Creditors

2013 Year End Notes, Part 4: Asset Protection Considerations

December 16, 2013 By Asher Rubinstein, Esq.

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

During 2013, we have seen the growth of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals. This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. As investors seek to blame others for investment losses, they are now suing fund managers and investment advisors personally, in addition to the fund itself or the advisor’s employer. In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but a phenomenon that we are seeing in increasing numbers.Continue Reading

Epilogue: Complacency Is The Enemy of Good Asset Protection Planning

May 9, 2013 By Kenneth Rubinstein, Esq.

For the prior history of the court case United States v. Grant, please see our article here.

After beating the IRS, Arline Grant became careless and sloppy. In 2011, she ordered the foreign trustees to make periodic cash transfers to her totaling more than $500,000. These transfers were made to various accounts in her children’s names that she controlled, as well as to an account in her name in Bermuda. In addition, the trusts now provided for mandatory quarterly distributions to her. The IRS discovered the transfers and brought Ms. Grant before a new federal judge who held her in contempt for violation the repatriation order that was issued in 2008 and was still in effect. (Remember, in 2008 the federal court ordered Arline to repatriate trust funds and pay the proceeds to the IRS, but then refused to hold her in contempt for failing to do so because the court determined that she tried to comply but had no control over the trustees.)Continue Reading

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

May 7, 2010 By Asher Rubinstein, Esq.

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

Traditionally, professionals in certain high-liability professions were most interested in asset protection. Examples include doctors facing the threat of medical malpractice lawsuits, and landlords and real estate developers facing lawsuits from purchasers or tenants of the real estate.

Lately, we’ve been seeing the emergence of a new group: investment advisors, hedge fund managers and other financial professionals. This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions. As investors seek to blame others for investment losses, plaintiffs are now suing fund managers personally, in addition to suing the fund itself. In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is something new, but something that we are seeing in increasing numbers.

In addition, government investigation and prosecution of financial firms, including the recent charges against previously-untouchable Goldman Sachs, add a further challenge for investment advisors and financial professionals. Individual professionals can be investigated and charged, in addition to the firm or fund itself. A finding of wrongdoing, or criminal charges, could form the basis of a civil suit by investors against the investment advisor or money manager.

Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims. Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements. One caveat: it is imperative that financial professionals protect themselves before the commencement of a lawsuit by a disgruntled investor.

Domestic asset protection via FLP’s is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants. In such cases, a financial professional may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies. International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts. Money, for example, may be wired offshore in order to be completely protected from disgruntled investors.

While in the past, hedge fund managers and investment advisors could take comfort in the indemnification offered by the their funds or investment houses, these days, adequate indemnification is far from certain. For one thing, indemnification would not occur in case of negligence or activity determined to run afoul of law, or even activity deemed to be contrary to internal fund or investment house policy. Of greater importance, indemnification is “after-the-fact”; it seeks fund reimbursement after you have already lost your assets. Proper asset protection is pre-emptive; it is designed to discourage lawsuits in the first place and to protect your assets from future claimants. It eliminates the need for indemnification or, at the least, significantly reduces the amount of indemnification needed.

Proper asset protection strategies offer financial professionals piece of mind and provide the protection their hard-earned assets need to withstand the inevitable attacks by investors looking to blame someone else for their investment losses.

Foreign Trust Survives Creditor Challenge – Offshore Asset Protection Sound, Legal And Effective

February 20, 2009 By Asher Rubinstein, Esq.

FOREIGN TRUST SURVIVES CREDITOR CHALLENGE – – OFFSHORE ASSET PROTECTION SOUND, LEGAL AND EFFECTIVE

Two recent news stories have led to hasty and unfounded pronouncements of the “death of offshore asset protection”. The first was the theft of confidential banking information from a foreign bank and its sale to German tax authorities. The second was the subsequent exposure of banking giant UBS as a promoter of U.S. tax fraud. Both stories have at their core tax fraud involving strategies based on “hiding assets”. We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection. The following actual case study proves that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective.

