Asset Protection — Public and Private Information

Just like in the game of poker (except for draw poker), there is always a certain amount of information about your assets that is publicly available or easy to figure out (e.g. the type of car you drive, the house where you live, etc.), and then there is information that isn’t so readily discernable. Asset protection planning, or in this context Asset Protection Poker™, is about adding some degree of privacy to your assets. But that’s not the whole game. Not by a longshot.

Welcome to Asset Protection Poker™

This series of blog posts is going to compare different aspects of asset protection planning to the game of poker. We are going to focus on risk management, wealth preservation, bluffing (a.k.a. deception . . . but never to a judge!), and the actual legal advantages that exist when you have an asset protection plan in place.

Of course, as a secondary goal, I hope to introduce you to the game of poker and/or help you improve your poker skills a little. Maybe one day we can even get together for a friendly game of cards one day . . . .

One major concern surrounding the use of offshore trusts is the question of control. Who controls the assets held in an offshore trust? Giving one’s assets to a trustee who is expressly prevented from returning those assets is scary, to say the least. The rub is that control over the assets must be partially relinquished at some point (though not initially), or else a court might not honor the trust. This is not an abstract concern but, rather, one that has resulted in actual losses for actual clients of other firms in reported cases involving foreign asset protection trusts. So control over assets must be partially surrendered (after litigation is in motion) in order to gain the full benefits of an offshore protection trust, but clients are hesitant to surrender control. How can we solve this problem?

Enter the Cunning Asset Protection Attorney

If a settlor retains control of trust assets, a U.S. court could require the settlor to make a distribution to her or himself. That distribution could then simply be paid over to creditors. That would be a nightmare. So asset protection attorneys devised an ingenious mechanism: The trust protector. In a broad sense, trustees “report” to trust protectors. Trust protectors have no control of the actual management of the trust or decision-making with respect to trust assets, but protectors can hire and fire trustees, veto certain actions (including unwanted distributions), and otherwise make sure that the trustee is managing the trust in a manner acceptable to you–the client.

One obvious problem still remains. If a trust protector is a U.S. resident subject to the jurisdiction of domestic courts, what is there to stop a judge from order the trust protector to replace a foreign trustee with a person subject to the court’s jurisdiction? The answer is “Nothing.”

There are a few ways that smart asset protection attorneys deal with this problem. The first is to appoint a trust protector who is not subject to the jurisdiction of U.S. courts. This can be a trusted friend or family member of the settlor (i.e. the trust creator). The second option is to give the trust protector only veto power over certain actions of the trustee. These are called “negative powers.” In other words, the trust documents can specify that the trust protector can “shoot down” affirmative actions of the trustee, even though the protector does not have the ability to replace a governing trustee. If a court then requires the trust protector to exercise it’s powers, those powers will be of limited use in repatriating offshore trust assets.

Using More Than One Trustee

Using multiple trustees is another option. In this scenario, some trustees can be domestic U.S. persons and at at least one such trustee must reside in the jurisdiction of the trust. If a lawsuit is filed, of course, the domestic trustees will be required to resign. Only at that point will the stigma of allowing a foreign trustee to control the settlor’s assets come into play. By that time, the foreign trustees (likely a very reputable institution) will have earned the settlor’s trust.