Below are a list of definitions for commonly used asset protection terms and phrases.
412(i) Plan -- A type of Defined Benefit Plan that requires the use of insurance for funding, and which may provide certain inherent asset protection advantages because of the ERISA anti-alienation provisions.
419A(f)(6) Plan -- A Welfare Benefit Trust formed pursuant to Section 419A(f)(6) of the Internal Revenue Code, and which may have asset protection benefits because of the ERISA anti-alienation provisions.
Anstalt -- A civil law entity that is somewhat similar to a U.K. Unit Trust and can carry on commercial business.
Asset Freeze -- The process of getting assets to the children or the children's trust, so that the assets and their future growth are not exposed to the parent's creditors. This is the asset protection variant of the Estate Freeze.
Asset Protection Consultant -- A multi-level marketing scam involving franchisees who pay $10,000 to become "consultants" in the area of asset protection and who, though they have no education or training in the area, solicit clients to participate in Nevada bearer share structures that have highly questionable advantages, and many tax disadvantages. The scam operates on two levels: first, against the franchisees who are suckered into buying into the program, and, second, the clients who are duped into buying services from the franchisees.
Asset Protection Kits -- Do-it-yourself packages that purport to allow purchasers to create one-size-fits-all asset protection plans. Suffice it to say that the quality of these plans is highly suspect, which is compounded by the fact that the purchasers almost never implement the plans correctly anyhow, often leading to very negative tax consequences.
Backwardization Strategy -- A method for creating an apparent high sale value to defeat fraudulent transfer purposes, with a later reduction in price when the limitations period has passed.
Badges of Fraud -- In the fraudulent transfer context, a historically recognized non-exclusive list of circumstances that tend to show that the debtor intended to make a transfer in derogation of the rights of creditors.
Bankruptcy Remote Entity (BRE) -- An entity that acts to contain and resolve litigation away from valuable assets, and which can file for bankruptcy without subjecting the valuable assets to the bankruptcy proceeding.
Bearer Shares -- Shares which are owned by and give all their rights to the holder (the "bearer"), which ownership is not recorded on the company's books. Because of their primary uses for money laundering and tax evasion, nearly all jurisdictions have abolished bearer shares in favor of registered shares, the ownership of which are recorded on the company's books so that physical issuance of the shares is in many ways superfluous.
Beneficiary -- One for whose benefits assets are held in trust.
Captive Insurance Company ("Captive") -- Slang for an insurance company used predominantly to underwrite the business risk of other subsidiaries of the parent company or owner. The term "captive" is not used in any insurance statutes or in the Internal Revenue Code, but is rather a practice term used to describe an insurance company fulfilling the described role.
Challenge Analysis -- The process of selecting forms of structures and transfers based upon what creditors know about those structures and transfers, and the level of efforts being made by creditors to penetrate them and set them aside.
Charging Order -- An order issued by a court to a judgment creditor which essentially compels an entity of which the debtor is a partner or member to direct to the creditor until the judgment is satisfied any distributions that would otherwise have been made to the debtor.
Charging Order Protected Entities (COPEs) -- Entities that restrict the remedies of a creditor of an owner to a "charging order" that entitles the creditor to distributions made in respect of that ownership interest, but do not allow-at least initially-the creditor to actually take the ownership interest. From an asset protection standpoint, the advantage is obvious: The creditor has no immediate means of getting at the assets in the entity even though the creditor holds a judgment against one of the owners.
Charging Order Protection -- This prevents a creditor of an owner of particular types of business interests from reaching the assets of the business and from gaining voting control over the business interest. Rather, the creditor can only get a court order charging the debtor's interest with the debt, meaning that the creditor will receive any distributions made in respect of the debtor's interest. If the person in charge of making such distributions never makes one, the creditor may be out of luck. Originally, this protection arose to protect nondebtor partners from the debts of other partners of a business enterprise. Typically, the availability of charging order protection is limited to partnerships and limited liability companies, which is why Family Limited Partnerships are a popular asset protection tool.
Check-the-Box Regulations -- Regulations promulgated by the Secretary of the Treasury in 1996 which allow an LLC simply to choose whether to be taxed as a partnership or a corporation.
