Congratulations! You’ve sold your business and the ink has finally dried on your check. Now what? You may have a very specific plan for that money or you may not, but either way it is crucial to protect it. Why? We have often seen the purchaser run the business into the ground and try to recover some or all of the purchase price by claiming misrepresentations were made. If those proceeds are properly protected, there will be no “post-sale price reduction.”
There is a great deal of misinformation that exists surrounding offshore asset protection, when in reality it could be your best option. It’s important for South Florida business owners to educate themselves on the differences between onshore and offshore planning and to understand the facts versus the myths.
Myth: Offshore trusts are illegal.
Truth: It is entirely legal. The key to effective asset protection planning is the word “advance.” As long as this type of planning is undertaken in advance of a creditor appearing on the horizon, it is 100 percent legal to protect yourself. Unfortunately, many people first seek to protect their assets after they have been sued or otherwise incurred an obligation. In such circumstances the planning options are significantly narrowed because of fraudulent transfer laws (in all states) that permit a court to set aside transfers made at the “eleventh hour.”
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Myth: There are negative tax consequences with an offshore trust and LLC combination.
Truth: The entire structure is tax neutral, meaning that your income, estate and gift tax “picture” does not change as a result of establishing this structure. The LLC will elect under IRS rules to be “disregarded” as an entity for U.S. tax purposes. This means it will not file a U.S. tax return and that all of its income and transactions will be reported on the trust’s information tax return. Income tax is only paid on your personal tax return — on the same items you would have paid tax on without the LLC/trust structure.
Myth: It’s safer to protect my assets domestically with an LLC.
Truth: Although some degree of protection is available through the use of the LLC, we can never predict how a local court or jury will act. Sometimes a “result oriented” judge or jury will ignore the fact that your trust is the owner of the LLC (and not you), and somehow pierce the protection. However, where the trust is subject to the laws of an appropriate foreign jurisdiction, the creditor’s U.S. judgment will be worthless. Geographical, financial and procedural impediments to reaching the offshore trust will have a significant impact on a creditor’s decision to chase assets.
Among our many success stories is a South Florida business owner who sold his share of the company after having a falling out with his business partner. After several years, as his partner moved closer to bankruptcy, he decided to sue our client, knowing that our client had the money from the sale of their company. At one point, the partner even broke into our client’s house and tried to seize everything while the client was away. Luckily, the client had the foresight to protect his assets and they were already located in an offshore trust that had no connection to the United States, so the plaintiff’s attorneys were unable to get to his money.
Properly structured asset protection planning can effectively protect your assets from potential litigants and creditors. It allows an individual, partnership, LLC, trust or corporation to protect assets against unanticipated claims, yet maintain a great degree of flexibility. That means that as a business owner, you’ll have one less thing to worry about.
Howard Rosen is a partner at the law firm of Donlevy-Rosen & Rosen, P.A. His publications include the BNA Tax Management Portfolio titled “Asset Protection Planning” (1994, 2002), of which he is a founding author. Patricia Donlevy-Rosen is also a partner at Donlevy-Rosen & Rosen. Her publications include the RIA Tax Advisors Planning Series titled “Asset Protection Planning.” Due to their extensive experience with offshore asset protection planning and the related tax issues, they are regarded as authorities on the subjects among their peers.
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