Investors Should Put Their Faith in Foreign Trusts

Monday, 15 Nov 2010 08:45 AM

By Denis Kleinfeld

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Are you an investor who wants to have confidence that your ownership of stocks, bonds and cash is protected? If so, maybe you should be considering using a foreign trust.

Legal liability is a wealth-risk exposure that every investor should try to avoid if at all possible.

The recent case decision by the Florida Supreme Court in Olmstead v. FTC raises real concerns about the specific use of limited-liability companies to protect assets. Even more so, it highlights the tendency and comfort with which the courts legislate from the bench.

If you hold your investments in your own name, then without question they are unprotected from every sort of legal cause of action that now exists or that trial lawyers — or the government — can conjure up as needed.

Virtually every U.S. state has responded to the needs of people to protect their assets by enacting legislation that limits the ability of creditors to enforce their money judgments. Limited-liability companies are among the most popular of these liability-limiting entities that investors use to own and, for estate planning, to transfer assets.

But the Olmstead decision shows that all isn’t so clear and reliable when it comes to the legal system. The problem that I see with the Olmstead decision is twofold.

Straightforwardly, the decision can be read to merely impact single-member limited-liability companies in Florida. The Florida legislature will either correct that problem or people just won't use Florida single-member LLCs.

But what about future cases, in other courtrooms, which involve varying factual circumstances?

The bigger problem is that the analysis the Florida Supreme Court used to get to the result it wanted shows that the Florida court, like other courts in the state and federal system, is certainly willing to torture legal reasoning to get to where it wants to go. This happens all too often.

It isn’t that Shaun Olmstead was a very sympathetic person or that the FTC wasn't fully justified in going after him. Basically, Olmstead was running a credit-card scam and the FTC got a big judgment that it wanted to collect.

But to get at Mr. Olmstead, the court had to use quite some legal gymnastics. And that's the problem. Bad facts make for bad law. If a court wants to get to a certain result, then essentially what happened to Mr. Olmstead, in terms of the court's legal analysis, can happen to you.

The litigation industry in full swing, and the courts are willing to effectively re-write the law from the bench. Logically, when it comes to protecting your assets for your own financial survival, then the more reliable planning objective clearly is to hold assets in a legal form that is not subject to the jurisdiction — the control — of the local courts.

One legal means that investors are finding "safer" is to set up a foreign trust to hold securities and cash. A number of international jurisdictions have specific asset-protection trust legislation and welcome the opportunity to provide their services.

Clearly, there are plenty of U.S. states that have recently enacted similar protection-from-creditor trust law as the foreign jurisdictions.

But it is hard to escape that using a domestic trust still leaves the assets of the trust exposed to the domestic court system.

In the past, there were concerns that a foreign trust would run afoul of the IRS. That problem has been cleared up by the recent enactment of the Foreign Account Compliance Tax Act, passed as part of Obamacare.

FACTA now provides the ground rules that were needed to make using a foreign trust compliant for federal tax-reporting purposes. Effectively, a taxpayer using a foreign trust knows exactly what needs to be filed.

Trusts have been historically used for tax, estate, and wealth protection.

The threats to wealth and the ability to keep what you have worked a lifetime to earn is at growing risk. Olmstead merely highlights an ongoing problem of the U.S. legal system.

For those who want to have peace of mind in protecting and conserving their wealth, then the foreign trust is the safer way to hold cash and securities.

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