Asset Protection using Offshore/Foreign LLC (Nevis LLC) and How to Avoid Fraudulent Conveyance
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November 7, 2000
Wenham, MA 01984
Re: Using Offshore Limited Liability Companies for asset-protection planning, specifically addressing "fraudulent conveyance."
You have asked me about the importance of using Foreign Limited Liability Companies (FLLCs) in certain circumstances where one of the members may be under attack by a creditor and the possible "fraudulent conveyance rules" bearing on the transfer of underlying assets.
A justice system run amuck. We have a highly unusual judicial system. Contingent-fee lawyers act like predators, armed street gangsters. Judges and juries act like Robin Hoods, determined to redistribute your wealth. Statistics are staggering: you will be sued more times than you will have a hospital stay.
And what’s outrageous is that our judicial system helps them by:
- making it easy for your predator-plaintiffs to sue
- predator-plaintiffs and their lawyers will sue you for just about anything they can dream up and
- plaintiffs don’t need to pay their lawyers in advance
They will work for a percentage of whatever they can squeeze out of you. The Trap has been set! Clever gold-digging lawyers have been successful in casting you as the villain. You are the "greedy rich" at the expense of working stiffs. Judge and juries are out to get even.
At a time when offshore trusts are under a magnifying glass, some clients and their U.S. financial planners are looking for alternative strategies. One such strategy may involve the use of Foreign Limited Liability Companies (FLLCs) for absolute strong asset protection and wealth preservation legislation. I’m presenting to you the use of a "Nevis Limited Liability Company" as the preferred "legal entity" alternative because of Nevis’s strong asset protection legislation against fraudulent conveyance.
Nevis is an offshore island in the eastern Caribbean Sea consisting of Saint Kitts (Saint Christopher) and Nevis. Nevis became independent from the United Kingdom in 1983. Under the Nevis Business Corporation Act (the ACT) of 1984, tax holidays are provided to all companies that carry on business outside its tax-haven jurisdiction. Major banks such as Barclays International, Royal Bank of Canada, and the Bank of Nova Scotia are located in Nevis with excellent banking facilities and wire transfer services.
All 50 American states have adopted Limited Liability Company (LLC) legislation and many foreign jurisdictions including tax-free Nevis, are familiar with this legal entity. The LLC is a hybrid of the limited partnership and the corporation. A limited partnership is comprised of a general or managing partner, and a group of investors or limited partners. The appeal of an LLC stems from the fact that it will be treated as a partnership for tax purposes, while still providing its members with corporate-style protection from liability.
The problem however, as with any United States legal entity(ies), is the application of "fraudulent conveyance rules" for any asset transferred while an existing or potential creditor could possibly under even the most unusual circumstances place a claim, as frivolous as it could be. The U.S. courts have been extremely sympathetic, as they have time and again enforced equity over legal precedence.
What distinguishes the Nevis LLC from the American LLC is the pro-debtor approach to its legislation. Where a member has an existing creditor, for example, Nevis LLC legislation allows the member to place assets into the LLC and avoid a claim of "fraudulent conveyance" if the member’s interest remains proportionate to the contributed capital.
Under such circumstances, Nevis legislation would treat the conveyance as a fair market value exchange, which would not be caught by Nevis laws on fraudulent transfers.
This dilution strategy can provide additional protection of the debtor-member’s assets. Under this strategy, other existing members would undertake to contribute proportionate shares to the LLC at some future date. This would leave the debtor-member with a minority interest in the LLC, even though he or she contributed all or most of the LLC’s present assets.
In the United States, the courts may, based on case law, say that such transfers impair the creditors and is therefore equivalent to a fraudulent conveyance.
In Nevis, however, there is no room for judicial interpretation as the law is set out in the legislation. "Investing in a properly engineered Nevis LLC is not a fraudulent transfer, and not challengeable, even when made against an existing creditor."
An additional advantage of the LLC is that the only remedy available to the creditor of a debtor-member is to obtain a charge against the member’s interest in the LLC.
This charge would give the creditor certain rights to the profit or liquidation proceeds of the LLC, but would not entitle the creditor to seize the LLC interest of the debtor-member.
A properly engineered Nevis LLC will delegate all important duties to the managing director, who acts in a similar capacity as a managing "member." An operating agreement would require the unanimous consent of all the members in order to replace the managing director. A creditor would not, therefore, be able to obtain a court order to force the replacement of the managing director.
Common to all Foreign Limited Liability Companies (FLLCs) and Foreign International Companies (IBCs) are the dedication to business use outside the incorporating island jurisdiction. Bearer shares are permitted in some jurisdictions, one person may act as the sole shareholder/director/officer and does not have to reside within the country of jurisdiction. "Bearer Shares" means he who owns the shares (undisclosed) owns the company. Shareholder meetings, corporate records, accounting records need not be kept within the country of jurisdiction. It’s entirely possible that the identity of the shareholder/director/officer may never be disclosed to the government or any potential creditor.
A secondary reason why noted people like Michael Jackson and others do business using foreign legal entities in tax haven jurisdictions is for the unbending asset protection and wealth preservation and uncomplicated legislation. Creditors and their very clever contingent fee lawyers cannot seize, lien or investigate bank records in tax haven jurisdictions due to strong bank secrecy laws. All of the largest banks in the world have to go through the local courts. Judgments are not enforceable in non-United States jurisdictions. U.S. contingent fee lawyers and their clients have a significant jurisdictional problem: only citizens of the tax haven jurisdiction can practice law. U.S. lawyers or their clients will have to hire a local law firm and pay up-front legal fees, post bonds, pay court costs, and pre-pay other expenses to pursue their claims. Generally speaking, foreign-generated claims/judgments are frowned upon by the local authorities.
While International Business Companies (IBCs) and offshore trusts are still preferred by planners, The Nevis Foreign Limited Liability Company is potentially the strongest asset protection devise that can be implemented, even under the creditor’s very nose and still avoid "Fraudulent Conveyance."
If you have any additional questions, feel free to contact me.