In 2004, one of our clients established an irrevocable asset protection trust in Liechtenstein with funds totaling $1.2 million. The client filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income.

In 2006, a U.S. creditor obtained a New York state judgment of more than $1 million against the client. Shortly thereafter, the judgment creditor served a restraining notice against the client’s U.S. assets. However, the client had minimal attachable assets in the U.S.

Frustrated with the lack of attachable U.S. assets, in 2008 the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. The creditor argued that because the client had established the trust, and because the client was a beneficiary of the trust, our client had a right to trust assets which was attachable by the U.S. creditor.

A lower Liechtenstein court temporarily restrained the trustee from transferring trust assets while that court considered the U.S. creditor’s claim. However, an appellate-level Liechtenstein court quickly determined that our client had no “right” to trust assets that was attachable because the trust was a discretionary trust. Therefore the Liechtenstein courts lacked jurisdiction over our client. The appellate court cancelled the restraint on trust assets. Thus, the trust assets were protected from the creditor’s U.S. judgment. Incidentally, the U.S. creditor was required to deposit $100,000 with the Liechtenstein court to cover our client’s legal costs.

The Supreme Court of Liechtenstein affirmed the decision of the appellate court, effectively dismissing the creditor’s challenge against the trust. Our client’s assets remain safe and secure in Liechtenstein. In addition, the creditor was ordered to pay the legal fees of the trust and our client.

This case is instructive in a number of ways. First, the ultimate lesson here is that despite the legal challenge by a U.S. creditor, the Liechtenstein trust assets remain safe and protected. The U.S. creditor was forced to commence a new action in a foreign jurisdiction, pay legal fees in advance (contingency fees are not allowed in good offshore jurisdictions), and overcome short statutes of limitations and prohibitive burdens of proof. With the odds so strongly stacked against him, the U.S. creditor lost and also paid our client’s legal fees.

Second, the trust was impenetrable because distributions to the U.S. client were completely discretionary by the Liechtenstein trustee. This was the basis for the appellate court’s ruling that the U.S. client had no claim to trust assets. This demonstrates that for effective offshore asset protection, the U.S. client must part with legal control of the assets. However, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who will, in fact, be sympathetic to the client’s needs and wishes.

Third, clients who protect their assets offshore must still disclose those assets, and all gains thereon, to the IRS. Clients cannot expect their assets to be “hidden” – neither from their creditors nor from the IRS. The assets will be protected offshore, but taxes are still due and reporting requirements must be met in order for the asset protection to be effective.

Finally, this case demonstrates that offshore asset protection is very much alive and 100% effective, provided that it is done properly and tax compliantly. “Hiding” assets does not work; “protecting” assets does.

Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein Become Effective

January 28, 2009 By Asher Rubinstein, Esq.

Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein Become Effective

New York, NY – January 26, 2009 — On January 17, 2009, the Antigua International Trust Act, International Foundations Act and International LLC Act, having earlier been passed by the Parliament of Antigua & Barbuda and signed by the Governor-General, were published as law in Antigua’s official gazette, thereby becoming effective. The publication of the advanced asset protection, trust and foundation laws, which were drafted by the New York law firm of Rubinstein & Rubinstein, LLP, firmly establishes Antigua and Barbuda as the premier jurisdiction for international asset protection and asset security in the world.

The new laws make it nearly impossible for foreign creditors to reach assets protected by Antiguan trusts or foundations. A creditor must first win a foreign judgment, then re-litigate the claim anew in Antigua and pay a fee to the Antiguan court. Contingency fees are not permitted. The new laws include very short statutes of limitations, which only allow the creditor to file a claim within two years from the original cause of action or one year from execution of the trust or foundation instrument. The new laws also create an arduous standard of proof, which limits a creditor’s ability to prove fraudulent conveyance claims.

