Domestic Asset Protection vs. Offshore Asset Protection

R. Sebastian Gibson

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Business Attorney - Palm Desert, CA

Contributor Level 14

Posted over 4 years ago. 2 helpful votes

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The primary tool used by domestic asset protection lawyers, is the family limited partnership. The primary tool used for offshore asset protection by attorneys is the offshore or foreign trust and sometimes the offshore LLC. This article compares the two for an easy comparison. Domestic Asset Protection vs. Offshore Asset Protection. You compare and decide. To create a family limited partnership, an operating agreement must be drafted by an experienced attorney. In San Diego, Orange County, Palm Springs and Indian Wells, you can call the Law Firm of asset protection lawyer, Sebastian Gibson. Domestic asset protection using family limited partnerships is best suited to protect real estate investments such as apartment houses and shopping centers and domestic businesses It is most effective if utilized by individuals with no current or lurking creditor claims or pending litigation. Offshore asset protection is best suited for liquid assets. However, some strategists use Nevis LLC's to hold titles of domestic real estate as well, but liquidate the real estate in the event of litigation and move the proceeds offshore. There is a split of opinion among experts whether non-business property can be transferred into a domestic family limited partnership and still utilize the gifting discount that will be recognized by the IRS. As of this writing, the issue is still unclear. Certainly if non-business assets are transferred into a family limited partnership, it is best not to be aggressive in claiming a substantial discount in the value of any gifts of partnership interests to the limited partners. There should also be other reasons why the family limited partnership was utilized apart from asset protection and avoiding gift or estate tax, and all the formalities of the Family limited partnership need to be strictly followed. In California, it is our opinion that an Family limited partnership must have a business purpose. If the Family limited partnership does not have a business purpose and has been created only to protect assets from creditors, the Family limited partnership may still be legal, but a creditor's rights may not be limited to only a charging order. With domestic asset protection, the individual retains legal control. With offshore asset protection, by comparison, the individual gives up all legal control, though still has influence over the actual control. Domestic asset protection offers no protection against actions brought by the federal government. Offshore asset protection may. With domestic asset protection, separate entities, such as family limited partnerships should be set up for each investment, such as each apartment house or piece of real estate. With offshore asset protection, one entity such as a foreign trust can be utilized to hold all the liquid assets. When utilizing domestic asset protection, distributions are often made to other types of trusts, such as spendthrift trust. When utilizing offshore asset protection, a second layer of protection is often used such as in the case of a foreign trust in the Cook Islands with a foreign corporation or LLC in Nevis. The best time to utilize asset protection and create an overall estate plan is before claims have been filed against the individual seeking to protect assets and wealth. With the proper planning, an individual can defeat a creditor's claim that the transfer of assets was for the purpose of avoiding one's debts. In this time of financial uncertainty and risk, those with the ability to protect their families should utilize the options available to protect and preserve their assets and wealth so they can be passed down to family members who may need them more than ever in a future without medicare or social security. Domestic asset protection using family limited partnerships does not allow for a stepped-up basis for assets. Domestic asset protection is expensive. Offshore asset protection is even more expensive. In compliance with IRS requirements, we must advise you that any U.S. federal tax advice, domestic asset protection and offshore asset protection advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.

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