How the rich make themselves judgment proof!
We get quite a few questions about being judgement proof, and for most people who come to this forum, it usually means they have no non-exempt assets (and some have no assets at all). Others try to create some crazy statute of limitations scheme, but being judgment proof is not just for the poor.
Thus, perhaps to satisfy your curiosity, and give you some interesting information about how to "really" judgment proof yourself.
To be truly judgment proof, your assets must not be subject to the power of any U.S. Court. After all, it is the U.S. court that can issue orders to banks and employers to turn over funds, freeze your assets, foreclose your home etc.
What the rich do is move all their liquid assets "offshore" (liquid assets are cash and securities). The word "offshore" often raises eyelids because it is seen as shady, but it really is how it is done and it is legitimate. Here is how it works.
PERSON A forms a Trust (for short, we will refer to the trust as APT) under the laws of the Cook Islands (they are located in the South Pacific near New Zealand), and the Trustee is a Cook Islands Trust Company (such as SouthPac Group). Then, Person A forms a Limited Liability Company (LLC) in Nevis (in the Caribbean). PERSON A is appointed "manager" of the LLC, but the "Owner" of the LLC is the APT. Then person A transfer all their assets into the LLC. This is merely a paper transaction, PERSON A does not really have to open accounts in NEVIS. However, it is generally recommended that the cash assets be put into Swiss Bank Accounts. (remember, the goal is to put your assets beyond the reach of the POWER of the US government, so you don't want them in U.S. Banks, even if the account in the U.S. bank is owned by an Offshore LLC). Also, the reason the APT and the LLC are in different countries is because it is preferable not to have the trust and the trust assets in the same country.
On a side note, it is legally significant that Person A is merely the "manager" of the LLC and not a "member (or owner)" Being a manager is like being the CEO, you make all the decision. This is how PERSON A retains control of their assets. PERSON A, as the manager of the LLC can do what ever they want with the assets, i.e. make purchases, trades, withdrawals, whatever. The reality is, PERSON A's interaction with their accounts does not change by placing them in the offshore LLC.
The other great thing is that now that the assets are offshore, and the LLC is a "single member LLC, i.e. the only member/owners is the APT), it is a non-taxed entity by the IRS. So PERSON A never pays any tax on gains, nor does the LLC.
Here is the other neat thing...most of you are aware of Fraudulent Transfer Law. So you might be asking, if you make these transfers during on ongoing suit or active creditor collection, can't the US court get the assets. The answer is NO, because there is no treaty between the Cook Islands and the US. Thus, a creditor would have to sue in the Cook Islands, and guess what their Fraudulent transfer look back period is, ZERO years. The Cook Islands has even thrown the US Govt. out of court (specifically the FTC) when they were trying to get assets from a person who committed securities fraud).
Generally, it costs about $30,000 to set one of these up and the annual up-keep is about $3,500-$4,000
However, the APT only works for liquid assets, i.e. cash, stocks, bonds etc. You cannot use this for real estate, or other "real" type assets, cars, airplanes, accounts receivables etc. Here is what you CAN do...
Quite a few people on this forum get thrown into a chapter 13 because they have too much equity in their house. The only way to eliminate equity is to encumber it somehow, but not too many people can afford the payments. However, if you have a lot of equity (and frankly, what I am about to suggest is really only cost effective if you have $900,000 or more in Equity, because of the minimum fees involved).
Step 1: you need to set up an offshore trust, the APT as discussed above.
Step 2: A bank in Nevis will issue an interest only mortgage up to 95% of the equity, in this example, 855,000.
Step 3: Simultaneously, a bank in the Cook Islands will deposit into your APT a Certificate of Deposit in the amount of $855,000 that pays 0.5 percent more interest than the mortgage rate.
To clarify who has what...
The bank in Nevis holds the mortgage and will be the entity that records the mortgage in the US with the local county recorder where the house is located. The proceeds of the mortgage, the money, go from the Nevis Bank to the Cook Island Bank...then the Cook Island Bank turns around and issues PERSON A a CD (Certificate of Deposit). Here is the beauty of it, the interest earned on your Certificate of Deposit pays your monthly mortgage payment.
The catch is the fee, the yearly fee is 1.2 percent of the mortgage amount and there is usually a 3 year pre-payment penalty.
The net result, however, is that you have now encumbered nearly all your equity in the house, or at least to a point where the remaining equity is probably not worth the creditors hassle (becasue they would have to pay off your 1st and 2nd mortgage in order to foreclose). And the proceeds of the loan are safely tucked away in your Offshore trust in the Cook Islands in the form of a Certificate of Deposit. The CD serves as additional collatoral to the bank in Nevis that issued the mortgage, so you really can't do anything with the CD.
Anyway, I figured this might make for some interesting reading for you. Why this ultimately works is because of the various treaties, or lack thereof, among the countries. For example, you could not do this by forming an APT in Canada, because the U.S. and Canada, because of various treaties, are practically one country and the U.S. courts and Canadian Courts have liberal reciprocity.