The new laws also contain strong protections against asset repatriation, along with anti-alienation and spendthrift provisions, which prevent foreign courts and creditors from reaching assets protected in Antigua. According to Kenneth Rubinstein, the New York attorney who drafted the legislation, unlike any other jurisdiction, anti-duress provisions are explicitly built into the Antiguan statutes, prohibiting an Antiguan trustee from honoring any request made pursuant to foreign court order or other compulsion. This provides a clear defense of impossibility to any threatened contempt citation. These laws also do not recognize foreign marital rights or forced heirship rights, which ensures that only specifically designated beneficiaries will receive assets.

The new laws balance regulation of trust and corporate service providers with tight confidentiality and absolute asset protection. Antiguan trustees and corporate service providers are carefully regulated by the government of Antigua, and are insured and bonded, which ensures client security and protection. At the same time, Antiguan trustees and corporate service providers are prohibited from disclosing any information about trust, foundation or corporate activities and assets, except pursuant to treaties covering government investigation of serious crime. Unlike in Switzerland, the Cayman Islands and other once-confidential jurisdictions, Antigua now offers the highest level of international confidentiality.

The Antiguan laws offer the world’s most secure and confidential environment for international asset protection, wealth preservation and tax minimization.

For more information about Rubinstein & Rubinstein’s legal services, including domestic and international asset protection, wealth preservation and tax planning, please visit www.AssetLawyer.com.

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Contact:

Kenneth Rubinstein, Esq.
www.AssetLawyer.com
212-888-6600
Rubinstein & Rubinstein, LLP
18 East 48th Street, New York, NY 10017

Offshore Trusts Survive Threats from the IRS, Repatriation and Contempt

December 10, 2008 By Asher Rubinstein, Esq.

To borrow a line from Mark Twain, recent pronouncements about the death of offshore asset protection (e.g. UBS, theft of Liechtenstein bank data) are highly exaggerated. As the following U.S. federal court decision (1) proves, offshore asset protection, when planned by professionals, is alive and well and very effective.

Background

In the 1970’s and early 1980’s, businessman Raymond Grant utilized domestic limited partnerships to take advantage of certain tax credits and deductions which at that time were valid and legal. Then, in 1983 and 1984, Raymond Grant established two irrevocable offshore trusts, one in Bermuda and one in Jersey, both funded with approximately $2.1 million.

In the late 1980’s, the tax law changed, the IRS disallowed the previous tax credits and deductions and in the early 1990’s assessed millions of dollars in back taxes and penalties against Mr. and Mrs. Grant. The Grants challenged the tax assessments and lost. In 1994 they entered into an installment agreement with the IRS whereby the IRS agreed to accept $3,000 per month. The Grants adhered to the installment agreement and paid regularly. In 1999, the IRS agent in charge died and a new IRS agent took over the Grants’ file. The new IRS agent did not like the deal and unilaterally terminated the installment agreement that had been in place for five years, even though the Grants were current on their obligation and had been paying timely and properly.

The IRS Sues

In 2000, the government filed a federal action against the Grants in the Southern District of Florida, charging them with failure to pay federal income taxes, plus interest and penalties. Initially the Grants defaulted, but when the IRS went after the assets in the foreign trusts, the Grants appeared in court. In 2003, the IRS won a judgment against the Grants for over $36 million. In the interim Mr. Grant died. The IRS levied on Mrs. Grant’s Social Security benefits and tax refunds, but found no other U.S. assets.

The Repatriation Order

In 2005, the IRS targeted the offshore trust assets and sought a repatriation order from the federal court. U.S. Magistrate Klein found that Arline Grant held the power to fire and replace trustees, and the power to effect distributions from the trusts to herself. Therefore, Magistrate Klein issued a repatriation order, requiring Arline to either repatriate the assets or fire the foreign trustees and appoint a U.S. resident trustee to administer the trusts, thus bringing the trust assets within U.S. jurisdiction, and available to creditors.

Arline Grant complied with the repatriation order and wrote to both trustees, requesting distribution of the trust assets to her and advising that she was dismissing the foreign trustees and appointing a U.S. resident trustee to administer the trusts.

