Save the Hostage and the Ransom
There are simple arrangements you can make internationally that will gain you a worthwhile measure of protection.
- Having money in a foreign bank account ensures that no purely bureaucratic action in the US could suddenly leave you desperate for cash.
- Buying an annuity from a non-US insurance company could gain you currency diversification and perhaps make things a little more difficult for any future creditors.
- Opening a brokerage account outside the US would open the door to investments not available in the US.
- Using a foreign limited liability company to hold investments could make you less attractive as a lawsuit target, and it would make it easier to set up that foreign brokerage account.
Such steps are worth considering. Any one of them would be an improvement over leaving everything in the US. But they all have the same limitation. While some of your wealth would be out of the country, you would still be here. And since you’re still here, you could be compelled to undo what you’ve done.
For example, suppose that you lose a big lawsuit in a big way – and you fail to pay the judgment. At the request of your judgment creditor (the person who won the lawsuit), the court will order you to submit to a “creditor’s examination.” Under penalty of perjury, you’ll be forced to answer questions about your financial life.
Forget About Hiding
Unless the judgment creditor’s lawyer is inept, his questions will uncover what you have abroad. If it’s a foreign bank account, the court will order you to draw on it to pay the judgment. If it’s a foreign annuity, the court will order you to cash it in and pay the judgment. If it’s a foreign brokerage account, the court will order you to sell everything, bring the money home, and pay the judgment. If it’s a foreign limited liability company that you manage and own, the court will order you to make a distribution to yourself and use the money to pay the judgment.
And when the court issues those orders, the judge won’t be saying “please.” Failure to comply would mean going to jail for contempt of court, where you would sit until you changed your mind.
So the simple asset-protection measures I’ve listed can buy time, and they may make things a little more difficult for your attacker. And some of them, if used with sufficient shrewdness, can reduce the attacker’s chance of taking what you’ve put internationally from 100% to something less than that. Definitely better than no protection at all, but hardly a reliable barrier.
What makes an international trust a truly reliable barrier is the legal distance – just enough – that it puts between you and the assets you want to protect. You won’t own the assets; your trust will. And as Trust Protector, you can do much to influence the Trustee, but you can’t compel the Trustee to give you money to pay a judgment creditor. In fact, a properly drafted trust instrument will prohibit the Trustee from doing such a thing.
Nonetheless, a cautious investor who’s seeking real protection may hesitate to establish an international trust, because he wonders just how things would play out if somewhere down the road he’s facing a judge who is determined to make him pay a big judgment. He doesn’t want a trust that might trap him in a contempt of court problem.
So exactly what happens if:
- You move assets into an international trust;
- You get sued for a large sum and lose; and
- You’re unable to pay the judgment the court has ordered?
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Yes, Your Honor
As in the earlier example, you’ll undergo a creditor’s examination. If your judgment creditor doesn’t already know about your trust, the examination will bring it to light. Then the court will order you to recover the property you transferred to the trust or will order you to replace the Trustee with a bank in the US.
Your legal obligation would be to do everything reasonable to comply with the court’s order. That’s what you should do, and you should go about it in a fashion that makes it clear and unmistakable that you are in fact doing everything reasonable to comply. Here are some of the measures your attorney may recommend to you.
- Advise the court that any action you might take would risk triggering the trust’s anti-duress provisions, which would prevent the Trustee from acting on your request while you’re subject to a court order.
- Invite the judgment creditor to propose a written request or demand that you would send to the Trustee.
- Ask the court to issue a more specific order as to how you should approach the Trustee.
- Retain legal counsel in the jurisdiction where the trust is located to advise on how to compel the Trustee to give you the money you need to pay the judgment.
Your attorney may advise you to take other steps as well. Whatever his advice, follow it. Make every effort that he recommends. Knock on every door that the court might imagine could give you access to your trust fund. Provided that your trust has been properly structured and properly administered, none of these efforts will succeed, but you should make all of them. Then your attorney will inform the court of your failure and of your readiness to take any further steps the court requires.
If a court ever orders you to walk on water, you aren’t going to comply, because you can’t. But you should try your utmost. Take instruction from a qualified waterwalker if you can find one. Get very wet. Then return to court to announce your failure… dripping.
You wouldn’t enjoy being under a court order that you’re unable to comply with. But you’d certainly prefer that experience to being wiped out by a lawsuit. And while your legal ordeal is going on, your trust can still help you by paying credit card and other bills and by making distributions to family members whom you’ve included as Beneficiaries.
A Second Protection
The steps you take now to gain thorough protection for your assets will cut the chance that it will ever make sense for anyone to sue you. If there is no easy-to-reach prize for an attacker to win, you’re unlikely ever to be attacked. For you, the process I’ve summarized here will never begin.
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