By Edward D. Brown, Esq., CPA, LL.M
With all the talk about asset protection trusts and the court opinions that have expressed a negative view as to their effectiveness, offshore LLCs should be considered as an alternative to convert attractive (to creditors) assets onto one large ugly asset (one that a creditor would be less thrilled to inherit in a lawsuit, even if the creditor could successfully take over ownership or control of such LLC).
The offshore LLC is a less expensive option that can create and achieve protections very similar to those gained through trusts.
The way these LLCs work is that a person can place what is known as low hanging fruit (liquid funds, tangible personal property, intangibles, etc.) into an LLC that is owned by that person. The LLC is more effective if it has at least two owners. The LLC is managed by an offshore management company. The importance of this becomes apparent once you consider that under US law, a creditor of an LLC owner (the “debtor”) may succeed in having a court rule that the LLC is either subject to (1) being viewed as a sham; (2) being treated as an alter ego of the debtor; (3) a “reverse piercing” remedy that allows the court to attach and seize the assets contained inside the LLC; (4) a charging order remedy, which does not cease to garnish LLC distributions until the debt is fully paid; or (5) having any US manager of the LLC forced to disband the LLC. If any of the forgoing rulings were to occur, such court ruling would have little enforceable impact over the offshore manager.
The offshore laws also typically have other additional statutory protections in the event a creditor were to seek compensation in the foreign jurisdiction where the LLC was formed. For example, a charging order (referenced above) can in effect freeze up everyone from getting distributions from an LLC under US law, but Nevis law provides that a charging order expires after three years and cannot be renewed. As such, funds are no longer subject to garnishment under Nevis law after the three year period has run and the offshore manager is again free to make distributions as it sees fit.
Some people may prefer to be directly involved in the management of the LLC’s assets as opposed to relying on a sole manager who is located offshore. Although this added control can give a creditor more ammunition that the debtor has too much control over the LLC’s assets, and can therefore be ordered by a court to somehow move the LLC assets away from the protective LLC arrangement, the debtor’s control as a co-manager can be limited so as to minimize the risk.
This is achieved through a combination of (1) bifurcating the manager powers so that the offshore manager has the more creditor-sensitive powers while the debtor has the daily investment decision powers, (2) making certain that any high-powered authority that is in the debtor-manager’s hands be rendered ineffective in the event the debtor-manager is acting under duress (known as “duress clauses”), and (3) subjecting some of the powers of the offshore manager to certain oversight controls as a check-and-balance mechanism within the LLC’s operations and administration.
Some examples of the foregoing include: (1) the power to appoint any additional managers can be exercised only with the consent of both the US (debtor) manager and offshore manager; (2) the offshore manager may not take instructions or recognize approvals or disapprovals by any persons acting under duress; (3) the offshore manager can be removed only through the debtor acting as an act of free will; (4) the debtor cannot be removed as manager unless an event of duress (as defined in the governing LLC documents) has occurred; (5) the offshore manager has sole authority to declare distributions and to enter into certain loans; (6) both managers would be required signatories on any financial accounts of the LLC, but the offshore manager is authorized to co-sign only if the debtor manager is co-signing in an act of free will; (7) the offshore manager can sign unilaterally on any such account only if the financial institution is made aware that the debtor manager is subject to an event of duress; (8) the offshore manager cannot sell any LLC assets without the debtor manager’s voluntary consent; and (9) the LLC cannot be dissolved without the offshore manager’s consent.
With a properly and timely funded offshore LLC, and strategically located assets, in conjunction with a well-crafted operating agreement that builds in the appropriate provisions such as those mentioned above, such an entity can result in a highly effective planning tool.
*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
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