Protection of existing assets is a general objective for any business and its owners. Business risks can only be undertaken to a certain extent, and there are few people who deliberately decide, at their own will, to jeopardise the entire property they have acquired before. The primary criterion in asset protection as one of the cornerstones of asset planning is to protect the existing assets against the claims of a third person. Asset protection professionals regularly use about two dozen different structures to protect the clients’ assets on a world-wide basis. The structure we use depends on how well a client would like to protect his/her assets, how aggressive the creditors will be, and the specific assets that need to be protected. When we dug down to examine which structures we use most often, we came up with the following three pillars of asset protection.
The limited liability company is a simple and easy to implement and use structure. Asset transfer as capital is tax exempt and there is complete freedom to retain control over the assets and to revert the assets back to the client. LLCs work well when we are setting up the asset protection structure ahead of any possible issues the client may face. LLCs are used to protect liquid assets, rental real estate, business interests, collectibles, and intellectual property. Given the low cost and the low effort of set up, the LLC provides the best bang for the buck. Nevertheless, it does not provide the highest level of protection, as the corporate veil of an LLC may be pierced under the right circumstances. Higher level of protection requires a combination of LLC and trust.
It usually makes little difference where an LLC is organized. It’s more important factor, how it is structured. There are many nuances to correctly structuring an LLC for asset protection, including asset protection-tailored distribution clauses, buy out rights, and management succession issues. Primus Trust Corp. regularly uses LLC under the trust we manage as further asset protection vehicle.
The Hungarian trust is an excellent asset protection vehicle, as none of the creditors of the settlor, trustee and beneficiary may have access to the trust assets. Hungary does NOT recognize US civil court judgments. The creditor of the settlor MUST take legal action in Hungary against the settlor and the trustee, and MUST prove that the transfer of the trust asset was a fraudulent one. The burden of proof lays on the creditor, and the fraudulent transfer must be proven beyond reasonable doubt.
Highlights of the Hungarian trust:
Total asset protection
Strict fiduciary duties
The trustee is subject to a duty of confidence
Several types of trust
Possible to set up an irrevocable trust
The trustee is a NON-US person
Power to revoke the trustee at any time
Power to change the governing law at any time
Tax free asset transfer
Trust income max. 9 % CIT
Tax & legal compliance
Segregated trust assets
Segregated bank and security accounts for every trust
No publicly available information about the settlors and beneficiaries
Monthly financial reports to the costumers
An irrevocable trust is more complex structure than an LLC. There are still no tax consequences, if structured correctly, and some degree of control may be retained by our client with the proper trust drafting. With the trust it is not as easy to move assets in and out, and irrevocable trusts are better suited for assets like a personal residence or an investment account that the client does not need access to. The irrevocable trust will accomplish a higher level of protection than an LLC.
There are different types of irrevocable trusts and different methods of funding these trusts. We will usually customize a trust for each client based on their needs and circumstances. All good asset protection trusts will be funded for the benefit of a third-party (often, the children of the settlor), and will include the use of a trust protector.
Trust has created an opportunity for people taking a high business risk, such as lawyers liable with their entire property or senior executives, to secure the property for the beneficiaries by putting some of it into trust. In addition to these two highlighted interest groups, trust may be an alternative for a marriage contract too, as the items placed into trust are separated from the own property of the settlor and the beneficiaries and do not qualify as joint property. By using carefully structured trust before marriage, the parties can prevent many unnecessary disputes and long-lasting litigation should they get a divorce. Furthermore, trust is a good means against fraudsters and swindlers. The mere fact that the managed assets are in the ownership of the trustee and the identity of the beneficiaries is not known publicly represents a sort of security, a firewall for the beneficiaries, who can enjoy the managed assets and their benefits without being exposed to the curious eyes or, in the worst case, the attacks of the external world.
3. Non-domestic structure
A non-domestic structure including the movement of funds out of country of residence, is the best asset protection structure. These structures very rarely get challenged and when challenged have an exceedingly high likelihood of success. The non-domestic structures carry tax reporting obligations, and like irrevocable trusts, make it somewhat more difficult for the client to retain control and access to the assets (but both may be possible). The use of non-domestic structure should be limited to assets that are liquid in nature or can be easily converted to liquid form.