How and Why to Protect Your Assets

Are you prepared for the possibility that your assets – – your home, your savings, your business – – could be taken from you by litigants, creditors, the government, potentially even your spouse?  That could happen if you are a business owner, property owner, guarantor or a perceived “deep pocket”.  If you are a potential target of a lawsuit or other legal threat, you owe it to yourself and your family to consider asset protection.

Asset protection is the safeguarding of wealth and assets from attack by future, unsecured creditors.  The assets and wealth that we can protect is a broad class:  your home, bank and investment  accounts, business interests, professional practices, real estate including your home and investment properties, commercial properties, jewelry, cars, boats, art and other personal property, intellectual property and virtually anything else of value that you may wish to preserve for yourself and your family.

We protect assets using domestic laws and entities such as limited partnerships, trusts and corporations, as well as the laws of foreign countries.  We have been pioneers in this field and have developed domestic and international asset protection strategies that enjoy an impeccable record of success.

People sometimes have the misconception that in order to engage an asset protection attorney, they need to have significant wealth.  In fact, we protects the assets of many different people, of diverse backgrounds and all levels of affluence.  Our asset protection clients have ranged from young entrepreneurs seeking to protect their assets from the risks of their next business ventures, to retirees seeking to preserve their assets for their children and grandchildren, people seeking to protect their home from mounting medical bills, celebrities and mega-wealthy individuals with real estate holdings around the world.  All types of people, with all types of assets, need asset protection.

You need asset protection if:

  • you are facing a current or expected lawsuit;
  • you are in a profession with a high degree of liability (real estate investor, real estate developer, landlord, doctor, lawyer, financial advisor);
  • new laws may impact your business or create new liabilities (e.g., the Fair Labor Standards Act (FLSA) and the proposed “sweat” law in New York state);
  • you are a debtor and/or a guarantor;
  • you face a potential tax or other government liability;
  • you have accumulated, or are about to receive, significant wealth (e.g., inheritance, investment or business success, vesting event, business buy-out, etc.);
  • you (or your children) are going to get married or divorced;
  • you are concerned about the financial viability of your business.

There are two options to asset protection: domestic and offshore.

Domestic asset protection can be totally effective if implemented by individuals with no current claims against them.  Domestic asset protection is also usually used to protect real estate.  As an added bonus, some structures that we use for asset protection, like the family limited partnership, also offer excellent tax minimization and estate planning benefits.

Offshore asset protection involves the transfer of your assets to a trust or corporation established in a confidential, secure and stable foreign country.  If an offshore asset protection strategy is established by an attorney experienced in this area, it can be absolutely effective.  However, this must be done carefully in order to comply with I.R.S. rules and regulations governing control of foreign assets.

Contact us to discuss your asset protection needs and options.


New Sweat Law Targets Business Assets Even Before a Finding of Labor/Wage Law Wrongdoing

A recent article in the New York Times, “Workers Find Winning a Wage Judgment Can Be an Empty Victory” (April 13, 2017), discusses a proposed new law that would allow a lien against a business accused of improperly withholding wages from its workers.  The law is known as a sweat law or securing wages earned against theft law.

The problem: the theft is merely alleged, not proven.  If the law is passed, employees with grievances against their employers – – irrespective of whether the grievances are valid or frivolous, retaliatory or vexatious, and before any finding of wrongdoing – – will be able to tie up the employers financially.  This would be crippling for the employers and could lead to significant cash flow and credit issues.  Such consequences could happen on the basis of a mere claim against the employer, however flimsy or unfounded.  As the New York Times stated, the proposed law “would essentially enable employees who accuse an employer of wage theft to have a lien placed on the employer’s assets while the outcome is being determined.”

Existing law is hesitant to allow for such crippling consequences before a court or government agency finds any wrongdoing.  Such a “pre-judgment remedy” is very rare.  Pre-judgment remedies are allowed in limited circumstances, such as when a litigant can demonstrate that his adversary may flee the court’s jurisdiction and take assets with him.

