Why Hiding Assets Is Legal and Smart

By Robert J. Mintz JD, LL.M (Taxation)

A question asked by clients is how to hide money, bank accounts and property. Often the client is concerned about protecting his or her home and savings from real world threats of lawsuits, creditors and judgments.  Is hiding assets legal and is it smart?

As asset protection lawyers we deal with these cases on a daily basis. It’s clear that those with visible and reachable assets are often a target of lawsuits and other actions. It is the availability of information about what you own that creates these potential dangers from a variety of sources. Keeping assets hidden and protected, limits access to your financial information. Strictly limiting information about your assets reduces your vulnerability and the dangers to you.

These facts are well understood by business and property owners and those with accumulated wealth.   Also, individuals who are subject to some degree of public or private scrutiny, including   politicians,  celebrities  and others in the public eye routinely set up privacy shields to maximize the level of secrecy for their holdings and reduce potential dangers.  It is hard to argue with the basic premise that if your assets are open and available for claims you are an attractive target for lawsuits and threats from potential legal (or illegal) adversaries. Under the current legal and political climate, privacy is an essential component of a sound financial plan. Hiding assets may sound sinister but taking advantage of legal entities such as trusts, LLC’s and corporations to keep your property out of public view is permitted and achievable in every state. Why not take full advantage of these rules to enhance your protection?

Before we look at the planning structures used for hiding and protecting assets you may wish to review the techniques used by investigators and others who are looking for your assets. We have covered these topics in significant detail in previous articles about asset protection privacy and how experts find your property and your accounts and these discussions provide insight into the development of privacy planning techniques.

Legal Strategies for Hiding and Protecting Assets

Privacy Trusts

Trusts are often used in a plan to maximize privacy and anonymous ownership. Most personal wealth in the U.S. is held in the name of trusts to control privacy and concentrate management activities.  The big advantage is that a trust is not a publicly registered document. Unlike LLC’s, family limited partnerships, corporations and other state sanctioned legal entities, state registration is not required for formation. The trust agreement, stating how assets are to be held, who has management powers and the benefits of each of the parties, can be held in your file drawer, privately without public registration and disclosure.

Since a trust is a private agreement it is easy to see the immediate privacy benefit. When you hold a property in your personal name, publicly recorded title shows your name as the owner. But if you hold the property in a trust, public ownership appears under the name of “XYZ as Trustee of the ABC Trust.” Any individual or licensed trust company can serve as trustee so you can take the privacy level as deep as you wish depending on whom you name as trustee.  These types of privacy trusts are popular with individuals and public figures who wish to conceal their ownership (and address) from view. As described below, Privacy trusts are often combined with other entities to enhance privacy and asset protection features.

Limited Liability Companies for Privacy

One or more LLC’s can serve as alternative or useful additions   to a simple Privacy Trust.  Unlike trusts, LLC’s do require a public filing for legal formation. However, the content of the public filings vary significantly by state.  Most states, (California, New York, and Nevada for example) require that the articles of organization list the names of either the members or managers of the LLC.  Since this filing is available for public view, providing these names can create a traceable trail and may not be best for maximizing privacy.  On the other hand, a limited number of states, including Delaware and Wyoming,   do not require a listing of any individual names.  An LLC can be formed in these states by providing only the name of the LLC and the registered agent. Using this approach, title to real estate, held in a Delaware LLC, appears on the public record only as “ XYZ Company” without further information about the manager or members. Because of these and other privacy friendly rules, Delaware is often considered the best choice for maximizing   anonymous   property ownership by both U.S and foreign real estate investors.

In most cases an LLC is required to register or qualify in any state in which it conducts business. For example, if investment property is located in California, the LLC which owns the property must be registered or legally qualified to do business in California. Since registration or qualification in California requires public disclosure of the name of the company’s member or manager steps must be taken to preserve privacy.

