So often a client walks through my door to discuss trusts, corporations, family limited partnerships and/or other structures designed to protect their wealth. Structures are very important, but structures alone cannot do the job in a one-size-fits-all approach to asset protection. While an international trust may be just what the doctor ordered for protecting a surgeon's life savings, the same structure will do very little to help a commercial real estate developer operating in litigious North America.

The structure is only part of the equation, while the investment class is the other part. You need to put both parts of the puzzle together in a coherent fashion to truly protect and grow your wealth.

International Trusts - As many of you know, this is the Cadillac of asset protection vehicles. You select the jurisdiction in which a future fight over your assets may occur. Going global allows you to pick jurisdictions that favor grantors, beneficiaries, debtors, defendants, etc., at the expense of all types of future plaintiffs. The international asset protection trust can help your future estate avoid estate taxes, avoid probate and allow your financial and moral influence to be felt from beyond the grave. Asset Protection Trusts work exceptionally well with assets that can be "picked up" and moved, including stocks, bonds, precious metals and titles to foreign real estate, and anything else that can be “titled” offshore.

The Qualified Intermediary (QI) rules applicable in many "haven" jurisdictions, however, make it impractical to hold and trade U.S. Securities from a foreign trust. Some financial institutions simply will not allow a trust in which they serve as administrator to buy or sell U.S. securities. Others will only allow you to trade U.S. Securities once you have filed a W-8 BEN Form with the IRS. The new FATCA (Foreign Account Tax Compliance Act) rules as brought about by the HIRE Act will make certain financial transactions (in moving money offshore) even more difficult for American created structures that have US beneficiaries.

Foreign trusts, however, are not good vehicles for holding U.S. real estate, bulky silver, antique cars, expensive artwork and things that are difficult or impossible to "move" across international borders. If you move an asset into a foreign trust, you may also put some of your remaining domestic assets at greater risk, since judges will get very upset when they find that they cannot attach certain assets that you have moved outside of their jurisdiction. For this reason it is important to have a look at the domestic assets that will stay behind as well as the assets to be moved.

International Business Companies (IBCs) - Are great vehicles for holding business assets that you intend to put to productive use. It can include real assets such as machinery, foreign real estate or intellectual assets such as patents, trademarks and/or copyrights and, of course, any type of global business opportunity. The IBC is not taxed in the jurisdiction in which it is formed, and may or may not be subject to current taxation in your home country based on the type of income generated (active vs. passive), the nationality of the controlling shareholders, and a number of other factors.

The IBC is generally not a good vehicle to hold strictly "investments" also known as passive activity. The U.S. tax code has a section dealing with Passive Foreign Investment Companies (PFICs) which can make taxation of these entities worse than in a domestic vehicle or simply holding them in your own name.

Family Limited Partnerships (FLPs) - Can be used both domestically and internationally. FLPs are a great way for senior generations to gift various assets over time to the next generation while still maintaining control as the general partner. This strategy works great for domestic real estate, U.S. closely held businesses and assets that you generally want to have "kept in the family." FLP drawbacks include succession challenges to the general partner and the potential asset protection challenges of the general partner. Sometimes the general partner of an FLP can be an offshore IBC designed to protect the partnership from claims against the general partner, or the general partner interest can be placed in a trust.

Private Placement Life Insurance - This is really the only vehicle left in which an individual can legally defer taxation on passive income, avoid capital gains, and eliminate estate and income tax. VUL (Variable Universal Life) policies are great for assets that have the potential for large capital gains or income streams, since the income that flows into the foreign insurance company normally is tax free. The instruments inside the insurance wrapper must be diversified under the insurance section of the Internal Revenue Code to constitute legitimate insurance.

Hedge funds are particularly good investment classes for life insurance wrappers since they are by themselves private partnerships which are very tax inefficient. Instead of liquidating a third of your gains every year just to meet your tax obligations, the money is able to grow tax-deferred. Private Placement investments with strong upside are also good candidates for insurance wrappers while money-losing investments are best kept in your own name for tax deduction purposes.

Debt - Quite simply "debt" can be used as a very effective asset protection structure and strategy especially where U.S. real estate is involved. Many advisors strongly advise clients against debt, but that is largely because they do not understand the role of debt as an asset protection vehicle. Instead of putting
real property in a trust, which may not protect it at all, why not leverage the property instead and make sure the equity that you pull out of the property goes into an asset protection structure. Believe me, the property involved will become very "unattractive" to potential plaintiffs once they realize that they will have to get in line behind a bank holding a first mortgage position against the property. To the extent that your international investment returns from the cash you pull out of the real estate exceed your domestic interest expense, you are ahead both with your returns as well as your asset protection. A number of my clients borrow in dollars but invest in a basket of foreign currencies they believe will strengthen vis-à-vis the dollar, thereby paying back the debt in dollars that will be worth less than they are today.

IRAs or Individual Retirement Accounts generally refer to all types of tax deferred vehicles including SEPS, Keoghs, 401(k) and 403(b) plans. These domestic retirement “trusts” can legally own the member interests of foreign LLCs, which in turn can own bank, and brokerage accounts as well as virtually any type of business interest, real estate or investment. The LLC itself can be set up as a “disregarded entity” which minimizes tax and reporting requirements and allows income to pass through to the IRA (which itself is tax deferred). This is a tremendous vehicle for folks looking to defer significant income for their retirement years

Hard Assets - Foreign real estate, foreign art acquired and held abroad, precious metals and precious gem stones all have a few things in common. They are not reportable as a foreign trust, IBC, bank or brokerage account would be. It is therefore possible to maintain a low profile with these items no matter how the ownership is structured. The lack of "present" income in addition to the lack of reporting requirements are ideal for folks looking to grow their assets offshore in a private and discreet way. Real estate that produces agricultural products, such as coconuts, wood (teak, mahogany), alternative fuels (sugar, coconuts, corn), etc. may also be an excellent way to diversify out of traditional investment classes, as well as the dollar and into hard assets that produce non-dollar denominated income. Even if the income must be reported, it is a great way to protect and grow income that will increase in value as the dollar declines in value.

In conclusion, no matter what type of assets that you hold or the type of asset protection structure that you have, certain assets are better predisposed to fit together in certain structures rather than others. Knowing what you need or want from an asset protection strategy will influence your investment mix, and conversely, a strong desire for a particular asset mix will dictate the type of asset protection structure that will work best for you. Keeping the relationship between the two in mind will help you to maximize the effectiveness of both your structure and your overall investment return.