In the U.S. Supreme Court case Grupo Mexicano v. Alliance Bond Fund (1999), the highest Court held that the law does not allow for a preliminary injunction preventing defendants from disposing of their assets pending a court deciding the creditor’s claim.  For a court to grant creditors such preliminary injunctions “could radically alter the balance between debtors’ and creditors’ rights,” the late Justice Scalia wrote, and “might induce creditors to engage in a race to the courthouse . . . which might prove financially fatal to the struggling debtor.”  In other words, the creditor had to first obtain a judgment from the court in order to prevent the defendant from doing something with his assets.  The proposed “sweat” law seems to run directly counter to the Grupo Mexicano opinion by the U.S. Supreme Court.

The New York Times article does point out that certain business owners have lost employment litigations and then have undertaken questionable actions, such as “selling off houses and businesses – sometimes for a nominal sum, and frequently to a relative – and declaring bankruptcy . . . to avoid paying back wages, overtime or damages, usually as a result of a court order.”  However, the law already has remedies for such actions.  For one thing, such sales to insiders, without fair market consideration, can be reversed by a court as a “fraudulent conveyance”.  In addition, the Bankruptcy Code allows a bankruptcy trustee to void any such transfer within ten years of the bankruptcy filing.  The NYT article also notes that when one business, say a restaurant, is sued and loses, that business then changes its name but carries on business as usual.  However, the law also does allow for “successor liability” for the “new” business when the new business is substantially the same as the old.

Irrespective of whether the proposed “sweat” law is passed, the threats to business owners are clear and immediate.  An entire industry of lawyers has arisen to bring litigations against business owners based on alleged labor and wage violations under the Fair Labor Standards Act (FLSA).  Business owners and investors are personally liable for labor law violations, which means that even if the business is owned in an LLC or corporation, the owner’s personal assets are vulnerable.

The lesson is that business owners should protect their personal and business assets BEFORE a claim is filed.  AFTER may soon be too late.  Proper asset protection, in conjunction with compliance with labor and wage laws, is the best pre-emptive defense, and often discourages the predatory lawsuits in the first place.  Proper asset protection strategies offer business owners peace of mind and provide the protection their assets need to withstand the inevitable attacks.

Please contact us with any questions or to schedule a consultation on how to protect assets from labor and wage claims.

The Panama Papers:  Effective Asset Protection Should Not Be Compromised by Lack of Banking Secrecy

The “Panama Papers” purportedly show how one law firm in Panama City with branches from Switzerland to Hong Kong utilized offshore entities and bank accounts to hide money for a world-wide clientele of wealthy people, including political leaders in various governments.  While foreign entities and bank accounts are legal, it is against the laws of many countries to hide income from taxation, to launder bribe money and other proceeds of corruption and criminal activities.  If the reports are true, the Panamanian law firm of Mossack Fonseca participated in tax evasion and money laundering on a global scale.

The “Panama Papers” raise issues, not for the first time, about foreign tax havens, banking secrecy and offshore asset protection.

In 2012, I visited Panama and met with trustees, attorneys and bankers, all eager for business and client referrals.  While I was witness to the explosion of Panama’s banking industry, and I knew that Panama banks were a gateway for doing business in Central and South America, I have not sent a single client to Panama nor recommended Panama as an asset protection jurisdiction.  Years earlier, we had made the decision that we preferred other jurisdictions for asset protection, for reasons including:  the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures, and our contacts and experience with other jurisdictions.

One of the factors that we look for in an asset protection jurisdiction is the social, economic and political stability of that country.  Panama was ruled by a military dictatorship from 1969 to 1989.  In 1989, within recent memory, U.S. troops entered Panama to arrest its president, who was also a military general and drug dealer.  While the Panamanian banking system developed since those years, and Panama City skyscrapers soared, the prior history made us hesitant.  Other jurisdictions offered better laws, a better record of political stability, and lawyers, trustees and bankers who we already knew to be professional and honest.