Closely Held Insurance Company (CHIC) -- A privately-held insurance company that is typically owned either by the owner's children or an irrevocable trust formed for the owner's children, to provide additional tax and succession benefits in addition to those of the captive arrangement.
Combo Platter -- A widely-marketed cookie-cutter asset protection structure involving an FLP with the limited partnership interests owned by a FAPT. The strategy is that if a creditor attacks the FLP, the FLP is liquidated into the FAPT and all assets moved offshore.
Companies Limited by Guarantee -- A company that has not been capitalized by cash, but rather by the promises of the shareholders to provide a specified amount of cash if required by the company to satisfy liabilities. A similar example is the traditional Lloyds of London syndicates were essentially companies that were capitalized by the unlimited guarantees of their members (the "Names") to stand behind the syndicates' underwritings.
Complex Asset -- An asset that is capable of being broken into component parts.
Controlled Foreign Corporation (CFC) -- In very general terms, the U.S. Internal Revenue Code term used to describe a foreign corporation that is owned in substantial part or controlled by U.S. persons. For example, an International Business Company formed in the Cayman Islands and owned and controlled in majority party by three U.S. shareholders would likely be treated as a CFC. A CFC has very extensive reporting requirements, and the failure to disclose the existence, operation or revenues of a CFC may be a felony in some instances.
Cook Islands Trust -- See Foreign Asset Protection Trust, below.
Cookie-Cutter Plan -- A plan of a one-size-fits-all nature sold by promoters, who make enormous profits from selling such plans because their costs to implement the plan are nominal. The effectiveness of such plans is highly questionable, since typically if a creditor is able to defeat one plan then all similar plans can be likewise defeated.
Corporate Shell (a/k/a Corporate Veil) -- Slang for the liability limiting advantage of a corporation, which limits the liability of shareholders to the equity they have contributed.
Corporation -- A fictitious legal entity authorized by statute, created by the filing of Articles of Incorporation with the relevant jurisdiction, and capitalized by issuing shares of stock. A corporation can provide protection to the shareholders against the liabilities created by the corporation in excess of the corporation's capital.
Debt Financing -- The financing of an entity by borrowing or by issuing bonds or promissory notes, etc. From an asset protection standpoint, the advantage of debt financing to equity financing is that in the event of a bankruptcy the debtholders should have priority over general creditors of the entity in the distribution of the entity's assets.
Defense-In-Depth -- A strategy whereby multiple layers of defenses are created with the idea that even though the creditor might ultimately be able to break through each layer, the creditor will eventually be worn down and settlement will be facilitated.
Deferred Private Annuity (DPA) -- A Private Annuity arrangement that is deferred until the Obligee reaches some age, usually around 70. From the asset protection viewpoint, the hoped-for advantage is that the creditor will not be able to garnish payments until the deferral period ceases and the annuity payments begin.
Devaluation Strategy -- A method of setting a low value for an asset by repeated sales to third-parties at successively lower prices, and which may include dissembling an asset with the idea of later reassembling it with the target purchaser.
Dilution Strategy -- A method of decreasing a creditor's share or interest in an entity by issuing additional shares or interests to non-creditor shareholders or members.
Directors' and Officers' Liability (a/k/a D&O Liability) -- The direct, personal liability of directors' and officers' of corporations for their acts that adversely affect the corporation (and thus giving rise to a shareholders' derivative action) and for the corporation's acts which adversely affect others (as in the case of employment discrimination claims).
Discretionary Trusts -- A trust that allows the trustee the discretion to make or not make distributions of benefits to the beneficiary, and to make unequal distributions among all beneficiaries.
Disregarded Entity -- An entity for which the tax consequences are attributed to its owner as if it did not exist. Note that this does not mean that the entity is "tax exempt", which is a common and false claim made by tax scam artists.
Doctrine of Disbelief -- This doctrine holds that since no sane person would transfer all of their assets to a foreign trustee and risk the assets disappearing, it then stands to reason that they still retain some hidden control over the assets whether they admit to such control or not.
Domestic Asset Protection Trust (DAPT) -- A self-settled spendthrift trust formed in a U.S. state that permits such forms of trust.
