Protecting assets is becoming more and more important every day. Potential legal liabilities abound and governments are constantly clamping down on financial privacy. It is essential for all wealthy individuals to have a well-crafted asset protection plan in place. Today, the best asset protection strategies utilize multiple tools to create several layers of protection between assets and creditors. They also take advantage of the financial privacy afforded by offshore jurisdictions and cryptocurrencies.
Asset protection refers to any method or strategy which an individual can employ to protect wealth. An asset protection strategy can be used to protect an individual or business from the threat of lawsuits. They may also be used to protect against other types of liability, such as workers compensation claims. Asset protection tools may be used to prevent creditors from attacking assets in order to satisfy debts. These tools may also be used to limit tax liabilities in certain circumstances.
When asset protection strategies are crafted correctly, they are completely legal. Asset protection strategies are an important part of any responsible individual’s financial portfolio. They do not enable individuals to evade taxes or defraud creditors. They simply allow individuals to use the law to their advantage to protect their assets from business liability or potential lawsuits. Asset protection strategies are especially important for those working in high liability fields, such as physicians and lawyers.
A number of tools may be used for asset protection. Today, many people are using cryptocurrency in combination with traditional asset protection structures, such trusts and limited liability companies.
Let’s start right off with this. We are not suggesting cryptocurrency as a primary asset protection strategy. You can stick with traditional banks. The bank can be domestic or international, with an account held in proper legal tools and detailed below. That is precisely what most our our clients to do protect liquid assets from lawsuits. So, we are simply mentioning e-currency to keep with the theme of our article since this form of non-traditional money is a fairly recent option. That said, now on with the story.
Cryptocurrencies are digital or virtual currencies which are encrypted to provide enhanced financial privacy. Cryptocurrencies are very difficult to counterfeit as a result of this cryptography. A major benefit of using cryptocurrency is that it is decentralized. Not having a central government authority means that cryptocurrencies are subject to fewer regulations than traditional currencies.
The first cryptocurrency to become popular was Bitcoin. It was introduced in 2009 by an individual or group using the pseudonym Satoshi Nakamoto. Bitcoin is still the world’s most popular cryptocurrency. As of June 2018, there are over 17 million bitcoins in circulation. A number of competitors have entered the market as a result of Bitcoin’s success. These competitors include Ethereum and Litecoin.
The main advantage of cryptocurrencies lies in the privacy that they provide. Those who use cryptocurrencies are not required to register their names. This allows transactions conducted using cryptocurrency to remain anonymous. However, cryptocurrencies are managed using apps. The accounts created to use these apps may be registered to an individual or a company. It is possible to increase the privacy afforded through the use of cryptocurrency by registering the digital account to an offshore company. This creates an extra layer of separation between the cryptocurrency and its owner.
The problem is that Cryptocurrency is easier to trace than one would think. Want to buy something sing crypto and have it shipped? First, all crypto transactions are recorded in the public domain. Second, the company whom you paid has a record of the shipment. This creates a digital trail straight to your doorstep. What if you walk into a store and pay for something using an app on your mobile phone? The movement of your mobile phone can be tracked. Your payment is tracked. Put the two together an you have tied yourself to the transaction. Now the judge says, “Turn the funds over or else you can wait behind those grey bars in the next building until you do.” So, even if you do have e-currency, if you want real asset protection, hold it in an offshore LLC plus an offshore trust, as you will see below.
Offshore Limited Liability Companies (LLCs)
A limited liability companies (LLC) is an example of a traditional tool used for asset protection. Limited liability companies act as separate legal entities from their owners. This separation is commonly referred to as the corporate or company veil. It is very useful for shielding assets from business liability. The liability of the owners of an LLC is limited to their investment in the company. As a result, claims against the owner’s personal assets may not be made to fulfill debts and obligations incurred by the company. Conversely, in a personal lawsuit, there are provisions in LLC law such that creditors of the LLC members cannot seize the business or its assets.
It is advisable to use an offshore limited liability company for the best asset protection. This is because domestic limited liability companies are subject to the laws of the United States. As a result, any creditor who obtains a judgment against the assets held by a limited liability company may be able to take those assets. It is far more difficult for a creditor to obtain a judgment in their favor in an offshore jurisdiction. Many offshore havens do not recognize foreign judgments. Even if one were to file a secondary lawsuit overseas and pursue the funds offshore, there are tremendous barriers to doing so. Laws in jurisdictions such as Nevis require a $100,000 bond from the plaintiff. Plus, a judgment/charging order against a Nevis LLC would only last three (3) years and is not renewable.