The “Panama Papers” is apparently the second time that a whistleblower has offered Mossack Fonseca documents to tax authorities.  The first instance resulted in raids and tax fraud prosecutions in Germany, and the information was then shared with the UK and U.S. governments.  The current situation arose as a result of a hacker penetrating Mossack Fonseca’s computer system and transferring millions of documents to the International Consortium of Investigative Journalists (ICIJ), which released the documents earlier this year.

In the “computer age”, nothing is immune from hacking and therefore there is no real secrecy.  Four days before the Panama Papers were made public, the Wall Street Journal reported that elite New York law firms Cravath, Swaine & Moore and Weil, Gothal & Manges were hacked.  J.P. Morgan Chase, the biggest bank in the U.S., was hacked in 2014.

Hacking, leaks and whistleblowers can happen anywhere, not only in Panama.  In 2013, ICIJ, the same group that released the Panama Papers, released a trove of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other governments, leading to investigations and prosecutions of many Europeans for tax fraud.  In 2006, an employee at LGT Bank in Liechtenstein (once the most secret of tax havens) sold confidential banking records to the German government for millions of Euros.  The German government shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

It may be said that the entire unraveling of Swiss banking secrecy can be attributed to a single causative event:  UBS employee Bradley Birkenfeld revealing to the U.S. Government how UBS lured wealthy Americans to open accounts in Switzerland, how UBS advised on keeping the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, revealing the names of some 5,000 Americans with non-compliant accounts, and the end of Swiss banking secrecy.

While hacking, theft by bank employees and whistleblowers are universal, Panama is being singled out today due to the size of this latest leak of data, the historical scope (thirty to forty years) as well as the details of illegality.  What makes the “Panama Papers” leak different are the revelations of illegality: banks apparently willing to open accounts for entities without knowing the true beneficial owner of the corporation or trust, or knowing the beneficial owner to be connected to a rogue government but looking the other way; attorneys offering bearer share corporations (which most of the rest of the world no longer does and is illegal in all fifty U.S. states), and attorneys willing to backdate documents.

In better jurisdictions, these practices should not exist.  I personally have not seen a bearer share corporation in about a decade and a half.  Lawyers, banks and trust companies with whom we work around the world have strict “know your client” and due diligence requirements to vet and protect against money laundering and other illegal activities.  We disclose the beneficial owners of foreign accounts, because legitimate banks and U.S. laws require this.  Our asset protection clients are not looking to hide behind sham entities, and our clients do not rely on banking secrecy, because our clients understand that sham entities are ineffective and, where disclosure to tax authorities is involved, bank secrecy has been proven to be extinct.

Of course, another crucial difference is that despots, criminals and tax evaders need a jurisdiction like Panama, where attorneys and bankers look the other way.  Simply put, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of attorneys at Mossack Fonseca.  Asset protection of legitimately earned and tax compliant money does not require banking secrecy.  In that light, Panama is simply offering the very same services that got Switzerland in trouble.

The UBS, HSBC, LGT, Mossack Fonseca and other leaks clearly demonstrate that banking secrecy can be compromised by hackers and renegade bank employees.  Further, the success of the U.S. Department of Justice in penetrating Swiss banks and obliterating Swiss banking secrecy, the adoption of the Foreign Account Tax Compliance Act (FACTA) by banks and governments around the globe, and a host of Mutual Legal Assistance Treaties and Tax Information Exchange Agreements signed between governments, all point toward the conclusion that banking secrecy, at least as it relates to government mandated disclosure, has been effectively destroyed.

Good asset protection does not rely upon banking secrecy.  Foreign banking secrecy has been compromised by hackers, whistleblower employees, investigations and prosecutions of foreign banks and bankers, treaties and governments cooperating with each other and sharing banking information.  In addition, foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed to the IRS.  Even in civil litigation, tax returns are often discoverable by one’s adversaries.  Again, reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world.