Domestic/Offshore Trust – See “Killer Rabbit Trust”
Dynasty Trust -- A trust formed in a jurisdiction that has either abolished the Rule Against Perpetuities (which limits the duration of trusts) or has statutorily expanded the Rule Against Perpetuities for a period in excess of 100 years.
Efficacy Challenged -- Those strategies identified as asset protection strategies (typically in the marketing materials of asset protection promoters), but about which the law is not yet settled.
Efficacy Known -- Those strategies that are readily identifiable and either do or do not work according to established law.
Employee Stock Ownership Plan (ESOP) -- A plan formed to benefit and incentivize the employees of a business, and which can qualify for advantageous tax treatment.
Equity Stripping -- The process of borrowing against an asset so as to reduce the debtor's equity in the asset.
ERISA Anti-Alienation Provision -- A provision found in the Employee Retirement Security Act (ERISA) that prohibits a participant in an ERISA-qualified trust from transferring his or her interest in the plan to others, and which effectively prevents a creditor from attacking the assets of the plan while they are in the trust.
Estate Freeze -- The process of transferring assets to either the children or a trust for the benefit of the children now, so that the future growth of those assets is with the children or their trust, and not within the parent's estate. The asset protection equivalent is known as an "asset freeze".
Extreme LLC -- See Xtreme LLC, below.
Family Limited Partnership (FLP) -- A limited partnership which holds the family's business or investments, with the idea that the parents will gift interests in the partnership to their children at a discount, thus potentially saving federal gift and estate taxes. The term is planner's slang, since there is no entity called a "family limited partnership" that is referenced by any statute, nor is any such entity referenced in the Internal Revenue Code.
Father of Asset Protection -- (or sometimes, "Grandfather of Asset Protection") -- A self-annointed title shamelessly used by some cookie-cutter promoters in their sales materials in an attempt to falsely give the impression that they were the one who created the field of asset protection planning. There have been no claims to be the "Mother of Asset Protection" yet, but as women enter the field of asset protection planning it is inevitable that such a title will eventually be claimed.
Fleeing Trust – See “Killer Rabbit Trust”
Flight Trust – See “Killer Rabbit Trust”
Foreign Asset Protection Trust (FAPT) -- A self-settled spendthrift trust formed in a foreign debtor haven jurisdiction.
Foreign Foundation -- A charitable organization typically created in a tax and debtor haven jurisdiction, most often on the model of the Stiftung.
Fraudulent Transfer (a/k/a "Fraudulent Conveyance") -- A transfer in derogation of the rights of a creditor to satisfy his judgment against the assets of the debtor.
General Partnership (GP) -- A partnership that consist only of general partners, all of who are jointly liable for the liabilities of the partnership, and all of whom have management rights to the partnership. In asset protection planning, general partnerships are usually to be avoided.
Golden Parachute -- A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by changing the corporation's officers, the officers are given large severance benefits, thus increasing the costs to the hostile party.
Hard Wiring -- Relationships or transfers linking persons or entities that cannot be undone. For instance, a gift is "hard wired" because it cannot be undone. A Protector who cannot be changed or removed is said to be "hard wired". Contrast with "Soft Wiring".
Homestead Exemption (a/k/a "Homestead Protection") -- A statutory exemption against collection given to certain interests in real property being used as the primary residence of the debtor.
Hybrid Entity -- An entity that does not have a classic form, such as a corporation or partnership, but instead exists as a combination of entities, such as a combination of trust and corporation. Even as late as the early 1990s the LLC was considered to be a hybrid of a corporation and a partnership, for example, but it has since become a classic form of business entity.
Innovative Frontier -- New and unique strategies that have not been identified as asset protection strategies, and which have not been the subject of studied attempts to pierce.
Institutional Trustee -- A bank, financial services firm, or licensed trust company that acts as a true third-party trustee of trusts.
Insurance Manager -- A person or entity that has obtained a license from the local insurance commissioner to manage insurance companies in that jurisdiction.