Offshore trusts are widely considered to be the most powerful asset protection tools available. The strongest asset protection strategies will almost always involve offshore trusts. Offshore trusts work in a very similar way to domestic asset protection trusts. They take the discretionary control over distributions of assets held in the trust away from the beneficiaries of the trust. When the “bad thing” happens, this control is handed over to the trustee. (The trustee is our offshore law firm.) Beneficiaries, who may include the settlor of the trust, have no control over distributions of assets. As a result, there is no way for creditors to demand that those assets be turned over in order to satisfy a debt.
Offshore trusts offer significantly more protection than domestic trusts. This is especially true with regards to fraudulent transfer claims. Fraudulent transfer occurs when a person transfers assets with the expressed intent to delay or defraud creditors. A successful claim of fraudulent transfer will nullify the protection afforded by an asset protection trust strategy. The burden of proof for fraudulent transfer claims in the United States is clear and convincing evidence. This is far lower than the burden of proof in many favorable offshore jurisdictions. In these jurisdictions, the burden of proof is beyond all reasonable doubt. This is the same burden of proof that is required to convict someone of murder. As a result, it is much more difficult to bring a successful claim of fraudulent transfer in an offshore jurisdiction.
Additionally, a majority of offshore jurisdictions do not recognize foreign judgments. In order to make a claim against assets held within an offshore trust, a person must travel to the jurisdiction where the trust is held. They must then have their case tried by the local court. This often proves to be prohibitively time consuming and expensive. For this reason, many creditors do not think it is worth the trouble to pursue assets held in an offshore trust.
The best modern day strategy for asset protection involves using cryptocurrency in combination with an offshore trust and offshore limited liability company. This combination provides the maximum financial privacy available. It also creates multiple layers of protection which creditors would have to pierce through in order to make claims against assets.
Cryptocurrency provides asset protection because of its associated financial privacy. Since cryptocurrency is anonymous, it is less likely to be attacked by creditors. However, there have been cases where cryptocurrency has been seized when it has been effectively linked to a debtor. This usually occurs as a result of using a domestic bank account or domestic cryptocurrency wallet. Domestic financial institutions are subject to the rulings of US courts. As a result, a domestic bank or cryptocurrency wallet may be ordered to turn over the names and records of account holders. In this circumstance, it may be possible to trace the owner of cryptocurrency through the wallet or institution used to carry out the transaction. It is essential to choose the right jurisdiction when using cryptocurrency for asset protection. The location of the structure used to hold the cryptocurrency will determine the laws to which it will be subjected.
For this reason, many savvy investors are choosing to use offshore entities to hold their cryptocurrency.
Using an offshore trust with an offshore limited liability company is one of the best ways to hold cryptocurrency. In order to use this strategy, an individual must first settle an offshore trust in a favorable jurisdiction. Next, they establish an offshore limited liability company. This company may be in the same offshore jurisdiction as the trust. It may also be located in another favorable offshore jurisdiction. The offshore LLC is then placed inside the offshore trust. The offshore LLC may then open an offshore bank account or an account with an offshore cryptocurrency wallet. The settlor of the trust will then fund that account with their cryptocurrency.
While things are running smoothly, the settlor of the trust may act as the manager of the LLC. This allows them to maintain day-to-day control over the assets held by the LLC, including the cryptocurrency. In times of legal duress, however, control of the LLC may be transferred to the trustee. Trustees are legally prohibited from making transfers of assets while the settlor of a trust is under legal duress. As a result, those assets will be effectively protected from creditors.
Trustees are also contractually barred from complying with foreign judgments. In order for a trustees to be compelled to release assets, they must be ordered to do so by a local court. As mentioned previously, this often proves to be too expensive and time consuming for creditors to consider doing it. Trustees are able to pay bills for the settlor of a trust. Additionally, they may make distributions to relatives or trusted friends on the settlor’s behalf. Using this structure, the settlor has the ability to access their cryptocurrency, or traditional bank account, while keeping it out of the reach of creditors.