The trustees rejected Arline’s instructions, claiming that their relinquishment of the trust assets to her would be a breach of the trustees’ obligation to future trust beneficiaries (i.e. the Grants’ children), and that her removal of the current trustees would not be a valid exercise of her powers under the trusts. The trust assets thus remained offshore out of U.S. jurisdiction.

No Contempt

By 2008 the trust assets still had not been repatriated. The IRS urged the Court to hold Arline Grant in contempt for failing comply with the 2005 repatriation order. U.S. District Judge Jordan refused to hold Mrs. Grant in contempt for the trustees’ refusal to repatriate the trust assets, stating that “…this failure is not for lack of effort [by Mrs. Grant]”. Judge Jordan held that because Arline had repeatedly written to the trustees requesting distributions and dismissing the trustees, she had sufficiently established that she was not able to repatriate the assets. The Court stated that when compliance with a court order is impossible, the court cannot hold the respondent in contempt. Arline Grant is free and the trust assets are intact.

Result After Grant

In theory, Magistrate Klein’s order to repatriate should have had a more favorable result for the IRS. After all, according to the trust deeds, Arline did have the power to fire the trustees, and the power to order distributions. The fact that the trustees refused to make distributions and did not allow themselves to be fired was counter to the terms of the trust deeds. But the case centered on contempt. The court did not (and, indeed, could not) concern itself with whether the trustees’ responses were valid. The issue at hand was whether Arline complied with the court’s order to repatriate; she did – – she wrote to the trustees requesting a distribution and dismissing them.

The ultimate issue in this case (as in all other offshore trust contempt cases) was whether the defendant had actual control over the offshore trust assets. Although the trust deeds did, in fact, give Arline power over the trusts – – the power to remove trustees, and the power to require distribution of assets – – those powers proved to be ineffective when the trustees refused to follow Arline’s instructions.

Thus, it was, in fact, impossible for Arline to repatriate the funds, notwithstanding her attempts to remove the trustees and order that the funds be brought back to the U.S. Arline had a paper power over the trusts and their assets, but not an actual power, and the gap between the two rendered it impossible, as a practical matter, to comply with the Court’s order to repatriate. Because of that impossibility, Arline was not in contempt of the repatriation order. The Grant case is a clear pro-debtor decision holding that a contempt order will not be issued where compliance with a repatriation order is impossible.

The lesson for offshore asset protection planners is to prevent a situation where the US client may be found to control the trust. The Grant trusts should never have bestowed powers on Arlene. This would have avoided the Magistrate’s repatriation order in the first place. In the Grant case, the Magistrate correctly held that Arline had power over the trust assets. It was only because of the trustees’ violation of the terms of the trusts that Arlene avoided contempt. A good offshore practitioner should never allow the client to be put in this position. Proper offshore asset protection planning requires the U.S. client to part with all legal control over trust assets. In other words, render repatriation impossible because of lack of legal power, not because of a trustee’s refusal to follow proper instructions. Although the client must part with legal control, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who will, at all times, be sympathetic to the client’s real interests.

In the end, Arlene Grant is free, with her money safe in the offshore trusts. The result after Grant confirms what we have long counseled — that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective.

1. United States v. Grant, 2008 U.S. Dist. LEXIS 51332 (S.D. Fla., May 27, 2008).

UPDATE: Please see our 2013 Article here

Who Needs Asset Protection?

December 4, 2008 By Asher Rubinstein, Esq.

People sometimes have the misconception that in order to engage an asset protection attorney, they need to have significant wealth. However, that is not true. Rubinstein & Rubinstein, LLP (n ow part of Gallet Dreyer and Berkey, LLP) protects the assets of many different people, of diverse backgrounds and all levels of affluence.

Our 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; from cancer victims seeking to protect their home from mounting medical bills to celebrities and mega-wealthy Europeans with real estate holdings around the world. All types of people, with all types of assets, need asset protection.

