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Is Domestic Asset Protection Dead?

November 14, 2011

There has been quite a bit of buzz about a recent bankruptcy case involving an Alaska asset protection trust. However, the case merely confirms a weakness in the use of domestic asset protection trusts that was obvious even before this case.  

Domestic asset protection trusts (DAPTs) promise the holy grail of creditor protection - a trust where the settlor/grantor can transfer assets to, be a discretionary beneficiary of. but still have the assets of the trust be protected from the settlor's/grantor's creditors. Alaska, Delaware, and Nevada are three popular jurisdictions for these trusts.


There are open questions about the effectiveness of the trusts for creditor protection purpose, including enforceability across state lines under the U.S. Constitution. A major issue is the 10 year voidability provision of 11 U.S.c. Section 548(e) that entered the U.S. Bankruptcy Code in 2005.

In Battley v. Mortensen, a bankruptcy court in Alaska found that a transfer to a DAPT could run afoul of 11 U.s.e. Section 548(e), even though the debtor was solvent at the time of creation of the trust.
The court noted:  

"when property is transferred to a self-settled trust with the intention of protecting it from creditors, and the trust's express purpose is to protect that asset from creditors, both the trust and the transfer manifest the same intent. In this case, I found that the trust's express purpose could provide evidence of fraudulent intent."

Since a debtor can be placed in bankruptcy by his creditors on an involuntary basis, one cannot simply avoid this exposure by not filing for bankruptcy protection.

The result in Mortensen is clear: Domestic Asset Protection Trusts don’t protect assets from creditors for the first ten years after the trust is settled.

As we have been advising clients for years, only a Foreign (Non US) Juridiction can provide certainty of your asset protection solutions.  With Domestic Asset Protection, you never KNOW that you do not have it until, a US Judge decides that you do not have it!

Read more at: Tax Times blog

Swiss Parliament Approves Amended U.S.-Switzerland Tax Treaty

November 11, 2011

A Swiss parliamentary committee Nov. 10 gave its go-ahead to proposed amendments to a new U.S.-Swiss double taxation treaty that would make it easier for U.S. authorities to seek information on secret bank accounts held by U.S. taxpayers with Swiss banks.

The amendment allows for the handover of files on suspected tax offenders to the U.S. in cases where the U.S. authorities don’t know the identities of American holders of Swiss bank accounts and are basing requests for information merely on certain patterns of behavior.

According to the amendment, Switzerland will only grant administrative assistance in cases where the U.S. tax authorities produce clear evidence of a suspected offense, Eugen David, the president of the committee, told reporters in the capital, Bern. In addition, they must detail the pattern of behavior and explain why they need the information.

There must be evidence of wrongdoing by the Swiss bank where the U.S. client had the account and the mere fact that a U.S. citizen had an account with a Swiss bank isn’t sufficient, David said.


The Council of States decided on Sept. 21 to send the amended treaties back to the foreign affairs committee. The upper house “wants to wait until the Federal Council makes clear progress towards a comprehensive solution to the tax dispute with the United States.”

For more information go to: http://www.businessweek.com/news/2011-11-10/swiss-parliament-panel-approves-amendment-to-tax-deal-with-u-s-.html

Read more at: Tax Times blog

Former UBS Client Sentenced for Stashing $7.1 Million in Swiss Accounts

November 10, 2011

Bloomberg reports that Richard Werdiger, 64, is one of 36 Americans charged since 2007 in a U.S. crackdown on offshore tax evasion, and his was the longest prison term by a day. Werdiger, who pleaded guilty in March in federal court in New York, paid a civil penalty of $3.84 million and was fined $50,000 yesterday at his sentencing.

A New York diamond merchant, who is a former client of the Swiss banking giant UBS AG has, been sentenced to a year and a day in prison for hiding more than $7.1 million in Swiss bank accounts and evading more than $400,000 in U.S. taxes, prosecutors announced Nov. 9 (United States v. Werdiger, S.D.N.Y., No. 10-CR-325, sentencing 11/9/11).

The penalty was part of his plea agreement when he admitted in March to a single count of conspiring to defraud IRS and five counts of filing false tax returns. His prison term was just over half of the lower end of a range of 24 months to 30 months recommended in the plea agreement.

Read more at: Tax Times blog

Public Anger and Shareholder Unease Threaten Tax Havens' Tranquility

November 10, 2011

The Economist recently reported that - Under intense international pressure to lift banking secrecy, the first and biggest of the world’s “tax havens”—places that charge low or no taxes to foreigners—is ceding some ground. In a deal signed on October 6th, Switzerland agreed to tax money held in its banks by British residents (it had already done a similar deal with Germany). These customers face a levy of up to 34% as well as, from 2013, a withholding tax.

That could bring the British treasury around £5 billion ($7.8 billion). But Nicholas Shaxson, author of “Treasure Islands”, a book on offshore finance (and a former contributor to this paper), calls it a “Swiss tax swizz”: the country will in effect pay a fat fee to avoid revealing clients’ names. That undermines efforts at the Organisation for Economic Co-operation and Development, a Paris-based club of mostly rich countries, to set international standards on tax evasion.

Global Financial Integrity, a campaigning group, says poor countries “lose” more than $1 trillion a year to tax havens, around ten times the aid they receive. Two-thirds of this is tax evasion and avoidance, the group says, the rest transfers by criminals and the corrupt. Another outfit of fiscal inquisitors, the Tax Justice Network (TJN), cites research by the Bank for International Settlements, the Boston Consulting Group and McKinsey to calculate that global offshore deposits amount to at least $9 trillion, some $2 trillion more than the total held at home by American banks. ActionAid, a charity, published research this week showing that the companies in the FTSE 100 index had 8,492 offshore subsidiaries.

Campaigners also want to see more countries agree to the automatic exchange of tax information on non-residents. Bilateral tax treaties normally require such exchanges only on request. This works if the government seeking information knows precisely what it is looking for and if the host government can obtain it. As this issue has moved up policymakers’ agendas, some havens have voluntarily become more co-operative. The Isle of Man, for instance, now automatically swaps information (though Jersey refuses to follow suit for fear of losing “competitive advantage”).

Overall, however, resistance to change remains strong, not least in big Western financial centre's such as Wall Street and in the City of London, which see the flexibility offered by tax havens as an essential part of their business model. Public discontent may be filling the campaigners’ sails, but political support for reforms is still patchy. France, which holds the presidency of the Group of 20 (a club of the world’s biggest economies) wants to discuss tax havens at next month’s meeting in Cannes. But other countries are less keen, and more urgent items crowd the agenda.

Read more at: Tax Times blog

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