astandardnor-mally used exclusively for criminal matters in the United States).

ii. Theissueof whichisbetter,domesticoroffshore,shouldthereforefocusonasettlor’sprimaryuseof thestructureasanestateplanningvehicle,ratherthanasanassetprotectionvehicle.

iii. Considerations In Favor Of Offshore Trusts

(1) Statutory framework and case law in foreign jurisdictions may provide greater certainty to the result of a settlor’s transfer (such as whether the transfer is a completed gift despite the trustees’ discretionary power to return the trust assets to the settlor).

iv. Considerations In Favor Of Domestic Trusts

(1) Although a properly structured foreign situs asset protection trust should not be taxed any differentlythanadomestictrust,substantialreportingrequirementsareimposedonforeigntrustswithU.S.beneficiaries.

(2) Many offshore asset protection trusts are designed with either automatic or discretionary “flee”clausestocausethetrustto“migrate”abroadwhencreditorproblemsarise.Atthatpointthetrustwillbedeemed“foreign”undertheIRCandmaybecomesubjecttoadditionaltax reporting requirements.

(3) Prospective settlors of offshore asset protection trusts must concern themselves with the economic stability and political security of the jurisdiction whose laws they are entrusting their assets to compared with the economic stability and political security in the United States.

(A) Even offshore jurisdictions with extensive histories of political and economic stabil-ity may probably not provide the same level of comfort as a domestic trust.

(4) U.S. federal and state courts and the IRS may regard domestic trusts as a more legitimate creditor protection and estate planning device than offshore trusts.

(A) A domestic court may resent transfers outside of the jurisdiction of U.S. courts and reasonthatno“legitimate”reasonexistsforusinganoffshoretrust(ratherthanadomes-tic trust) other than thwarting the domestic legal system. See, e.g., In Re Portnoy,201B.R.685(S.D.N.Y.Bkrtcy.Ct.1996)andB.V. Brooks,217B.R.98(D.Conn.Bkrtcy.1998).

(5) Domestictrustsshould,bothintheircreationandinmaintenance,belessexpensivethanoffshore asset protection trusts with comparable assets.

v. Considerations In Favor of Alaska Or Nevada


(1) Duetothecarve-outsavailabletocertaincreditorsunderDelaware’sstatute,thereisarisktheIRSmaytakethepositionthatthetrustproperty,beingsubjecttoclaimsof creditors,eventhoughrestricted,nonethelessrendersthetransferincompleteforgiftandestatetaxpur-poses.

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EXAMPLE

Dynasty Trust Without Trust

InitialAmount(Grantor50YearsOld) $ 1,000,000 $ 1,000,000ValueatGrantor’sDeath ------------------ -------------------(7percentGrowth–25Years) $ 5,427,432 $ 5,427,432Estate Tax @ 55 percent 0 (2,985,088) $ 5,427,432 $ 2,442,344

ValueatChild’sDeath–50Years $ 29,457,027 $ 13,255,658Estate Tax @ 55 percent 0 (7,290,612) $ 29,457,027 $ 5,965,046

ValueatGrandchild’sDeath–75Years $159,876,030 $ 32,374,885Estate Tax @ 55 percent 0 (17,806,187) $159,876,030 $ 14,568,698

ValueafterFourGenerations–100Years $867,716,164 $ 79,070,627Estate Tax @ 55 percent 0 (43,488,845) $867,716,164 $ 35,581,782


ASSETPROTECTIONAUDITCHECKLIST

I. Determine Possible Sources Of Liability

A. Professional Malpractice

B. GeneralTorts(forexample,autoaccidents)

C. Contract Claims

D. Creditor Exposure

E. OfficerAndDirectorLiability

F. Environmental Liability

G. Divorce

H. Forced Heirship (such as right of election)

I. Political Threats

J. Economic Risks

K. ExistingLawsuits

II. Insurance Adequacy Analysis

A. Homeowners

B. Auto

C. Umbrella

D. Business Risks

E. DirectorsandOfficers

F. Disability

G. Life

III. Maximization Of Exemption Allowances

A. Does Client Participate In Or Have Retirement Plans?

1. Determine Exempt Status

B. Is Homestead Exemption Available?

1. Ascertain How Title Is Held

2. ConsiderEffects(TaxAndNontax)Of Changing Title

C. Determine Extent Of Joint Ownership Or Community Property

IV. ReviewEstatePlanAndNatureOf AssetHoldingsWith View Toward Creditor Protection

A. Does Client Expect Large Inheritance?

1. Ascertain Whether Outright Or In Trust

B. Do Wills And Trusts Provide For Outright DistributionsToBeneficiaries?

1. Consider Amending To Retain Assets In Trust

C. Business Activities

1. What Form of Entity Is Used?

q LLC q Corp q Sole Proprietor

q LLP q LP

2. IsClientAGeneralPartner?

3. HasClientProvidedGuarantees?

4. Consider Reorganizing Holdings And Segregating Assets With Liability Potential

V. Prepare Solvency Analysis

VI. Consider And Discuss The Following Techniques To Protect Wealth

A. Domestic Trusts

1. Non-Self-Settled

a. QPRT

b. CRT/CLT

c. QTIP

d. Discretionary

e. Power Of Appointment

f. SaleToGrantorTrust

2. Self-Settled

B. Foreign Trusts

C. Swiss Annuities

D. Foreign Life Insurance

E. Limited Liability Entities