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 International Business, Tax, Estate and Asset Preservation Planning

 

September 2015 

Stephen A. Malley
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Stephen A. Malley has for over 40 years specialized in the areas of international business, tax and finance, transnational estate, tax, and asset protection planning,  and pre-immigration and expatriation planning. Mr. Malley's  practice includes domestic and foreign licensing of intellectual property,  and  the formation of  captive liability insurance companies.

 

Clients include:

 

*U.S. companies with or developing foreign operations

 

*U.S. citizens with foreign assets or conducting business and investing overseas

 

*Foreign individuals with U.S. assets and/or U.S. business

 

*Domestic and transnational estate and asset protection planning

Learn more about Stephen A. Malley

 

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Prior Newsletters

ASSET PROTECTION: AN INTEGRAL CONSIDERATION
IN ESTATE PLANNING FOR U.S. TAXPAYERS AND FOREIGN PERSONS OR COMPANIES WITH U.S. ASSETS

AVOIDING A FRAUDULENT CONVEYANCE

U.S. Taxpayers (Citizens, U.S. permanent residents), and foreigners with U.S. assets, are often are the targets of lawsuits, and creditors are too often favored by State and Federal laws.

STRUCTURES INCLUDING  
THE LIMITED LIABILITY COMPANY

U.S. Taxpayers can protect personal and business assets by holding them in appropriate structures. For example, Limited Liability Companies, with ownership and Operating Agreements specifically designed to accomplish estate planning objectives and  asset preservation. A corporate structure might be appropriate, perhaps with the shares held by an LLC, the membership interests of which are in a Trust or other estate planning structure.

A "charging order" is, by statute, a judgment creditor's remedy against a debtor's LLC membership interest, which entitles the creditor to all distributions from the LLC to the debtor. California, as well as certain other States, might not be the best jurisdiction in which to domicile a Limited Liability Company, as California law allows for an ultimate "foreclosure" on the debtor's equity interest in the LLC; even so, the foreclosed interest does not take over management of the LLC, which can create a "phantom income" problem for the creditor. (The California Court can order other remedies, such as the appointment of a Receiver).

Many States limit the judgement creditor's remedy to a charging order, with no right of foreclosure. The Operating Agreement must nevertheless be carefully drafted, and consideration should be given to creating additional owners of the LLC, if even a small minority interest; the Operating Agreement can provide substantial protections to the minority interest, ultimately for the benefit of the primary owner. The trend of the case law in many States is, in effect, to disregard the LLC entity if it is owned solely by the debtor. A California Court should apply, e.g. Nevada law if the LLC is domiciled there, but the applicable law can be in issue in some situations. (This is a complex and ambiguous area of the law). 
 
OFFSHORE STRUCTURES

Offshore structures including Trusts, corporations, and limited liability companies (of various types) might be considered, but they come with substantial IRS reporting requirements, and they are almost always "tax-neutral", with income reportable and taxable to the beneficial owner. (Click here to see my article on offshore entity reporting requirements). Even if appropriate, the entity documents must be carefully drafted, and too often the "form" documents provided by offshore "fiduciary" companies are at best ineffective.

In some situations, even for a U.S. Taxpayer, a foreign entity might be a reasonable option, especially, for example, if beneficiaries are not U.S. Taxpayers. For asset protection purposes, the Cook Islands (among many other jurisdictions) has extremely protective statutes, which require a creditor to bring the action in such jurisdiction, an expensive and daunting procedure. If the transfer of assets to a foreign entity is made to "hinder or delay" a creditor, the transfer could be deemed a fraudulent conveyance (discussed below), but the creditor may nevertheless be completely stopped; if the beneficial owner cannot get the assets back from, for example, an irrevocable trust, a Court should not find him/her in "contempt".

In any case, use of an offshore entity is a serious decision requiring an understanding of all the issues, and while such planning may have its place, not many U.S. taxpayers are willing to deal with the consequences, such as U.S. and possible foreign Court hearings. A discussion of foreign jurisdictions and entities is beyond the scope of this Newsletter.
 
