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Home Kinetic Asset Protection: When The Financial Seas Are Calm

In last week’s newsletter, which you can revisit by clicking here, dealt with the players in a properly set up Kinetic Asset Protection Trust: the Settlor, the Trustees (both a U.S. Trustee and a Foreign Trust Company), the Protector and the Beneficiaries. In that newsletter I pointed out that an Asset Protection Plan is not just a pile of expensive, bound documents. The reality is that a properly conceived Kinetic Asset Protection Plan is more closely akin to a living organism that changes and evolves over time. By that I mean that the plan and its workings can only be understood when you look at it during different stages in its life.

The remainder of this newsletter focuses on the initial stage of setting up a plan: Funding.

An Asset Protection Plan (Kinetic or otherwise) should only be set up (e.g. funded) when the financial seas are calm. If there is a fraudulent conveyance, it takes place on the day that the plan is funded, which is also the date that the statute of limitations starts to run.

Great care should be taken to make sure that the act of funding the trust is not a fraudulent conveyance. Does this mean that you can’t do Asset Protection if you have problems such as a pending lawsuit or demand letters? The answer is almost always that you can STILL protect yourself provided that you retain plenty of assets in an unprotected environment to comfortably satisfy any potential judgment from the known claim. I always ask the lawyer representing clients who have had a wake up call in the form of a threat letter or a lawsuit what the worst case scenario is. I also determine if there is insurance coverage, and if so, I treat this as reachable cash in the bank. I then make sure that there are three or four times the worst case scenario in unprotected assets at the time that the plan is funded. We often find that the claim is more of a wake-up call.

For example, one of my surgeons, a young and happy bachelor with a great income, got sued by a girl that he had dated once or twice. She claimed that he had kissed her and given her a cold sore on her mouth. She demanded $500,000. This scared the doctor to death. What we did was speak with his litigator who diagnosed this as a typical contingent fee lawyer shake down suit (oh, so common nowadays!) with a worse case exposure of less than $50,000. The doctor happened to own a corner lot with just about $100,000 of equity in it. We left that unprotected and proceeded to protect the rest of his assets. The claim by the former girlfriend was just a wake-up call.

Provided the plan is funded when the financial seas are calm, it is completely appropriate to have the client who is almost always the Settlor also be the U.S. Trustee and sometimes the Protector. I discussed this in some detail in my last newsletter; however, I wanted to point out that this structure is only appropriate when the financial seas are calm. It is always wise when the financial seas are calm for the client to retain the power to invest and otherwise deal with the protected assets. The client will keep this control by virtue of his status or position of being the U.S. Trustee. A typical Kinetic Asset Protection Trust will have the U.S. Trustee having the power to invest the assets alone, without the involvement of the Foreign Trust Company, during all periods when there is no attack on the trust (also known as an “Event of Duress”).

When the financial seas are calm, the assets are often in the U.S. and often held by an entity known as a Family Limited Partnership. Note: This is just the same as any plain old limited partnership except that practitioners found out that they could charge more if they added the word “family” to the title. We will talk about FLPs in greater detail in later newsletters. A FLP integrated with a Kinetic Asset Protection Trust normally has the Trust as the limited partner. The Trust has no control and a majority of the ownership over the protected assets (normally 99%).

MOVING TO RED ALERT

The first step to move toward more solid protection (something I refer to as “Red Alert Status”) is for the Settlor to appoint a foreign person as Protector. This person is often a lawyer or solicitor in a jurisdiction other than the U.S. This Protector will also often go onto the accounts with the U.S. Trustee (aka client). Some clients start out with a foreign person as the Protector, particularly if they are in a high risk environment.

In my next newsletter I am going to focus on the mechanics of affecting the move to Red Alert Status. Suffice it to say that from the stage when the client appointed a foreign protector, this client will have very little to do or say if attack comes. The machinery takes over and the professionals (not the client) take the steps to move to Red Alert Status. In most cases this machinery was put in place many years before any attack. (Remember, “Old and Cold” matters a lot.) I will also make sure that I explain the techniques which the client can utilize to make sure that he is never at risk for theft even if he does go to Red Alert Status. (Remember my axiom: Never ever trust your Foreign Trust Company… because you never need to!)