IT HAS COME TO OUR ATTENTION LATELY THAT FOREIGN LLC's ARE BEING TOUTED AS BEING SUPERIOR TO OFFSHORE ASSET PROTECTION TRUSTS FOR A VARIETY OF CLAIMED REASONS. HERE ARE OUR BRIEF COMMENTS ON THE USE OF FOREIGN LLC'S IN ASSET PROTECTION PLANNING:asset protection offshore trusts limited partnerships foreign trusts assets

1. Internal Revenue Code Sections 6038B and 6046A require reporting of transfers to foreign partnerships (foreign corporations are covered by Sec. 6046 and also by Sec. 6038B; the LLC is either a foreign partnership or a foreign corporation (UNLESS IT IS A SINGLE-MEMBER LLC AND A TAX ELECTION HAS BEEN MADE), so extensive reporting will be required in any event (UNLESS IT IS A SINGLE-MEMBER LLC AND A TAX ELECTION HAS BEEN MADE) - see Treas. Reg. Sec. 301.7701-2 & 3) SEE NEW TREASURY REG - CLICK HERE.. An offshore trust can be created which will qualify as a US trust for US income tax purposes, while at the same time being governed by the laws of a protective foreign jurisdiction with respect to its creditor protection aspects.

2. Internal Revenue Code Sec. 1491 imposes a 35% excise tax on transfers of appreciated assets to a foreign partnership or foreign corporation through August 4, 1997. This can be a significant cost. The Internal Revenue Service has excepted "grantor trusts" from the imposition of this tax (a properly structured asset protection trust will qualify as a grantor trust). NOTE: THIS EXCISE TAX WAS REPEALED EFFECTIVE AUGUST 5, 1997, AND WAS
REPLACED BY PROVISIONS REQUIRING THE RECOGNITION OF GAIN ON THE
TRANSFER OF APPRECIATED ASSETS - SEE ASSET PROTECTION NEWS FOR DETAILS.

3. A 30% gross withholding tax will be imposed on US source income of the LLC (which should end up on client's form 1040). Quite an inconvenience. This can be avoided utilizing a properly structured offshore trust.(UNLESS THE LLC IS A SINGLE-MEMBER LLC AND A TAX ELECTION HAS BEEN MADE)

4. Where the owner of the LLC interest is in the US (i.e., no offshore trust), he is subject to our laws and the whims of result oriented judges. For example, a US judge could order the client to liquidate the LLC, and repatriate its assets. Since the foreign LLC interest must be reported to the IRS, the touted "secrecy" of the use of bearer ownership interests in the LLC is illusory at best. Remember - in a properly structured offshore trust, the settlor/beneficiary does not "own" anything, and what you don't own cannot be taken from you. Promoters of the LLC suggest that the LLC interest can be held by an offshore trust; this is, of course, true, but then one of the big selling points for the LLC - saving the costs associated with an offshore trust - is made moot, and items 1, 2, and 3 above will still apply.

5. A trust may contain flexible dispositive provisions - providing for the continuation of the holding of assets for generations (if desired), addressing unusual circumstances, such as the disability or incapacity of a beneficiary, providing for the payment of a beneficiary's health, education, welfare and other stated needs, and so on. In addition, an offshore trust can easily "move" from one offshore jurisdiction to another if circumstances warrant it - such a move would be far more difficult with an LLC.

All in all, in our opinion, the Nevis (or any other foreign) LLC (ALONE) does not rival the offshore trust in protection, tax neutrality, and flexibility.