Many asset protection advisers these days recommend LLCs (Limited Liability Companies – not Corporation as many incorrectly state) as an alternative to trusts. But how should the savvy PT choose? And with exotic islands like Nevis or the Cook Islands being touted as the best jurisdictions for trusts and LLCs, what is the best place to incorporate?
Trusts are an ancient English invention, a legal animal that has been around for centuries and protected the assets of many important families in both the old world and the new.
The LLC, however, is a much more recent American invention, pioneered in states like Delaware, Wyoming and Nevada but now commonplace in all states of the USA, as well as in many of the offshore jurisdictions. It includes elements hand-picked from both trust and corporation law.
When it comes to American taxes, the IRS regards an LLC (domestic or foreign) as a disregarded entity. This basically means you decide how to report its income on your tax return. You can choose to file as a partnership, trust or corporation, or simply include the profit on your personal tax return. Your tax preparer can give you more details on this.
As regards asset protection law, the LLC has many elements of a trust – principally the separation of ownership, control and benefits. But there are also important differences, as you are about to find out.
A very neat feature of an LLC is that you can move assets into it by doing what’s called a ‘like kind exchange’. This where you put any kind of assets (cash, cars, properties, or stock for example) of a certain value into an LLC, in exchange for a membership interest (ownership) of the LLC. Since the underlying assets don’t change, their value stays the same. Logically, therefore, the membership interest you have acquired is worth just the same as the assets you owned before – you have not realized any gain or loss. There should be no tax consequences to the like-kind exchange.
From an asset protection point of view, however, you have taken a big step. If the LLC is correctly structured, you have retained ownership but given up control – and you can legally prove this beyond doubt. This is where an LLC differs clearly from a trust: if you put something into trust you give up both ownership and control. If you put assets into the LLC, you keep ownership but you give up control.
So, let’s say a creditor gets a judgment against you. The court cannot order you to turn over the assets, because you are not the manager of the LLC. Although you are the owner, you can demonstrate that you do not control them. What’s more, the manager is in a foreign asset protection jurisdiction, like Nevis or the Cook Islands, and is subject only to their local courts. The manager will have strict instructions not to act under ‘duress’ such as court orders.
What your creditor can do, of course, is attach your membership interest in the LLC, effectively becoming owner of it. But if it’s properly structured, this will not bring the creditor any closer to the assets, because an LLC is not like a corporation where the owner necessarily calls the shots. The key here is the LLC operating agreement, a key document that should be properly drafted by a lawyer familiar with offshore asset protection laws.
In fact, your creditor could be in for a nasty surprise! If the assets in question generate profits, the onshore creditor now becomes liable to tax on those profits, without ever being able to get his hands on them!
The bottom line is that there is a lot you can do with LLCs. They offer much of the flexibility of a trust, with the benefits of a corporation. But as you can see they are quite complex. Your decision about choosing a trust or an LLC company for your asset protection should be based on professional advice.
Where is the best place to incorporate an offshore LLC? It’s generally accepted that two jurisdictions in the world have the most favorable asset protection statutes for both trusts and LLCs. Those two islands are Nevis and the Cook Islands. Both have very similar statutes, carefully drafted by British and American lawyers during the eighties and nineties to provide the best asset protection for their clients. The laws on these small islands have been shown to stand up to the test of the British and American court systems.
Some people prefer the Cook Islands because of their remoteness. One thing I dislike about the Cook Islands, though, is that they are part of New Zealand, a major, western OECD country. Although the Cook Islands are self governing, and have the right to secede from their union with New Zealand at any time, they are totally reliant on New Zealand and so unlikely to exercise that right simply to protect clients of their offshore industry, that is relatively small.
Nevis has a similar political arrangement, being an independent part of the Federation of St Kitts and Nevis, also with the right to secede from the Federation at any time. The major difference is that St Kitts and Nevis has a much larger and stronger offshore finance sector than the Cook Islands, and is not dependent on any of the major OECD countries.
In my view, therefore, you should seriously consider a Nevis LLC as an alternative to a trust.
Bill Freeman