Intentionally Defective Grantor Trust (IDGT) -- A form of trust where the gift is completed for federal gift and estate tax purposes, but the trust intentionally fails an element to avoid being treated as a grantor trust, so that it is treated as a grantor trust for federal income tax purposes.
International Business Company -- A corporation authorized by the statutes of a debtor haven which (with the exception of banking, of course) can only conduct business with persons or entities outside the debtor haven, and not with the locals. In other words, it is a company incorporated in a debtor haven but required to be used elsewhere.
International Private Annuity Contract (IPAC) -- A form of private annuity arrangement where the obligor to whom assets are sold and who will make the annuity payments is a foreign party domiciled in a tax and debtor haven jurisdiction.
Irrevocable Life Insurance Trust (ILIT) -- An irrevocable trust formed for the children, primarily to purchase and hold life insurance outside the parent's estate so that the life insurance proceeds are not subject to federal estate taxes at the parent's death.
Killer Rabbit Trust -- An asset protection trust created initially as a domestic trust, with the idea that if a serious problem arises the trust will migrate to an offshore jurisdiction where its assets will be protected from creditors. Planners who form these trusts theorize (perhaps “wish” is a better term) that U.S. judges will treat these trusts better than foreign asset protection trusts that were formed offshore in the first place. The somewhat derisive but apt nickname for this type of trust derives from the scene in Monty Python’s The Holy Grail where King Arthur’s men confront a harmless bunny rabbit, and then flee shouting “Run Away! Run Away!” when the bunny turns vicious. Also sometimes referred to as a “Flight Trust” or “Fleeing Trust” or “Domestic/Offshore Trust (DOT)”.
Leasing Company -- A company used to hire employees and lend those to the underlying business, to reduce profits in a liability-producing company or to shift employment liabilities away from a valuable business.
Limited Liability Company (LLC) -- A hybrid type of legal entity that combines certain traits of corporations with certain other traits of partnerships and other noncorporate legal entities. LLCs allow their owners (called members) to have the best of all worlds: pass-through tax treatment like a partnership, limited liability like a corporation, unheralded flexibility in ownership and management structure, and charging order protection.
Limited Partnership (LP) -- A partnership that consist of general partners who are jointly liable for the liabilities of the partnership and who have management rights to the partnership, and limited partners whose liability is limited to their contributions to the partnership and who have no management rights, i.e., general partners are true partners and limited partners are mere passive investors.
Litigation Expense Policies -- A form of policy which does not pay the claim nor make any funds available to the claimant, but instead only funds the costs and expenses of litigating the claim, and sometimes other ancillary costs.
Living Trust -- A revocable grantor trust. Because the trust can be revoked, and a court can order a settlor to revoke the trust, the living trust is thought not to provide any meaningful asset protection until the death of the settlor.
Management Company -- A company formed primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.
Manager-Managed LLC (MemLLC) -- An LLC that provides for one or more designated managers to have management rights, and with the members having no management rights. With a Member Managed LLC, the members are in a role very similar to limited partners.
Member-Managed LLC (MgrLLC) -- An LLC that allows the members to have management rights, very similar in operation to a general partnership, but with some degree of limited liability for the members.
Migration Strategy -- A method of transferring assets by repeated sales of the assets to third-parties before a final sale to the target purchaser.
Nevada Corporation -- A corporation formed in Nevada pursuant to Nevada's corporation act, which provides debtors some advantages not typically found in the corporation laws of other states. Unfortunately, the advantages are usually grossly overstated by promoters who arrange structured based on Nevada corporations that have very serious flaws from the asset protection perspective. Nevada corporations are usually the primary part of the "Asset Protection Consultants" scam that is run from Nevada.
Nevis LLC -- See Offshore Limited Liability Company, below.
Nominees, Nominee Shareholders, Nominee Directors, Nominee Officers -- These are persons who act on behalf of the true shareholders, directors, or officers of the company, and who typically have executed an undated resignation which allows their replacement at any time.
