Copyright © 1999 Robert L. Sommers, all rights reserved.
With one quick strike, the Off-Shore Asset Protection Industry has been all but wiped-out. In a recent court decision, The Ninth Circuit Court of Appeals ridiculed the central premise of off-shore asset protection planning: that a U.S. court could be stripped of jurisdiction by the creation of meaningless and self-serving documents (i.e. the offshore trust agreement) which supposedly transferred a defendant's assets to a so-called "asset protection" jurisdiction.
The Ninth Circuit Court of Appeal's decision (the Ninth Circuit, governing California and several other western states, is considered the most powerful court in the U.S. other than the Supreme Court) left no doubt that U.S. courts will continue to have personal jurisdiction over U.S. defendants and their assets, despite the best laid plans of the Off-Shore Asset Protection Industry.
Asset protection exists, in theory, to protect those subject to the jurisdiction of U.S. courts against lawsuits. Attorneys began exploring ways to hide or shield a person's assets against potential creditors. The idea was to convince very small countries with marginal economies to set up asset-protection legislation.
The legislation usually had two goals: (1) to make it difficult, if not impossible, for a creditor to bring a lawsuit to recover assets secreted in a foreign country; and (2) not to recognize U.S. court judgments or a U.S. court's jurisdiction with respect to the assets "held" in the foreign jurisdiction. Of course, the assets are usually not held in the jurisdiction, but invested in the U.S. or elsewhere.
The benefit to the foreign jurisdiction would be increased business activity and fees charged for using the country's asset protection laws. Usually, fees would be a flat amount, regardless of the asset's value and there are never any taxes levied on income or profits from assets. In short, the foreign country "sells" its asset-protection laws in return for an annual fee.
According to asset-protection adherents, if a U.S. person formed an asset-protection trust in an asset-protection jurisdiction and transferred assets to the trust, he could remain in effective control of his assets and at the same time shield those assets from potential creditors. Also, because the foreign jurisdiction would not recognize a foreign judgment, a creditor who successfully sued in a U.S. court would never collect on the judgment.
Although the focus on asset protection involved the laws of a foreign jurisdiction, there was scant mention in the literature about the possibility that a U.S. court might hold the protected individual in contempt of court. The asset protection crowd glossed over this distinct possibility by claiming that a court could not hold a defendant in contempt if it was "impossible" for the defendant to comply with the court's order. To this end, language would be inserted into the asset protection trust, attempting to make it impossible for a defendant to comply with a U.S. court's order.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**