          
          
          
                   International Asset Protection Trusts
          
          
               Recently another asset protection device in trust
          form has gained popularity, the international asset
          protection trust ("APT").  This foreign trust often
          appears to be attractive to persons wishing to shield
          personal assets from possible law suits or other
          potential liability.
          
          
          Protection Against the Unexpected
          
               Medical, legal and professional malpractice suits
          as well as legislative and judicial imposition of no-
          fault personal liability on corporate officers and
          directors have by now become a fact of U.S. business
          life.  An active business or professional person can
          suddenly be held responsible for all sorts of unforseen
          events such as a company's environmental pollution, a
          bank failure or a dissatisfied client.  Premiums for
          malpractice insurance have gone through the roof.  In
          this business climate, astute people must consider the
          best way to protect their personal assets against any
          eventuality.
          
               One way is to place those assets beyond the reach
          of potential litigation plaintiffs, creditors and their
          contingent-fee lawyers is creation of an asset
          protection trust located in a foreign country where the
          law favors such goals.  Certain of these foreign
          jurisdictions do not recognize U.S. or any non-domestic
          court orders, so a creditor must retry completely the
          original claim, which gave rise to the U.S. judgment,
          in the other country.
          
               The country chosen for such a trust must have
          local trust experts who understand fully and are able
          to assist you in your objectives.  The foreign attorney
          who creates your trust unquestionably must know the
          applicable law and tax consequences or you will be in
          trouble from the start.
          
               Once established, the offshore asset protection
          trust in its basic form can consist of as little as a
          trust account in an international bank located in the
          foreign country.  Many well established multi-national
          banks can provide trustees for such arrangements and
          are experienced in such matters.  With today's instant
          communications and international banking facilities, it
          is as convenient to hold assets and accounts overseas
          as it is in another American city.  Most international
          banks offer U.S. dollar-denominated accounts which
          often offer better interest rates than U.S.
          institutions.
          
          
          Pros and Cons
          
               Depending on the country of choice, the settlor of
          a foreign asset protection trust can gain many
          advantages including the exercise of far greater
          control over assets and income from the trust than
          permitted under U.S. domestic law.  Generally the U.S.
          rule which does not permit a settlor to create a trust
          for his own benefit does not apply in foreign
          countries.  Creation of such a trust also means removal
          of your assets as a lawsuit target since domestic
          creditors are discouraged when faced with enforcement
          of a U.S. judgment in another country.  However, the
          greater degree of control over the assets that the
          settlor maintains, the easier it is for a U.S. court,
          which has jurisdiction over the settlor, to order the
          settlor to return the assets to the jurisdiction of the
          court.  
          
               The trust can provide privacy, confidentiality,
          and reduced domestic reporting requirements in your own
          country; avoidance of domestic taxes and probate in
          case of death; increased flexibility in conducting
          affairs in case of disability, in transferring assets,
          international investing, or avoiding domestic currency
          controls.   A foreign asset protection trust can also
          substitute for or supplement costly professional
          liability insurance or even a prenuptial agreement as
          protection for your heirs and their inheritance.
          
          
          Trust Creation Abroad
          
               The structure of foreign asset protection trusts
          is not very different than that of an Anglo-American
          trust.  The settlor creates the trust and transfers the
          title to his assets to the trust to be administered
          according to the trust declaration by the trustees. 
          Usually the trustee is a bank in the jurisdiction
          chosen.  Beneficiaries can vary according to the
          settlor's estate planning objectives and the settlor
          may be a beneficiary but not the primary one.
          
               Many foreign jurisdictions also permit appointment
          of a trust "protector" who, as the title indicates,
          oversees the operation of the trust to insure its
          objectives are being met and the law is followed.  A
          protector does not manage the trust but can veto
          actions in some cases.
          
               Under U.S. tax law, foreign asset protection
          trusts are tax-neutral and are usually treated the same
          as domestic trusts, meaning income from the trust is
          treated as the settlor's personal income and taxed
          accordingly.  Because the settlor retains some degree
          of control over the transfer of his assets to the
          foreign trust, U.S. gift taxes can usually be avoided. 
          (But that degree of control can make the settlor
          vulnerable to court orders requiring him to exercise
          that control, thus defeating the asset protection he
          intended to gain.)  Estate taxes are imposed on the
          value of trust assets for the settlor's estate but all
          existing exemptions such as those for martial assets
          can be used.  Asset protection trusts are not subject
          to the 35% U.S. excise tax imposed on transfers of
          property to a "foreign person."
          
               As you will see in our discussion of partnerships
          in the next chapter, one device for a settlor to retain
          control of assets is to form a limited partnership and
          make the foreign asset protection trust a limited
          partner.  This allows a general managing
          partner/settlor to retain control over all assets he
          transfers to the asset protection trust/limited partner
          abroad at the same time trust assets are theoretically
          protected from creditors or other legal attacks.  
          
               Some American court decisions recently have
          reduced the scope of asset protection of a limited
          partner, in cases holding that under certain
          circumstances assets can be attached by a judgment
          creditor, even though the people selling these programs
          often insist that the limited partnership is
          unassailable.
          
               The greatest worry about a foreign asset
          protection trust often is the distance between you,
          your assets and the people who manage them.  (While
          your assets do not have to be transferred physically to
          the foreign country in which the trust exists, some
          circumstances may dictate such a precautionary
          transfer.  Without such a transfer, a court could
          decide not to recognize the trust and take possession
          of the assets.)  
          
