| Protection of Assets From the U.S. Litigation Lottery |
Asset protection from predatory litigation has become one of the primary motivations for U.S. persons to move some of their assets into a more hospitable legal jurisdication.
The U.S. legal system is heavily biased toward plaintiffs who have suffered some kind of personal or financial injury and U.S. judges and juries frequently hold defendants liable for the flimsest of reasons -- so long as the defendant has assets or insurance.
The U.S. trust laws permit the use of what is called a "spendthrift trust", which prohibits a beneficiary from assigning his or her interest in the trust to anyone. That will also protect the trust assets from the creditors of a beneficiary. However, the U.S. trust laws do not permit someone to establish a spendthright trust for their own benefit (a "self settled trust").
Various foreign countries (often called tax havens because they have no income taxes) have adopted laws that are more like the U.S. laws before the 1960s. A particularly popular arrangement is a foreign asset protection trust. This type of trust usually permits the settlor/grantor who funds the trust to also be one of the beneficiaries of the trust. In most cases, a creditor of the trust grantor would have to bring a legal claim against the grantor in the foreign jurisdiction -- and would not be able to employ lawyers on a contingent fee basis.
Other methods of offshore asset protection include a foreign limited liability company, a Swiss life insurance policy or annuity and in some cases, an international business company in which the founder does not have personal control of more than half the assets.
However, a variety of U.S. tax reporting and filing obligations are generated by using these asset protection structures. The foreign trust requires Forms 3520 and 3520-A (plus others). The International Business Company requires the filing of Form 5471 and Form 926. A foreign LLC with multiple owners will require a Form 8865 each year. An annuity or life insurance policy with a foreign insurance company may require the filing of a quarterly Form 720 or the filing of an annual Form 8833. Having a foreign financial account may require the annual filing of Form TD F 90-22.1. Where some assets are invested in foreign mutual funds, a Form 8621 may be required for each fund.
Vernon Jacobs
(C) Copyright, 2004 All rights reserved.
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