Asset Protection - History

History

Asset protection planning began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands. The most distinctive feature of the offshore trust is the fact that the settlor or creator of the trust may be included among the potential beneficiaries of the trust without causing the assets of the trust to be subject to the creditors of the settlor. This is often referred to as a "self-settled trust."

Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.

Choice of law rules in the United States make it possible for a person from any state to create a trust, corporation, limited partnership or limited liability company that is governed by the laws of any other state or jurisdiction. Because of this ability to "forum shop," various states and other jurisdictions have modified their laws to allow greater asset protection in order to make them competitive with other jurisdictions.

In most states, the assets of a self-settled trust are not protected from the creditors of the settlor. In 1997, the State of Alaska passed a statute which provided that the assets of an Alaska self-settled trust are not subject to the creditors of the settlor. Since 1997, the following states have adopted legislation allowing for a self-settled asset protection trust: Nevada, Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire. This legislation created a favorable offshore asset protection trust jurisdiction also for non-US settlors.

There is considerable debate about the comparative effectiveness of the asset protection provided by the laws of each jurisdiction, onshore and offshore. Similarly, the asset protection features provided by corporations, limited partnerships and limited liability companies vary from jurisdiction to jurisdiction. Once again, Alaska's limited liability company statute provides innovative advantages over other states. Case law from North Carolina demonstrates the asset protection advantages of a transfer to a limited liability company (see Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002).

Just as the Cook Islands have developed a reputation for the best offshore jurisdiction for an asset protection trust, Nevis stands out in the competition for the best jurisdiction to file a limited liability company. The Nevis limited liability company statute is based on the Delaware limited liability statute, but they have a few added advantages. One advantage of a Nevis LLC is that the members and managers are not disclosed to the public.

There is some debate over the ethics of asset protection planning. On one hand, every attorney that creates a trust, corporation, limited partnership, or limited liability company is engaging in some form of asset protection planning. On the other hand, most would agree that it is ethically inappropriate to assist a person to commit fraud or evade income taxes. The timing and the purposes of the plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate. In recent cases, individuals have gone to jail for contempt of court for failing to unwind a plan that a judge felt was repugnant to the principals of law and justice.