Often, the solution to this disclosure problem in a state like California is to form a Delaware (or Wyoming) LLC for the purpose of acting as manager of the California LLC.   Title to the property itself would then be held   in “ABC Company, a California LLC.” A search of the public records for this LLC would reveal only that the name of the manager- which in this case is “XYZ Company, a Delaware LLC.”  Tracing it back would not pierce the ownership veil since Delaware has no public (or non public) information about members or managers of LLC’s registered there. Taking title to real estate through a privacy trust or with this double LLC structure are the most popular forms of real estate ownership when preserving privacy is an important objective.  Other entities such as corporations and limited partnerships can be added to the mix as well depending upon the circumstances of the case.

Privacy and Asset Protection

As noted, privacy planning takes advantage of the rules governing LLC’s and trusts to achieve a level of privacy for asset ownership. Adding specific asset protection benefits to the privacy structure is also an important consideration for most people.

Certainly privacy by itself is one vehicle for asset protection. If no one knows what you own you will be less of a target. Reducing your exposure and avoiding litigation through privacy is a sound strategy.  But behind every privacy plan most clients want to make sure that if what they own is discovered, the structure of the plan itself legally protects the assets.

This makes sense because its often the case that no matter how careful you may be in concealing ownership, there are many ways in which your ownership can be revealed.  These topics are covered in detail elsewhere but understand that these days your personal data as well as financial information about you are “out there” to one degree or another. Hacks of your computer files and emails or those of anyone you do business with are commonplace.  Digital trails to much of your data should be expected unless you exercise an unusual level of caution.  In addition to inadvertent disclosure through unauthorized computer searches, you may be directly compelled to answer questions under oath about asset ownership in litigation. Similarly required disclosures under penalty of perjury on tax returns and loan applications can impact privacy goals.

If you are literally betting your house on keeping ownership permanently hidden from public view you are taking a risky bet. That’s why the strategy most people use involves two steps: 1) Keep assets private and confidential to the greatest extent possible. This discourages litigation and thwarts many potential threats: 2) But in the event that your assets are discovered, your plan should provide you with a high level of asset protection. The goal is that your property should be legally protected from claims even if someone else knows exactly what you own.

Planning Considerations

Asset protection with maximum privacy usually involves a combination of one or more LLC’s and specially designed trusts that create the desired result. Sometimes the trust will be the owner of the LLC but this can be reversed with the LLC as the trust beneficiary. There are limitless combinations and permutations which can accomplish these goals depending on the level of asset protection and privacy you are seeking. The most sophisticated plans may involve the use of domestic family savings trusts , offshore trusts , offshore LLC’s and corporations, arranged in a variety of structures for enhanced protection.

The combinations of entities and the structuring of the privacy plan can be taken to whatever level is appropriate.  LLC’s and corporations have annual registration fees and sometimes a state tax so multiple entities have costs that may add up. Using trusts for privacy and asset protection can avoid state registration and renewal fees but institutional trustees charge for their services so the advantage of a third party trustee must be considered. Adding overseas trusts and companies to the mix may also increase set up and administration costs substantially.

Another consideration is who the ultimate taxpayer should be.  Sometimes it is preferable to have a separate taxpaying or reporting entity file a return and pay the necessary taxes. The goal may be to keep income off the client’s individual return and moved to the return of a different taxpayer. Shifting income in this manner can produce tax benefits if this separate taxpayer is in a lower bracket or is entitled to greater deductions so that overall taxes are reduced. Tax benefits and privacy advantages can be created by shifting income in this manner. LLC’s, corporations and trusts can be designed to be a taxpaying or non-taxpaying entity and the advantages of each should be considered.

Limitations on Hiding Assets

While hiding assets is the smart strategy in most situations, sometimes it’s the worst thing you can do. Fraudulent transfers are illegal and may give rise to litigation independent of the claim itself. Similarly, hiding the proceeds of criminal activity is classified as money laundering which is a separate crime from the underlying offense. Lying under oath in litigation, untruthful statements to law enforcement officials and tax evasion are obviously unlawful and create a trap for those who rely on secrecy without an asset protection plan to insure protection of   business and personal property.

Holding your assets within a private and protected structure discourages claims against you. An attorney working on a contingent fee basis will not pursue a case against you unless collectible and reachable assets can be located. Behind every privacy plan is a sound asset protection plan which enhances negotiating leverage and legally protects your home, savings and business interests from collection actions.

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