How Foreign Entities Can Bolster Your Business Plan

Many U.S. based businesses avoid foreign entities due to lack of familiarity. Foreign structures can be strong tools in the business planning world, and can be excellent complements to an asset protection program.

“Asset protection” has become a popular phrase, however its overuse has diluted its definition. Asset protection is a subspecialty of estate planning that insulates assets from predatory claims. with purposeful structuring to limit liability exposure, make assets difficult to attach to, and segregate risk. Techniques are used in combination to enhance protection and benefits. A creditor may place a lien on assets owned personally, jointly, partnership, corporate, etc. but the statutes governing preferred entities preclude a lien on entity assets for claims against the owner.

Laws vary by state and by country. Forum shopping is common; for example the majority of new U.S. companies are based in Delaware. Many of the countries most think of when they consider foreign (Bermuda, Bahamas, Caymans) are vacation spots. For asset protection a “good” location amplifies a U.S. protection program by providing (a) business owner friendly law, (b) case history, © treated as a “local” for regional business, and (d) tax neutral or advantaged.

Business owner law provides:

a. Minimal creditor minimal rights (no right to demand distributions, no right to management, etc.)

b. Higher levels of proof; the U.S. standard is a “preponderance,” essentially a 51% standard, whereas preferred jurisdictions require clear and convincing (~75% standard) or proof beyond all reasonable doubt (~95% standard).

c. Shorter time periods to bring a lawsuit; U.S. law typically has a four year time period, whereas preferred jurisdictions often have a one year statute.

d. Requires prepaying attorneys; U.S. can use contingency, but not possible in preferred locations.

e. Decided cases confirming that the laws are consistently applied.

Entities that are familiar in the U.S. are usually available in multiple other locations; LLCs, corporations, and trusts. They can be integrated into an existing U.S. based plan fairly easily; for example a U.S. limited liability company can be owned by a foreign trust. Compliance in foreign jurisdictions is usually fuller and commonly calls for use of a registered agent and greater volume of paperwork to establish and maintain the entity. Practically, this means the time and cost for foreign entities is a little bit more.

Most offshore trusts are created as “asset protection trusts.” The statutes in most U.S. states provide that one can create a trust that will protect the assets it holds (meaning a potential creditor cannot reach the assets), however, the client may not retain significant controls over, or benefit from, the trust. If one is both a trustee and beneficiary simultaneously, a U.S. court could require you (as trustee) to distribute to yourself (as beneficiary) trust assets to satisfy creditors. Offshore jurisdictions developed the initial form of the asset protection trust in the early 1980s and provided a structure in which the client could retain benefit of the trust (as a discretionary beneficiary) while simultaneously protecting assets. (In the late nineties several U.S. states mimicked offshore asset protection trusts with similar statutes of their own, and U.S. asset protection trusts can be very useful, however, there is no significant case history yet). The offshore asset protection trusts are considered the strongest asset protection device available.

Offshore assets protection trusts are a powerful tool in the planning arsenal that can provide unparalleled asset protection, yet still allow family control while coordinating with business goals, tax minimization, and multi-generational planning.

Adam Chodos, Esq., CPA