Instead, our clients rely on full compliance with tax and disclosure laws, but they achieve effective asset protection from civil creditors through the use of time-tested asset protection laws in safe and stable jurisdictions.

As we have long-counseled, any of the threats to banking secrecy, whether by governmental agreements, weakened bank secrecy laws, hackers or renegade bank employees, is not material if the funds are legitimately earned and the foreign account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental or individual – – is eliminated.  As the window of banking secrecy closes further, those people whose foreign assets do not rely on secrecy and are tax-compliant need not worry.

Asher Rubinstein quoted by CNBC regarding offshore assets and the Panama Papers

Asher Rubinstein was quoted by CNBC on the issue of offshore banking secrecy and asset protection:

“Good asset protection does not rely upon banking secrecy.  Foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed … reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world,” stated Asher Rubinstein, an asset protection attorney at New York-based practice Rubinstein & Rubinstein, in an April note.

The full CNBC article is here, and also appears on Yahoo! Finance, here.

The original quote appears in our article, Is Offshore Asset Protection Still Viable?


Why a Trust, and What about a Will?

Most people believe that, when they die, the way to pass their assets to their beneficiaries is via a will.  That is not wrong.  But there are downsides to a will.  And there is a better way: via a trust.

In order for assets to pass on to your heirs via a will, the will has to be filed in court in a process called “probate”.  This means that your will is submitted to a court of law.  That makes your will a public document.  Anyone can read your will, see what assets you owned, make a claim to your assets, and challenge the validity of your will in court.  Since the will names your heirs, and the assets to be dispersed to your heirs, this public information now also provides a roadmap to your heirs and their new wealth.  If you leave behind property in multiple states, there may be multiple probate court proceedings.

Moreover, in order to maneuver through this probate court process, and whether or not there is a will contest or outside claims to assets, your heirs will need to hire a lawyer.  The court will make sure that your assets are distributed the way you directed in your will.  And courts work very slowly, which means that those assets may not pass on to your heirs for another year or two, or much longer if there is a court issue, will contest or other probate problem.  In short, if you rely on a will to distribute your assets, you automatically involve the state, which has monetary costs, lack of privacy and delays.

A better mechanism for passing your assets to your heirs is via a trust.  A trust is an entity created to manage assets.  The trust is controlled by a trustee, who manages the property within the trust.  Subject to the terms of the trust, a trustee can invest, sell, buy, lease, mortgage, lend, collateralize, etc., whatever has been placed in the trust, e.g., cash, securities, shares of stock or LLC interests, art, real estate, patents, trademarks, anything of value.  If you establish a trust, and contribute assets to this trust, you may be the trustee over this trust and thus continue to control the assets in the trust while you are alive.  You would also chose a successor trustee.  Because the trust continues to exist after your death, the role of the successor trustee is to control the trust after you die.  The successor trustee, who could be your surviving spouse, relative or trusted friend, would be obligated to follow the instructions you set forth in the trust document, called a trust deed of settlement.  This document will also set forth who inherits your assets upon your death, much like a will directs where your assets are to be distributed at your death.  The people who inherit your assets are called “beneficiaries”.  The trustee has a fiduciary obligation to act in the best interests of the beneficiaries.

However, whereas a will has to go through the probate court process, a trust does not.  At your death, the successor trustee (who you’ve appointed when you created the trust), follows the directives of the trust (which you’ve set forth when you created the trust), including distribution of trust assets to the beneficiaries who you’ve named when you created the trust.  The beneficiaries can be your children, other family members, your alma mater, charities, etc.  Distributing your assets under the terms you’ve set forth could be accomplished by a will through the public probate process, or instead, the very same terms could be satisfied by a trust, privately, without involving the state, without a probate court, without lawyers, and with less of an opportunity for others to challenge the validity of the inheritance terms that you’ve set.