               If you are considering a foreign asset protection
          trust you should find out whether the foreign
          jurisdiction's laws are favorable, clear, and truly do
          offer the protection you seek.  Examine the economic
          and political stability of the country, the reputation
          of its judicial system, local tax laws, the business
          climate, language barriers and available communication
          and financial facilities.  Unfortunately there are very
          few U.S. experts in this field of asset protection law.
          
               Several offshore financial centers have developed
          legislation hospitable to foreign-owned asset
          protection trusts, among them the Caribbean-area
          nations of the Cayman Islands, the Bahamas, Belize, the
          Turks and Caicos Islands, and the Cook Islands near New
          Zealand, as well as Cyprus and Gibraltar in the
          Mediterranean.
          
          
          Fair Weather Financial Planning
          
               An important consideration about foreign asset
          protection trusts; this arrangement will only work if
          it is planned and created at a time of financial calm,
          not in a personal crisis.  If the foreign trust is set
          up when you are about to be (or have been) sued or are
          forced into bankruptcy, the act of transferring your
          assets to a foreign trust is likely to run afoul of
          strict fraudulent conveyance laws in the U.S. which
          protect creditors.  These laws allow a court to declare
          a trust or any device used to conceal or remove assets
          from creditors as illegal and therefore void.  If your
          assets are still within the court's jurisdiction, your
          having conveyed title to a foreign trustee is not
          likely to protect them from domestic attachment in such
          a case.  If the assets actually are in the foreign
          jurisdiction, as in a bank account, the creditor will
          have more difficulty in reaching them before you can
          act to protect them.
          
          
          Offshore Corporations
          
               Yet another legal device advocated by some as the
          perfect repository for asset protection is the creation
          of a corporation in a foreign nation ("offshore
          corporation") which you as the instigator will control
          through various indirect means.  The theory is that
          your corporate ownership will be concealed from the
          U.S. or other governments allowing you financial
          privacy.  The offshore corporation can hold legal title
          to foreign mutual funds or other valuable assets
          outside the U.S. thus sheltering income and profits
          from American taxes.  Business can be conducted through
          a designated nominee thus shielding your secret
          participation from the prying eyes of creditors or the
          U.S. government.
          
               In theory this sounds grand, but there are many
          practical problems associated with an offshore
          corporation.
               First of all, just as required in establishing any
          domestic U.S. corporation, the legal formalities have
          to be strictly adhered to when you incorporate abroad
          and the cost of setting up the company can be
          considerable.  You will need foreign local legal
          counsel who knows the law and understands your asset
          protection objectives.  Corporations anywhere are rule-
          bound creatures requiring separate books and records,
          meetings, minutes and corporate authorizing resolutions
          which make it less flexible than many other
          arrangements.
          
               Then there are the problems presented by U.S. tax
          law and court decisions upholding those laws.  There is
          a U.S. tax on unrealized gains and income and capital
          gains taxes on transfers to foreign corporations.  If
          the offshore company can be characterized as a "foreign
          personal holding company" the U.S. shareholder's
          portion of undistributed earnings will be taxed
          currently to him as ordinary income.  The same I.R.S.
          rule applies if the offshore entity qualifies as a
          "controlled foreign corporation" but additional taxes
          are imposed on gain derived from the sale of corporate
          assets.  There is an established series of U.S. cases
          in which the courts have looked behind the offshore
          corporate veil and attributed "constructive ownership"
          to the U.S. taxpayer as an individual.  Similar actual
          control findings have been based on a "chain of
          entities" linking the taxpayer to the corporation.  The
          courts will look to who has substantive control as
          opposed to paper nominees who exercise nominal control. 
          In addition, there are various specific I.R.S.
          reporting requirements when an offshore corporation is
          created and when you serve as an officer, director or
          10% or greater shareholder in a foreign personal
          holding company or offshore corporation of any kind. 
          The U.S. Supreme Court has even ruled that a U.S.
          taxpayer can be held guilty of "falsifying a federal
          income tax return" by maintaining he did not have
          certain foreign holdings and that Fourth Amendment
          guarantees regarding searches and seizures do not apply
          to documents located abroad pertaining to a U.S.
          taxpayer's ownership of foreign interests.  And any
          unreported foreign corporation ownership is
          automatically a felony if it is discovered.  When U.S.
          courts have concluded offshore corporations are being
          used to conceal assets or avoid taxes they have levied
          additional penalties and interest and often imposed
          criminal convictions.
          
               A properly used foreign corporation can be part of
          an overall asset protection plan, but please don't rely
          on forming a quick corporation with bearer shares as a
          means of protecting your assets.  Such shortcuts are
          only a pathway to disaster.
          
          
          A reliable source of help
          
               One of the best sources of help in setting up
          offshore trusts and corporations is an American
          certified accountant who has a large practice in
          Panama.  Marc Harris holds a master's degree in
          business administration from Columbia University in New
          York, and completed the certified public accountancy
          examination at the age of 18.  He is believed to be the
          youngest person in the U.S. to pass the examination.
          
               He opened his Panamanian firm in 1985, after being
          a consultant with the accounting firm of Ernst &
          Whinney.  His services are highly recommended because
          he is able to create and administer offshore
          corporations and trusts with complete compliance with
          U.S. laws.  Often an American client uses a tax-haven
          based advisor who knows the local laws but is not
          familiar with American tax law requirements and
          technicalities, and the client eventually gets into
          trouble, so Marc Harris has a unique ability to bridge
          the two worlds for his clients.  Although based in
          Panama, he can create and administer corporations and
          trusts that are registered in all of the popular tax
          havens.
          
               For more information, write to The Harris
          Organization, Attn: Traditional Client Services,
          Estafeta El Dorado, Apartado Postal 6-1097, Panama 6,
          Panama.
          
          
          