Thus, perhaps to satisfy your curiosity, and give you some interesting information about how to "really" judgment proof yourself.
To be truly judgment proof, your assets must not be subject to the power of any U.S. Court. After all, it is the U.S. court that can issue orders to banks and employers to turn over funds, freeze your assets, foreclose your home etc.
What the rich do is move all their liquid assets "offshore" (liquid assets are cash and securities). The word "offshore" often raises eyelids because it is seen as shady, but it really is how it is done and it is legitimate. Here is how it works.
PERSON A forms a Trust (for short, we will refer to the trust as APT) under the laws of the Cook Islands (they are located in the South Pacific near New Zealand), and the Trustee is a Cook Islands Trust Company (such as SouthPac Group). Then, Person A forms a Limited Liability Company (LLC) in Nevis (in the Caribbean). PERSON A is appointed "manager" of the LLC, but the "Owner" of the LLC is the APT. Then person A transfer all their assets into the LLC. This is merely a paper transaction, PERSON A does not really have to open accounts in NEVIS. However, it is generally recommended that the cash assets be put into Swiss Bank Accounts. (remember, the goal is to put your assets beyond the reach of the POWER of the US government, so you don't want them in U.S. Banks, even if the account in the U.S. bank is owned by an Offshore LLC). Also, the reason the APT and the LLC are in different countries is because it is preferable not to have the trust and the trust assets in the same country.
On a side note, it is legally significant that Person A is merely the "manager" of the LLC and not a "member (or owner)" Being a manager is like being the CEO, you make all the decision. This is how PERSON A retains control of their assets. PERSON A, as the manager of the LLC can do what ever they want with the assets, i.e. make purchases, trades, withdrawals, whatever. The reality is, PERSON A's interaction with their accounts does not change by placing them in the offshore LLC.
The other great thing is that now that the assets are offshore, and the LLC is a "single member LLC, i.e. the only member/owners is the APT), it is a non-taxed entity by the IRS. So PERSON A never pays any tax on gains, nor does the LLC.
Here is the other neat thing...most of you are aware of Fraudulent Transfer Law. So you might be asking, if you make these transfers during on ongoing suit or active creditor collection, can't the US court get the assets. The answer is NO, because there is no treaty between the Cook Islands and the US. Thus, a creditor would have to sue in the Cook Islands, and guess what their Fraudulent transfer look back period is, ZERO years. The Cook Islands has even thrown the US Govt. out of court (specifically the FTC) when they were trying to get assets from a person who committed securities fraud).
Generally, it costs about $30,000 to set one of these up and the annual up-keep is about $3,500-$4,000
However, the APT only works for liquid assets, i.e. cash, stocks, bonds etc. You cannot use this for real estate, or other "real" type assets, cars, airplanes, accounts receivables etc. Here is what you CAN do...
Quite a few people on this forum get thrown into a chapter 13 because they have too much equity in their house. The only way to eliminate equity is to encumber it somehow, but not too many people can afford the payments. However, if you have a lot of equity (and frankly, what I am about to suggest is really only cost effective if you have $900,000 or more in Equity, because of the minimum fees involved).
Step 1: you need to set up an offshore trust, the APT as discussed above.
Step 2: A bank in Nevis will issue an interest only mortgage up to 95% of the equity, in this example, 855,000.
Step 3: Simultaneously, a bank in the Cook Islands will deposit into your APT a Certificate of Deposit in the amount of $855,000 that pays 0.5 percent more interest than the mortgage rate.
To clarify who has what...
The bank in Nevis holds the mortgage and will be the entity that records the mortgage in the US with the local county recorder where the house is located. The proceeds of the mortgage, the money, go from the Nevis Bank to the Cook Island Bank...then the Cook Island Bank turns around and issues PERSON A a CD (Certificate of Deposit). Here is the beauty of it, the interest earned on your Certificate of Deposit pays your monthly mortgage payment.
The catch is the fee, the yearly fee is 1.2 percent of the mortgage amount and there is usually a 3 year pre-payment penalty.
The net result, however, is that you have now encumbered nearly all your equity in the house, or at least to a point where the remaining equity is probably not worth the creditors hassle (becasue they would have to pay off your 1st and 2nd mortgage in order to foreclose). And the proceeds of the loan are safely tucked away in your Offshore trust in the Cook Islands in the form of a Certificate of Deposit. The CD serves as additional collatoral to the bank in Nevis that issued the mortgage, so you really can't do anything with the CD.
Anyway, I figured this might make for some interesting reading for you. Why this ultimately works is because of the various treaties, or lack thereof, among the countries. For example, you could not do this by forming an APT in Canada, because the U.S. and Canada, because of various treaties, are practically one country and the U.S. courts and Canadian Courts have liberal reciprocity.
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