OWNERSHIP OF U.S. ASSETS BY  
NON-RESIDENT ALIENS
 
"Non-resident aliens", i.e. persons who are not U.S. taxpayers except perhaps for U.S. source income, have the same exposure with U.S. assets to judgement creditors as does any U.S. taxpayer. With the right planning, exposure to creditors can be minimized and often eliminated. For example, owning a non-business asset though a foreign Trust or other appropriate entity may provide anonymity (at least for the public record), and at the very least protect the individual's other U.S. and foreign assets. Such person often has foreign beneficiaries, and the use of offshore structures can be most beneficial.

Estate tax exposure is of course an important issue; (click here to see my article on International Estate Planning.). Of course, the registered owner of commercial and/or rental real estate might be subject to a lawsuit arising from that property, but it is important to protect all other assets. (See my Articles on how a non-resident alien can hold title to U.S. real-estate). This Newsletter does not discuss income or estate tax issues to be considered by the non-resident alien or when a spouse is not a U.S. Citizen.

FRAUDULENT CONVEYANCE ISSUES

U.S. taxpayers and foreign owners of U.S. assets often consider Estate and asset protection planning after there is an imminent creditor or a lawsuit. Even then, however, there may well be beneficial planning opportunities, but the Fraudulent Conveyance Laws must be considered. If a Court finds that a judgement debtor has made a fraudulent conveyance under State or Federal law, the Court can set aside the transfer in question, and/or both the Transferor and Transferee can be found personally liable for the judgement and possibly for attorneys' fees and costs.

While some States, including California, provide criminal sanctions for "fraud", criminal prosecution is rare and most all cases are civil and brought by judgement creditors. Nevertheless, a fraudulent conveyance can have serious consequences.

All States have statutes which define a "fraudulent conveyance", but the generic definition is well stated in the California statute:
 
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation (1) with actual intent to hinder, delay, or defraud any creditor of the debtor....
 
In California, the transfer of an asset might be deemed "fraudulent" even if there existed no creditor at the time of the transfer, if it was done to hinder a generic creditor. (Kilker v. Stillman). Asset preservation should always be in the context of and coordinated with estate planning, with documented support.

To avoid a fraudulent conveyance, planning must consider the "badges of fraud" which a Court can be expected to apply. Just for example, these include the following, not a complete list:
  1. Transfer to an "insider" or relative.
  2. Retention of control and enjoyment of the asset;
  3. Removal or concealment of the assets. (Subject to interpretation).
Statutory and Case law establish the many defenses to a creditor's claim of a fraudulent conveyance. Such defenses include the following:
  1. A transfer for "value"; this term is subject to much interpretation, and it can include, just for example, payment of premiums for on-shore or offshore life insurance, transfer for an item of more or less equal value, (70% may not be unreasonable); transfer for previously rendered services ( a contract for future services is problematic and likely not a successful defense).
  2. Transfer to another entity for estate or business planning, if ownership remains the same, for example into an LLC (California may not be the best domicile for such entity).
  3. And, if the Transferor remains "solvent" and is not otherwise rendered "incapable" of satisfying a creditor, there is no fraudulent conveyance. The definition of "solvency" is broad and subject to interpretation, and this is typically a very good defense.
  4. Statutes of limitations may apply to deny a creditor's claim.
Finally, it is reasonable to say that, even if a creditor is known, or a lawsuit is filed, some planning is better than no planning, but with careful consideration to avoid a fraudulent conveyance or at the very least to provide a creditable defense.
THIS NEWSLETTER IS A VERY GENERAL OVERVIEW OF COMPLEX SUBJECTS AND IS NOT INTENDED AS LEGAL ADVICE. 
Stephen A. Malley
A Professional Corporation
310-576-7772

 

2015 Stephen A. Malley, J.D.