Jeffrey M. Verdon Law Group, LLP

GLOSSARY OF TERMS

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ADVANCED ASSET PROTECTION

ANTI-DURESS CLAUSE

ANTI-DURESS CLAUSE:

Essential in every APT is a clause commonly referred to as the "anti-duress" clause. In the event that a U.S. judge orders the Settlor to return the property previously transferred into the APT, the provisions of the APT expressly prohibit the Foreign Trustee from following the instruction of one "under duress." Since a court order is included in the definitions of duress, it is a legal impossibility for the Settlor to cause the property to be returned by the Foreign Trustee. Legal impossibility is a complete defense to criminal or civil contempt.

FAMILY LIMITED PARTNERSHIP ("FLP"):

Recommended to be formed among family members with Mom and Dad as "General Partners". Device to protect against asset exposure to lawsuits because the "charging order" protects assets held by the partnership when one of its partners is sued. FLP is also an excellent device to make gifts to family members without losing "effective" control.

GENERAL PARTNER:

Makes all business decisions of the FLP while owning as little as 1%.

LIMITED LIABILITY COMPANY:

A relatively new business form, adopted by many states, which operates in much the same manner as a Limited Partnership with certain advantages in that the managing individual need not own any interest and in some states this business form may be created by an individual alone.

LIMITED PARTNERS:

Have no right to participate in management of business. Generally will be your living trust, foreign asset protection trust or other family members, if estate and gift tax planning is desired. Limited partners may not interfere in the management of the FLP.

LIVING TRUST (Domestic):

Most people with living trusts have the domestic version of living trust. It is formed under the laws of your state of residence, and directs the use and administration of the trust's assets during your lifetime, as well as after death, while avoiding probate. Domestic living trusts, however, do not insulate the trust's assets from liability suits brought against the creators of the trust.

JUDGMENT CREDITOR:

The party to a lawsuit who successfully obtains a money judgment against the other party (judgment debtor).

JUDGMENT DEBTOR:

The party against whom the judgment creditor obtains a money judgment.

FOREIGN SITUS ASSET PROTECTION TRUST ("APT"):

Similar to domestic living trusts. APT formed under the laws of an overseas country in order to have that country's more beneficial trust and creditor protection laws apply to protect assets owned by the APT. Terms of the trust are identical to domestic living trust. The APT is an extremely effective means of deterring liability claims from judgment creditors seeking assets held by the APT.

CHARGING ORDER:

When a judgment is obtained against a person who owns a partnership interest, the charging order is the sole remedy for enforcement by the judgment creditor. The charging order allows the judgment creditor to receive income and assets from the FLP when and if distributions are made. The judgment creditor may not interfere with the business of the partnership, may not inspect partnership books and records, and must report the debtor's portion of his or her partnership income, under IRS Rev. Rul. 77-137.

ADVANCED ASSET PROTECTION:

Strategies by which title to real and personal property is held to reduce their exposure to future judgment creditors. In a typical Advanced Asset Protection case, the FLP is formed to hold title to selected assets that require protection. Some plans use multiple FLPs where protections is desired for both liquid assets and real property. In a typical structure, the General Partner will own a 1% general partnership interest, and the APT will own a 99% limited partnership interest. All control over partnership assets vests with the General Partner. In the event of a lawsuit against one of the partners, the FLP may legally transfer 99% of its assets to the APT. After the assets are transferred to the APT, a judgment creditor proceeding against the APT must do so in the foreign country's court at considerable expense and logistical difficulty. When the threat is over, the assets in the APT are returned to the FLP.

PROTECTOR:

The person or persons named in the APT to act as liaison between the trustees and the beneficiaries. The Protector, while possession no powers over trust management or assets, has the following three important powers:
1. Power to veto trust investments
2. Power to veto trust distributions
3. Power to remove and replace trustees
With these important powers, the creator of the trust (the Settlor) may retain a sufficient degree of control over the trust so as to be comforted in case he or she is forced to "push the button" and move the FLP assets to the APT.

SETTLOR:

Creator of the Trust. Under the trust laws of most overseas jurisdictions, the Settlors may retain liberal powers over the APT. Under the laws of the Cook Islands, the Settlors may retain the power to revoke the trust.

FOREIGN TRUSTEE:

The trust generally names three trustees, two U.S. trustees named by the Settlors and one Trust company located in the country in which the trust is formed. Under the terms of the APT, a majority of the trustees may take trust action, avoiding the requirement that the overseas trustee be contacted each time a document or check requires signatures.

TAX-NEUTRAL:

The FLP / APT are specifically designed to avoid any adverse federal income, gift or estate tax consequences. With very few exceptions, the FLP will not result in any adverse income tax consequences when adding or removing property, including liquid assets. Income earned by the FLP is reported on a prorata basis by the partners. The APT is a foreign trust, but for Federal income tax purposes, is taxed as a U.S. Grantor Trust under IRS regulations. The trust will not be classified as a "Foreign Grantor Trust" thereby avoiding the burdensome annual reporting required for foreign grantor trusts. Please have your tax advisor contact our office for more details.