Especially in light of the difficult current economic times, you should be concerned about the protection and preservation of your assets. In this economy, the threat of creditors taking your assets is real and frightening and transcends all levels of personal wealth, from the very rich to the just-starting-out.

You need asset protection if:

you are facing a lawsuit;
you are in a profession with a high degree of liability (doctor, lawyer, financial advisor, landlord, real estate developer, real estate investor);
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);
the value of your home has been reduced to less than the amount of your mortgage;
you are having trouble meeting your mortgage or other loan payments;
you are concerned about losing your job or your business;
you have excessive credit card or business debt;
the value of your retirement plan and investment portfolio has fallen to the extent that now your most valuable asset is your home;
you are concerned about the financial viability of your business.

Clearly, all types of people need asset protection, from professionals who have worked hard to build their practices and client base, to captains of industry who face personal liability for their business affairs, to ordinary people facing financial hardship.

Asset protection is crucial for many different people, for many reasons, all united together with the common goal: keeping their assets for themselves and their families, and not exposed to greedy creditors, aggressive litigants and others seeking to deprive people of their hard-earned assets.

Foreign Trust Survives Creditor Challenge – – Offshore Asset Protection Sound, Legal and Effective

December 4, 2008 By Asher Rubinstein, Esq.

Foreign Trust Survives Creditor Challenge – – Offshore Asset Protection Sound, Legal and Effective

Two recent news stories have led to hasty and unfounded pronouncements of the “death of offshore asset protection”. The first was the theft of confidential banking information from a foreign bank and its sale to German tax authorities. The second was the exposure of banking giant UBS as a complicitor in U.S. tax fraud. Both stories have at their core tax fraud involving strategies based on “hiding assets”. We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection. The following actual case study proves that offshore asset protection, when done properly and lawfully and with complete disclosure to the IRS, is completely legal and 100% effective.

In 2006, a U.S. creditor obtained a New York State judgment against the client in an amount just under the initial amount of the trust corpus. Shortly thereafter, the judgment creditor served a restraining notice against the client’s assets. Later that year, the judgment creditor domesticated his judgment in a second state where the client resided in order to attach the client’s assets held in that second state. However, the client had minimal attachable assets in both states.

A lower Liechtenstein court enjoined the trustee from transferring trust assets while that court considered the U.S. creditor’s claim. However, an appellate-level Liechtenstein court quickly determined that our client had no “right” to trust assets that was attachable because the trust was a discretionary trust and therefore the Liechtenstein courts lacked jurisdiction over our client. Thus, the trust assets could not be taken to satisfy the creditor’s judgment and the lower court’s restraining order was cancelled. Incidentally, the U.S. creditor was required to deposit $100,000 with the Liechtenstein court to cover our client’s legal costs.

There is an appeal currently pending with the highest Liechtenstein court. However, based on the positive appellate opinion and relevant Liechtenstein law, we expect the favorable appellate decision to be upheld. Our client’s assets will remain safe in Liechtenstein.

This case is instructive in a number of ways. First, the ultimate lesson here is that despite the legal challenge by a U.S. creditor, the Liechtenstein trust assets remained safe and protected from the creditor. The U.S. creditor was forced to commence a new action in a foreign jurisdiction, pay legal fees in advance (contingency fees are not allowed in good offshore jurisdictions), and overcome short statutes of limitations and prohibitive burdens of proof. With the odds so strongly stacked against him, the U.S. creditor lost and also paid our client’s legal fees.

Second, the trust was impenetrable because distributions to the U.S. client were completely discretionary by the Liechtenstein trustee only. This was the basis for the appellate court’s ruling that the U.S. client had no claim to trust assets. Had the U.S. client been entitled to mandatory distributions, the court might have determined that the client had a claim to trust assets, and the court might have found in favor of the U.S. creditor. This demonstrates that for effective offshore asset protection, the U.S. client must part with legal control of the assets. However, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees.