by Richard Duff, J.D., CLU

Barry Engel is a Denver attorney whose international practice is limited to tax and asset protection planning, Barry's common sense contributes to his worldwide perspective when it comes to legal and financial planning, The following interview occurred in September of 1996.

Duff : Let me start by asking about the direction that U.S. lawsuits will take over the next few years. Will courts persist in having this "plaintiff-friendly'' attitude that we see so often!

Engel: Some people believe it's getting better out there. I, too, have a general sense that things are calming down, at least until l look at it in perspective.

Duff : What do you mean by "looking at it in perspective"?

Engel: A good analogy is inflation, If inflation is ticking along at 12 percent and then drops to 7 percent, we are inclined to feel better because the rate has dropped. However, the cost of goods is still higher than it was earlier, and it is getting higher all the time.

Duff: I take this to mean you are still a strong believer in asset protection. How do you define this type of planning?

Engel: It is the process of planning to protect against those risks that threaten accumulated wealth, To be effective, it must be implemented in advance of a particular risk materializing rather than after it has occurred.

Duff: Tell us about the current state of your art. For example, do you still favor using the foreign situs asset protection trust [APT] together with a domestic family limited partnership [FLP]?

Engel:We do, but over the last five years or so it has become relatively common to use multiple partnerships or similar vehicles in a given planning structure, as well as more than one trust. However, all of this still revolves around a typical APT that is a 99-percent limited partner in an FLP.

Duff: Your APTs, of course, use a foreign trustee. I'm curious--so many people seem to be worried about this person "running off with my money.''

Engel: I find it interesting that this subject doesn't surface when the planning is domestic, but it is often raised when there are foreign professionals, as if they are inherently less honest and scrupulous. This hasn't been my experience, In fact, the only case where I actually know of someone absconding with client funds involved a commodities trader from Chicago!
There are two parts to your concern The first involves securing foreign-based professionals who are reputable. The second requires checks and balances that are drafted into each and every structure.

Duff: Fair enough, but what if there is political strife or even a revolution where the offshore trustee is located?

Engel: Here again, there are two basic answers:
First, for a number of reasons, the protected assets are often physically held in a jurisdiction other than that in which the APT is located.
Second, the APT itself can redomicile to another jurisdiction pursuant to what is often called a flight clause, a flee clause or a Cuba clause.

Duff : Let me ask another question that frequently comes up--has a U.S. court ever forced the repatriation of APT assets held overseas?

Engel: I am unaware of any such case. Remember, for a court to compel repatriation, it must have jurisdiction over the person (the foreign trustee) who has power and authority to return the assets, or otherwise have some access to the assets themselves. Thus, the selection of a proper foreign trustee and the strategic plasement of assets are both important.

Duff: Who should consider asset planning, and when should they do it?

Engel: Anyone with a measurable degree of wealth should at least consult with a qualified lawyer about the planning opportunities that exist, and he or she should explore these alternatives when they are least inclined to do so-- when, as noted earlier, the risk has not materialized--when no threats are imminent, pending or expected.

Duff: Describe your typical client.

Engel: There really is no such individual. We have protected estates that range in value from a few hundred thousand dollars to over a billion dollars, and include persons in all professions and businesses. Our clients are mostly from the United States, but a number of them are citizens of, or residents in, foreign countries.

Duff: How many structures has Engel & Rudman created, and how many have been "put to the test"?

Engel: I estimate that we have been involved in over a thousand planning structures, and that roughly five percent have come under attack over the course of time ...with very favorable results.

Duff: Typically, for how much would those five percent settle their cases?

Engel: About 15 cents on the dollar.

Duff: Under what circumstances would your law firm represent a creditor?

Engel: We have been engaged by a number of bankruptcy trustees and creditors' counsel when they have hit a brick wall in the collection process. Perhaps the assets are located overseas in the debtor's name, in a trust, civil law institution or similar structure. We are perfectly positioned to analyze whether it is worth pursuing these assets, and if so, how to do this.
This is not to say that all protective strategies can be pierced--by no means. However, some structures are just begging to be taken down because they are poorly crafted or were implemented when it was too late.

Duff: Is there a way a U.S. citizen can create an offshore trust to save income or estate tax?

Engel: Let me first say that clients and their advisors often will automatically assume that, since we are going offshore, there must be a related, say, tax angle.'' This is not the case. The thrust of our planning is the lifetime side of estate planning-that is, protecting the assets when it often matters most, which is during the client's lifetime, There are some tax planning techniques that can be explored with a client in the right circumstances.

Duff: I'm aware that "asset protection is a vaccine and not a cure.'' And the core message is that timing is everything--that a plan must be implemented before there is a legal problem. But what, if anything, can be done for a debtor at the last minute?

Engel: While the scope of planning opportunities certainly narrows for a debtor in the eleventh hour, it is a rare case where absolutely nothing can be done or achieved for a client. For example, we often consider taking advantage of state exemption statutes. As long as the debtor is solvent following the implementation of the plan, with due regard for a pending matter, a great deal can usually be accomplished under local law--this is another planning option. In such cases, the primary goal is not to protect against a current problem, but to achieve protection if another challenge occurs later.

Duff: I know you strongly favor offshore structures for asset protection. Some practitioners disagree and believe that domestic planning involving only family limited partnerships is satisfactory for asset protection planning purposes. What is your view of this?

Engel: Yes, FLPs are helpful, as are limited liability companies and limited part nership associations. On the good-better-best scale, however, these are "better,'' but not "best.'' I place the foreign situs asset protection trusts and expatriation in the "best'' category.

Duff: Having mentioned expatriation, tell me about this strategy.

Engel: In my experience, and that of other attorneys I know who understand the concept, only a fraction of clients who explore expatriation actually expatriate. Although it is an extremely effective planning tool, most people conclude that the benefits carry too high a price tag.

Duff: Is my account in a tax-qualified retirement plan, such as a 401(k) program, protected from creditors?

Engel: Protection for retirement plans comes from two separate and distinct sources. First, the Employee Retirement Income Security Act of 1974, or ERISA, in general protects qualified plan assets, However, ERISA does not shelter IRAs, or 4O1(k)s that have only owner-employees--you should look to whether state law separately protects these funds.

Duff: What is your view on investing in "exempt'' property for asset protection?

Engel: Exemptions vary dramatically, state by state. For example, Texas provides a full and complete exemption for the family home and for the cash value of life insurance and annuity contracts. Contrast this with a state like Colorado, which provides limited exemptions. I am concerned when a client has been advised to invest in an asset solely on the basis of it being exempt under local law. For example, it may be shortsighted to close out a $2-million bond portfolio, and then place everything in an annuity contract, merely to achieve asset protection. This would be the asset preelection tail wagging the investment dog. There may be other flexible, and perhaps more protective alternatives.

Duff: l live in a state that doesn't adequately protect my homestead, IRA or insurance policies. Can I protect these assets by acquiring them in a more, let's say, "defendant-friendly'' state?

Engel: No,unless you change residence to that state.

Duff: Can you explain if there is any advantage to a U.S. citizen forming an irrevocable life insurance trust offshore?

Engel: Presently, the full income and transfer tax benefits of stateside insurance trusts can be obtained offshore. The "rule against perpetuities'' can be avoided offshore, as well. Consequently, when international asset protection features are added to tax leverage and the usual protection afforded life insurance, the benefits are impressive.

Duff: Explain the advantages of an offshore charitable remainder trust [CRT]

Engel: It works just like a domestic CRT. Assets contributed to it generate an income-tax charitable deduction and avoid a capital gains tax. The donor retains a stated payment, and trust assets are protected for the charity. The problem with U.S. structures is that the income stream is exposed to creditors of the donor. If we couple the CRT with an APT, then we achieve normal planning benefits that CRTs offer, but we protect the future income stream, as well.

Duff: Does a domestic NIMCRUT--net income with makeup charitable remainder unitrust--that is invested in a deferred annuity protect the payout for a non charitable beneficiary?

Engel: Yes, but only for as long as there are no assets to distribute. Once you commence the income stream, it is available to an adversary. Don't forget, the life of a judgment is typically a very long one. Creditors can be and have been quite patient!

Duff: Let's assume that, without delaying or defrauding anyone, l create an irrevocable domestic trust for my personal benefit, and l name an independent person as trustee. Distributions are available, but only if they are necessary for my health, education, support or maintenance, after my other resources are considered. lf the trustee believes 1 already have personal assets that satisfy my needs (and withholds distributions), will this trust protect my assets?

Engel: I know of a California case and a Georgia case that each support a conclusion that the trust fund is protected. The core principle is that if you can't get it, then neither can your creditor. The problem, however, is that if you can't get at it due to your other resources, then this implies that the creditor can simply proceed against your other assets to satisfy a judgment.

Richard W. Duff, J.D., CLU, is a financial advisor in Denver, Colorado. This article is adapted from his forthcoming book, Wealth Preservation for the Generations: Receiving and Passing the Baton. He is also the author of Preserving Family Wealth Using Tax Magic.

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