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Kinetic Asset Protection

By Rob Lambert - Email Editor

Date: July 21, 2005

Last week Bob Bauman, Editor of the Sovereign Society's newsletter and a person whom I respect very much, wrote a very heartfelt endorsement of Offshore Asset Protection Trusts.

Bob wrote: “One of the most effective asset protection devices, and one we recommend, is the offshore asset protection trust … it's not designed to hide assets from creditors, nor to reduce income tax liability. It does just what its name indicates: it protects assets.” True.

Bob finished his comments on APTs with the following comment: “One important point to keep in mind; offshore trusts are effective only if the creator relinquishes all control over the trust, its assets and the trustee.” This is true, some of the time and not true some of the time. It is a common misconception.

Let me explain.

Asset Protection is a process, not a plan.

It is learning and implementing a series of rules. I often tell my clients that a well done asset protection plan is just the first step in the ongoing process of protection. The structure depends on the risks faced by the creator of the trust. This changes over time. It is best to analyze the structure in two phases because the structure will change as the risks change.

The first phase is when the financial seas are calm.

The plan must be implemented when the financial seas are calm and the client has sufficient assets to pay his reasonably anticipated bills. At this stage it is not necessary that the creator of the trust relinquish control. Indeed, it is absolutely intelligent and appropriate for the creator of the trust to exercise nearly complete control over the trust and its assets at this stage. When the financial seas are calm the creator can safely handle trust administration (including investments). I do not have any clients who are comfortable abrogating control of protected assets to some unknown, distant and often small time trust company (note, the larger institutional grade trust companies do not like asset protection trusts and often refuse to do them). This is why I always say: “Never trust your trust company.” I say this because it is not necessary to ever expose your hard earned assets to a trustee or anybody else at this stage. So, with a properly done asset protection trust, it is my opinion that the creator should remain in control of all aspects of the trust when the financial seas are calm.

This does not mean that the trust is not properly funded. Indeed, the protected assets are no longer the property of the creator of the trust and the statute on fraudulent conveyancing has begun to run. The fact that the creator retains control does not abrogate in any way the effectiveness of the trust. At this stage, all the creator has implemented the tools to go to red alert status when and if this is ever necessary.

I will be going over the structures which work well in much more detail in future newsletters; but, for now just recognize that it is fine to keep control when the financial seas are calm.

The second phase is when the financial seas are not calm. This is the “ red alert status ” I previously mentioned.

A properly done asset protection trust moves to a situation where the creator of the trust has no effective control over the protected assets if, and only if, the creator is being put into a situation where protected assets are in jeopardy of seizure. This is usually done by the foreign trustee and Protector working together and without involving the creator. This is the heart of effective asset protection and why I have coined the phrase “kinetic asset protection” to emphasize that asset protection is indeed a process and not just some fancy documents.

In future newsletters I will deal with the nuts and bolts on moving to red alert status . In those newsletters I will discuss the options and interaction of the various players who must be on top of the situation for it to work well. Note, moving to red alert status does not mean that the creator's assets are subject to theft or that the creator is “trusting ” the very trust company which I have been warning them for years never to trust. There are solid time tested techniques which are employed to move the trust to red alert status (without the interaction of the creator of the trust and also without exposing the creator to any risk of theft).

NOW, FOR A WORD ON TAXES

Asset protection planning is not designed to reduce taxes and it normally has no material effect on the taxation of the creator. I do keep my eyes open for good and safe tax planning options. In the years I was an Assistant Professor of Taxation at the University of Southern California I thought I had heard of almost every tax scheme; both good and bad. Well, last week I learned from one of my readers of something I had not heard of called Section 29 tax credits. Basically, anybody can purchase dollar for dollar Federal Tax Credits for a little over 70 cents on the dollar. That is a huge savings and a no-brainer in my mind. I want to encourage any of my readers who have tax ideas to share them with me and I will pass them onto you if they make sense to me. In most of my newsletters I would like to offer up a little tax tidbit which may on occasion help. I know the Section 29 credits hit a chord with me and I am indeed purchasing some!

Have a great and protected week.

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