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| Best Practices: Matters of Trust |
Protected Class
Melissa Phipps
10/01/2004
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Wealth manager Marc Singer spends his days avoiding liability—not for
himself, but for his affluent clients. His firm, Singer Xenos Asset Management,
in Coral Gables, Fla., serves the needs of physicians, many of whom are part of
the estimated 50 percent of doctors in southern Florida who refuse to pay for
exorbitantly expensive medical malpractice insurance. Going bare, as it is
known, may keep Singer’s clients ahead of the game financially, but it leaves
them extremely vulnerable to potential lawsuits. So it is not surprising that
Singer has lately become an ad hoc expert in asset protection—strategies for
keeping wealth out of the reach of potential future creditors, now and for
generations to come.
TOP VIEW
As offshore asset protection trusts come under increasing scrutiny from the
federal government, their domestic counterpart is gaining favor among families
seeking financial shelter. A handful of states, including Delaware, Alaska and
Nevada, have adopted legislation that builds roadblocks similar to offshore
trusts, forcing creditors to try their cases in these grantor-friendly environs.
The domestic version is also a more cost-effective alternative. |
A growing number of real estate developers, business
owners, corporate board members, inheritors and other wealthy individuals are
seeking hedges against litigious predicaments. In a 2003 survey of individuals
with $5 million to $25 million in assets, conducted by Connecticut-based
research firm Prince and Associates, 75 percent of the respondents claimed their
greatest fear with respect to protecting their wealth was that someone would
take advantage of a child or grandchild for financial gain. Sixty-eight percent
stated they were “very” concerned that they would become the target of an
unfounded lawsuit brought by someone they know—an ex-business partner, for
instance, or an ex-spouse. These fears were especially pointed among individuals
with more than $25 million in assets.
In efforts to mollify these concerns,
affluent families are turning more frequently to domestic asset protection
trusts. These trusts extend beyond the needs of doctors and other professionals
confronting liability issues: They can also be used to safeguard recent
inheritors, vulnerable family members with substance abuse problems, individuals
anxious to secure family wealth prior to marriage, and even personal injury
victims whose awards would otherwise be exposed.
Traditionally, our last line
of defense for our wealth in these situations has been the offshore asset
protection trust. The federal government, however, has complicated this
strategy: Not only has the passage of the Patriot Act increased disclosure and
due diligence requirements for clients with offshore accounts, but the IRS has
grown suspicious of the uses of these trusts. As offshores have come under
closer scrutiny, a handful of states have reformed their laws to create domestic
asset protection trusts. These vehicles offer a level of protection previously
available only in offshore jurisdictions, but at a fraction of the cost. As with
many other types of trusts, the assets that fund these entities transfer out of
our estate and beyond the reach of our creditors. In contrast to typical trusts,
however, the individual creating and funding a domestic asset protection
trust—the grantor—can also be a beneficiary of trust distributions. This tactic
provides the grantor with creditor protection, as well as a share of the trust’s
assets.
 While some experts question the firmness of the legal ground on which
domestic asset protection trusts stand, no case law yet recorded threatens their
validity. Moreover, they are becoming the next-best defense for those of us
seeking an onshore shelter. Proponents of these trusts argue that the game of
asset protection has less to do with evading creditors than creating barriers to
assets. “Whether these trusts hold up or not is the second question,” contends
Singer. “The first question is whether there are enough obstacles to make it so
difficult for someone to sue you, that they would rather not.”
Evasive Action
Offshore jurisdictions, such as the Cook Islands and
Bermuda, have offered self-settled spendthrift trusts for years. But in 1996,
U.S. lawmakers mitigated the appeal of keeping money offshore by revoking all of
the legitimate income tax benefits of doing so. One year later, Alaska became
the first state to introduce the domestic trust. Delaware quickly followed suit,
as has Nevada, Missouri, Rhode Island and Utah.
Offshore asset protection
trusts are still considered more effective at hindering creditors, mainly
because they make it so much more difficult for creditors to even attempt to
reach the trust. Offshore trusts force a plaintiff to pursue an action overseas,
which is both expensive and extremely complicated. The plaintiff’s burden of
proof also remains much higher in these distant jurisdictions, while the statute
of limitations remains shorter. Nevertheless, we must be aware that, in light of
current global events, moving our money offshore could attract unwanted
attention from authorities. “You don’t want to show up on the radar of Homeland
Security,” Singer advises. “Even if you are not doing anything illegal, most
people of substantial wealth don’t want to be on that radar.” Additionally,
because offshore trusts no longer retain their tax or estate-planning
advantages, a U.S. court is more likely to regard them as creditor-evasion
vehicles.
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