Cain, Charles: Offshore Asset Protection

A fresh look at offshore techniques in conjunction with recent developments in law relating to fraudulent transfer in the Isle of Man
For some years, the favoured mechanism of Asset Protection vehicles, that is to say, vehicles for the protection of the assets of US persons from litigious creditors, has been the offshore trust. Indeed, it had almost reached the point where nothing else was ever mentioned, in spite of the fact that there always have been a variety of mechanisms available.

The original reason for this was a tax reason. At that time, and indeed, still today, the objective was to establish a vehicle into which assets could be placed which

protected the assets from attack through the US judicial system
would be able to make the assets available, if necessary, to the client and/or his family
would at worst be entirely tax neutral and at best enable routine Estate Tax planning to be done.
To achieve the first objective was comparatively simple – just get the assets out of the USA into a jurisdiction which had no Reciprocal Enforcement of Judgements Agreement1.

The actual holding mechanisms available then had to be selected.

At that time, the Limited Liability Company (LLC) was not available. In addition, the older classification rules of the IRS were still in force, and had not been replaced by the Check-the-Box Regulations, which were introduced in 19972.

All offshore Corporate forms were, as a consequence, ruled out because an overseas holding corporation would have been a Controlled Foreign Corporation3. Quite apart from the enhanced reporting requirements implicit in a Controlled Foreign Corporation (CFC) with Sub-Part F income, a Foreign Personal Holding Company (FPHC)4, a Passive Foreign Investment Company (PFIC)5 and the other implications of being caught up in Prof. Harvey Dale?s renowned five armed Pentapuss (now six-armed with the addition of the PFIC), there is a distinct penalty provision in relation to Basis step-up for Capital Gains Tax, derived from the rules in IRC s.1246(e) and 1291(e). The tax consequences of using a CFC for asset protection were therefore prohibitive.

The Limited Partnership was another vehicle which was used extensively inside the USA, but in those days, few offshore jurisdictions had them, although they have been in the statute book in the Isle of Man since 1909 (Partnership Act, 1909).

Many US Practitioners then looked at Trusts for Asset Protection. They found that there was a rich tradition of Trusts being used for ?Asset Protection? in a more general sense – indeed, there is scarcely any other purpose for a Trust.