Offshore Employee Leasing -- (a/k/a "Irish Employee Leasing" or "Barbados Employee Leasing") -- A complex arrangement that attempts to utilize favorable tax treaties (usually with Ireland or Barbados) to facilitate (Step 1) a U.S. professional's self-firing from his U.S. company, (Step 2) being re-hired by a foreign employee leasing company, (Step 3) being leased back to his own U.S. Company, and (Step 4) deferring a portion of his income in the foreign jurisdiction. Widely marketed throughout the United States, primarily by David Tedder (now a convicted felon) and certain professionals with whom he came into contact, those schemes are now being challenged by the IRS, and in a few particularly abusive cases there have convictions for felony tax evasion.
Offshore Limited Liability Company (OLLC) -- A limited liability company formed pursuant to the laws of a foreign debtor haven jurisdiction, such as the Nevis LLC.
Offshore Management Company -- A company formed in a foreign debtor having jurisdiction primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.
Offshore Private Placement Deferred Variable Annuity -- (OPPDVA or more commonly "Swiss Annuity") -- A variable annuity with annuity payments initially deferred that is offered by a foreign insurance company on a private placement basis, and which are typically customized to the specific needs of the policyholder.
Offshore Private Placement Variable Universal Life Insurance -- (OPPVULI or more commonly "Offshore PPLI") -- A variable universal life insurance policy that is offered by a foreign insurance company on an private placement basis, and which is highly customized for the specific needs of the policyholder.
Opportunity Shifting -- The process of putting new wealth-creating assets into distanced structures, so that the wealth is created within those structures and not the existing one.
Panama Foundation -- A charitable organization formed in Panama that is modeled from the Stiftung.
Partnership -- A partnership is an association of two or more persons carrying on a business venture as co-owners for profit. Partnerships come in two basic varieties: general and limited.
Piercing the Corporate Veil -- Where a court disregards the legal fiction of the corporation and imposes liability against the shareholders.
Poison Pill -- A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by accumulating stock, additional stock is issued so that all shares are diluted, thus increasing the costs of the hostile party's acquisition.
Pre-Bankruptcy Planning -- Planning that is done immediately in anticipation of a bankruptcy filing, and which seeks to maximize exemptions and avoid claims of preferential transfers.
Preferential Transfer -- A transfer that has the effect of alienating property in advance of a bankruptcy filing, and which may usually be set aside by the bankruptcy court within a defined time period.
Private Annuity -- A method of selling an asset whereby the seller (obligee) sells the asset to the buyer (obligor) in exchange for the buyer agreeing to make certain payments to the seller until the seller dies. To qualify as a Private Annuity for U.S. tax purposes, in addition to other requirements, the buyer (obligor) must not be in the business of issuing annuities.
Private Trust Company (PTC) -- A trust company directly or indirectly owned or controlled by the settlor of a trust. The concept is to give the appearance to third parties that the trust has an independent trustee.
Professional Corporation (PC) -- A form of corporation that can have only certain licensed professionals as shareholders, and which typically does not protect the professional shareholder from lawsuits brought alleging their professional negligence.
Promoter -- One who sells one-size-fits-all cookie-cutter plans to any client whose check clears, regardless of whether the plan is suitable for the particular client or not. Promoters often attempt to maximize their profits by selling asset protection kits.
Protector -- See Trust Protector, below.
Psychology of Settlement -- The parties' consideration of the totality of circumstances involved in a case as impacting their decision to settle the case or continue litigation.
Pure Trust -- A sham trust sold by scam artists that purports to be free of government regulation or intervention because of the Contract Clause of the U.S. Constitution.
Purpose Trust -- A form of trust which has no beneficiaries, but instead exists to serve some purpose such as to benefit cancer research. Because the trust has no beneficiaries, it is sometimes used in the asset protection context for holding title to management companies.
Recapitalization Strategy -- A method of increasing the capital base of an entity under creditor attack by contributing a valuable but illiquid asset to the entity.
Redemption Strategy -- A method of containing liabilities by an intermediate sale to a party in a debtor-haven.
Registered Agent -- An agent for the corporation who is domiciled in the state of incorporation and is available to receive service-of-process on behalf of the corporation.
Reinvoicing (a/k/a "Transfer Pricing") -- An offshore tax scheme involving the creation of a middleman entity or offshore wholesaler in a tax haven jurisdiction for purposes of skimming profits and thus decreasing the amount of U.S. income shown. The IRS has significant powers to combat such arrangements, some of which may amount to criminal tax evasion.
