Why Asset Protection Planning is Better in the Bahamas

    Why Asset Protection Planning is Better in the Bahamas

    Why Asset Protection Planning is Better in the Bahamas 150 150 Kamilla Mishiyeva, Esq.

    Why Is Asset Protection Planning is Better in the Bahamas?

    Asset protection is a viable strategy to today’s “court-happy” society.

    Consider the following example:

    Mike Bloom is an oncologist with an established practice in New York City.  His medical practice is located in a four-story building in the neighborhood of Chelsea, which he owns. Mike owns his brownstone, and has personal bank accounts and a decent portfolio of stocks and bonds.  His practice is held in a professional limited liability company (Chelsea Oncologists, PLLC), with its own business bank account and separate books and records.

    As any responsible medical professional, he carries a multimillion dollar malpractice liability policy on his business.  Despite this, Mike lives with chronic worry of losing everything he’s worked so hard to build to a lawsuit for improper treatment or wrongful diagnosis, or a judgment due to complications in pregnancy or childbirth from chemotherapy.  Given this fact pattern, what are Mike’s options to protect his assets from our litigious society?

    Re-titling Assets 

    Mike is single.  If he was married, one option may be to transfer his personal assets to his spouse’s name and re-title the brownstone’s deed to both names.  Although this would provide some protection, today’s increasing divorce rate suggests that this approach may become more of a problem to Mike than a solution. A sometimes useful strategy is placing personal assets into LLC’s and corporations.  But these efforts are commonly met with skepticism in court and are struck down if the claimant can demonstrate (usually an easy task) that the corporate entity is simply the “alter ego” of a defendant.

    Off-Shore Trusts

    Retitling assets into domestic trusts and multi-tiered corporate structures may deter small time creditors, but rarely do they do a good job of truly protecting the shareholders from persistent plaintiffs.  The solution is foreign trusts.  Often, offshore trusts are overlooked or simply unknown territory to estate lawyers.  To a certain extent, off-shore trusts may be the most foolproof plan available to shareholders and individuals in the realm of asset protection.

    Foreign trusts are a superior alternative to domestic trusts in that they generally offer a greater degree of protection from claimants.  Revocable and irrevocable trusts governed by New York law may very well mirror a trust governed by foreign law.  The benefits of foreign instruments come from the jurisdiction that governs it ie Bahamas law.  In other words, the material difference between domestic and foreign trust lies in the controlling jurisdiction.  In addition to asset protection, off-shore trusts can achieve estate planning goals such as the avoidance of probate, which is a huge accomplishment on its own, and the passing of property to beneficiaries at the trust creator’s death.  Trusts of all kind should be written and funded in such a way to get around the need to probate a will, and fulfill the creator’s last wishes should he or she decease during the duration of the trust.

    Benefits of Planning with Off-Shore Trusts

    In addition to protecting assets from judgment creditors, in some jurisdictions, a trust can provide prenuptial protection in the event that the settlor (ie trust creator) decides to get married during the term of the trust.  Property held outside of U.S. may automatically be deemed separate for marital and divorce purposes under the laws of some countries and territories.  Likewise, foreign trusts offer a high level of privacy which help attain anonymity in regards to wealth.  Moreover, off-shore trusts can be useful for retirement planning should the grantor move or apply for citizenship in another jurisdiction.  There are many other benefits to off-shore planning that should be discussed with your trust lawyer.

    Control is Key

    Achieving actual asset protection requires relinquishing control. The creator must give up control of a majority of his assets for a fixed amount of time.  This is not optional; there is no way around it.  The creator can retain a life estate in a real property or co-op, but he can’t be the trustee or a beneficiary of the trust.  Depending on the creator’s needs, the trust can continue in effect until his death, or allow him to renew the trust in 10-15 years from creation.  When it comes to income, an irrevocable trust is typically set up so that the named beneficiaries receive little or no benefit from the trust during the creator’s life, so that the assets remain untouched throughout the trust term.  Control is key; less control, more protection.  The less power the creator retains, the higher the burden for a judgment creditor to reach assets.  Since the creator strategically has no actual vested rights to the trust assets, no authority to revoke the trust during its term, and he’s not named as the trustee or the beneficiary in the instrument, a creditor will have a very difficult time collecting on his judgment, without proof of fraud.

    Trusts are Better on the Islands

    Asset protection planning in certain Caribbean jurisdictions has become popular over the last two decades due to established banking industries within the islands, close proximity to USA and the use of the English language.  Some countries have gone to great lengths to make its asset protection laws attractive to foreigners.  The Bahamas and other jurisdictions are particularly good venues due to their favorable trust laws.

    To start, a select few Caribbean jurisdictions do not honor foreign judgments.  For example, if a creditor won a lawsuit in New York and obtained a judgment for his recovery/damages, he’ll have to attach the judgment to the debtor’s assets wherever they are located. If the debtor has a home in Kentucky, the laws of KY will honor the NY judgment.  However, in debtor-friendly jurisdictions, the creditor will have to file a brand new lawsuit in that country in order to reach assets located in that venue.  Its oppressive for many creditors to relitigate in the Caribbean since the process would entail hiring local counsel and having to bring the trial to island (ie transport witnesses and evidence).

    Another deterrent for a foreign creditor is if he wants to bring a lawsuit in that country, he’ll have to post a substantial bond if he’s a non-resident or has no assets in that jurisdiction.  Also, a plus for a debtor is that some Caribbean countries have a very short statute of limitations, which is usually two years from the alleged wrong.  If a suit is not filed within that time frame, the creditor loses his right to pursue legal action in that venue.

    Reporting to the IRS

    Foreign trusts are not forbidden by the IRS so long as the creator is not attempting to evade federal tax.  When assets are transferred off-shore, compliance forms must be submitted to the IRS for review.  Failure to report may subject the trust creator to civil fines, as well as potential criminal charges.  An upside to compliance is that it can help disprove a claim of fraudulent transfer, because the trust creator will be able to show his intent to comply with legal requirements.  Make sure to discuss the reporting requirements with your estate attorney prior to executing the trust document.

    Contact Us

    Kamilla Mishiyeva is an attorney practicing trusts & estates law with Mishiyeva Law, PLLC, 85 Broad Street, New York, New York 10004.  We know trusts! Our services include domestic (New York) and foreign (off shore) trusts.  She can be reached at 646-233-0826 or kamilla@mishiyevalaw.comThis article is intended to provide general information, not legal advice.