Moreover, because a trust avoids probate and the delays of probate, the successor trustee can step in immediately and administer the trust assets.  The successor trustee can communicate with banks and brokerage firms without a need for court appointment, and can begin to settle the estate and make distributions much faster than if a probate court were involved.  In addition, because banks, brokerage firms and other custodians will freeze an individual account at death, thus complicating the account and delaying distributions and payments, a trust account may continue seamlessly with the successor trustee.  Finally, illiquid assets (e.g., real estate, private investments, private equity, limited partnership interests) that may be complicated by the probate process and require re-titling of the assets after death, can instead continue smoothly in the name of the trust.

The trust is a “revocable” trust, meaning that you have the ability to revoke, or cancel it.  You also have the ability to modify it.  For instance, you can change your beneficiaries or change the trustee.  Because the trust is revocable, the IRS doesn’t consider it to be an independent taxpayer and the trust will not get its own taxpayer ID number.  However, when you die, the trust becomes irrevocable.  At that point, the successor trustee (who you’ve already chosen), steps in and is obligated to follow the terms of the trust that you’ve set forth.

It is more difficult to contest the terms of a trust than the terms of a will.  This is because whereas the will is admitted to a probate court for all to see, nowhere is the trust publicly recorded.  A probate court automatically provides a venue and a mechanism for challenging a will.  Yet, trusts are not public documents and trusts avoid the probate process.

This allows you a greater opportunity to control the terms of distribution, knowing that it will be more difficult for others to challenge those terms.  For instance, you might direct the successor trustee to pursue a certain investment at the exclusion of another.  You might also, for example, set forth pre-conditions for inheritance, such as completing college or graduate school.  If you leave behind a child who is a minor, you can create a sub-trust for that minor, funded with life insurance, IRA proceeds or other accounts payable on your death, and set the terms of that sub-trust, such as delayed distributions at certain ages or periodic support payments over the life of a beneficiary.

An additional important benefit to a trust is that the assets held in trust may be protected from lawsuits, including divorces, and the claims of creditors.  On the other hand, after distribution from a will to a beneficiary, the inheritance is vulnerable to creditors of the beneficiary, including a spouse.

Your will still does have a role in estate planning, even though distribution of your assets is controlled by a trust.  In your will, you set forth your personal representative, who is the person you empower to take care of your funeral arrangements, final personal debts and your last tax return.  This person can be the same as your successor trustee.  If you have children who are minors, the will is also the document to name their guardians in the event both parents pass away before the children reach adulthood.  Finally, the will also should include a provision that any property that you did not address in your trust should now “pour over” into the trust and be subject to the terms of your trust.

Another benefit to a trust is that, if you are married, it preserves both spouses’ exemptions from the estate tax.  Each person currently is allowed an exemption from federal estate tax for the first $5.45 million worth of assets.  In other words, if one’s estate is valued at less than $5.45 million, there is no federal estate tax.  (State estate tax may apply, however, and there is great disparity among exemptions and estate tax rates across all the states.)  That exemption of $5.45 million is now “portable”, meaning that if one spouse did not use up the exemption at death, the unused amount can be transferred to the second spouse and added on to the exemption of that second spouse.  The net effect is a combined federal exemption of $10.9 million for the couple.  On the state level, however, there may not be portability and the exemptions may be much smaller in your state.  Through the use of a revocable family trust, both spouse’s exemptions on the state level could be preserved.  Notably, portability cannot be accomplished via a will.

Thus, while a will has traditionally been thought of as the way to pass on one’s assets at death, wills have significant drawbacks including the probate court process, delays and lack of privacy.  A trust is a better way to accomplish the same inheritance planning, privately, more efficiently, without involving courts or lawyers, with greater control over inheritance terms, and with lower estate taxes.

For information about your estate planning needs, contact Rubinstein & Rubinstein today.



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