Repatriation Order -- An order to the debtor to bring assets back within the jurisdiction of the court; if the debtor does not do so, typically the court will order the debtor incarcerated for contempt.
Replication Strategy -- A complicated strategy for transferring wealth involving mirrored option arrangements and controlled counterparties, and based on particular future assumptions of market volatility.
Reverse Alter Ego -- A developing theory of relief for creditors, which allows creditors of an owner of an entity to invade the entity and get at the entity's assets directly so as to satisfy the creditor's debt against the owner.
Self-Canceling Installment Note (SCIN) -- A method of selling an asset where the buyer provides a promissory note to the seller with a fixed payment period, but which note and obligation to pay the seller is canceled if the seller dies.
Self-Settled Spendthrift Trust -- A trust formed for the benefit of the person who created the trust, with spendthrift provisions that attempt to disallow a creditor from invading the trust assets or forcing a distribution to the beneficiary that the creditor would then seize.
Series LLC (a/k/a "Cell LLC") -- A form of LLC allowed by the statutes of only a few jurisdictions (most popularly Delaware) that allow membership interests to be divided into categories or "cells" with liability for particular actions of the LLC theoretically limited to the capital contributed to the particular series in which the operations of the LLC occurred.
Settlor -- One who provides assets to a trustee, so that the trustee can hold the assets in trust for the beneficiary.
Single-Member LLC (SMLLC) -- An LLC with but one member, who is typically also the manager, formed in a jurisdiction that allows a single member. Because they are relatively untested, the liability protections of SMLLCs are mostly theoretical, but should be similar to that of a sole-shareholder corporation.
Soft Wiring -- Relationships or transfers linking persons or entities that can be easily undone or changed. For instance, an installment sale may be considered "soft wired" if it can be renegotiated and changed. A trustee who can be easily replaced is said to be "soft wired". Contrast with "hard wiring".
Spendthrift Trusts -- A trust that includes certain language giving the trustee wide latitude to avoid making distributions to beneficiaries where the distribution would go to a creditor, or where the trustee fears the distribution would be wasted by the beneficiary.
Stiftung -- A civil law arrangement that is basically a charitable fund that is created for a particular purpose. It is similar in many respects to a Purpose Trust.
Structural Methodology -- The decision-making process for choosing the type of structure that will be utilized hold particular assets.
Structured Financial Product -- A financial product created to serve a transaction-specific purpose.
Texas Joint Stock Company -- An alleged form of company in Texas that scam artists puff as having certain asset protection benefits but which benefits do not actually exist. This is the corporate version of the Pure Trust scam.
Transfer Methodology -- The decision-making process for choosing the type of transfer that will be used to move assets to a particular structure.
Trust -- A relationship whereby one party (trustee) is given assets by another (settlor) to hold for the benefit of a third party (beneficiary).
Trust Protector -- A person or entity who has certain powers under the trust document, usually to discharge (but not appoint) trustees, and to veto (but not make) certain key decisions of the trustees.
Trustee -- One who agrees with a settlor to hold assets in trust for the beneficiary.
U.K. Limited Liability Partnership (UKLLP) -- A limited liability partnership formed under the United Kingdom's Limited Liability Partnership Act of 2000.
U.K. Limited Partnership (UKLP) -- A limited partnership formed under the United Kingdom's Partnership Act of 1907.
Unbundling -- The process of breaking an asset into components and treating the components as separate assets.
Uniform Fraudulent Transfers Act (UFTA) -- A statute that sets forth the fraudulent transfer laws of most states.
Wealth Preservation -- Planning that preserves wealth over time against numerous unforeseen circumstances.
Xesop -- A very complex arrangement for holding an operating business, which combines an ESOP with an Xtreme LLC.
Xtreme LLC -- A very complex arrangement involving a Series LLC and complicated interrelated and diverse transactions utilizing a variety of irrevocable trusts.
Zero-Coupon Bond -- Typically, a bond that has been stripped of its interest coupons so that only a single lump-sum payment is made at maturity.