Bernanke Bond Buying May Risk Rise in Prices Similar to 2004

Bernanke Bond Buying May Risk Rise in Prices Similar to 2004

By Steve Matthews and Scott Lanman – Nov 3, 2010 1:18 PM GMT+0200

The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the U.S. economy.

The Fed today will probably restart purchases of bonds to spur the economy even as growth is likely to accelerate at a 2.6 percent annual pace in the second quarter of next year from 2 percent last quarter, according Bloomberg News surveys of economists. The Fed will likely pledge to buy $500 billion or more in securities, according to 29 of 56 economists surveyed.

By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake- up in currency and bond markets, said James D. Hamilton, a University of California, San Diego economist.

“That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,” said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. “So the Fed has a careful tightrope act here.”

By 2012, the unprecedented stimulus would probably cause inflation excluding food and energy to exceed 2 percent, beyond the Fed’s preferred range, according to seven economists surveyed, including Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

‘Maximum’ Panic

“The parallels are very close to 2003, when the Fed had a maximum degree of panic about deflation when inflation had already bottomed out and was about to pick up,” said Stanley, a former Richmond Fed researcher who expects 2.8 percent inflation in 2012 on a rise in the prices for commodities and housing. “Their inflation forecasts are going to be too low, and as a result policy is going to be very easy.”

The Fed would probably not be alone in underestimating inflation. From 1996 until 2009, the Bureau of Economic Analysis revised up its initial reports on core inflation by an average of 0.21 percentage point, according to James Stock, a Harvard University economist.

Policy makers are scheduled to release a statement at around 2:15 p.m. in which they’ll likely reiterate the view from their September release that “inflation is likely to remain subdued for some time,” said former Fed governor Lyle Gramley, now senior adviser at Potomac Research Group in Washington.

Too-Low Inflation

Treasuries rose today, sending the yield on 30-year bonds three basis points lower to 3.9 percent as of 7:13 a.m. in New York. That’s the lowest in more than a week. Two-year notes yielded 0.35 percent, and the yield on the 10-year note fell two basis points to 2.57 percent.

The Treasury market is pricing in lower inflation expectations than it should, said Michael Pond of Barclays Plc.

“The market is looking for too-low inflation even though we won’t get a ton,” Pond, co-head of interest-rate strategy at Barclays in New York, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for the annual increase in consumer prices over the life of the maturity, increased yesterday to 2.21 percentage points, the widest level since May 18.

Target Rate

Bernanke as a central bank governor in 2003 urged colleagues to avert a drop in prices amid sluggish job growth, according to transcripts of a May 2003 meeting released last year. The central bank kept its target rate at 1 percent for a year beginning in June 2003 to counter deflation.

Meanwhile, inflation excluding food and energy rose from an initially reported 1.2 percent in May 2003 to above the Fed’s 2 percent goal a year later. An initial reading of 1.6 percent for May 2004 is now 2.1 percent in the history books.

Since December 2008, the Fed has kept interest rates near zero and used asset purchases to try to stimulate growth following the worst recession since the 1930s. New asset purchases would follow Fed acquisitions of $1.7 trillion in Treasuries and mortgage debt that ended in March.

Even with unprecedented stimulus, the economic recovery and inflation have slowed. The Fed’s preferred price measure, which excludes food and fuel, rose 1.2 percent in September from a year earlier, the smallest gain since September 2001. Most Fed officials’ long-term preferred range for the inflation rate is about 1.7 percent to 2 percent.

Pizza Price

Passing on higher costs isn’t feasible for some companies. Domino’s Pizza Inc. will keep its promotion of two medium pizzas for $5.99 each, Chief Executive Officer Patrick Doyle said on an investor call last month. “We’ve got to provide the price that’s going to get consumers to buy,” he said.

Still, signs of inflation are emerging. Oil prices have risen 18 percent since May, and food staples including corn and cattle are up more than 20 percent this year.

Wal-Mart Stores Inc.’s U.S. stores chief Bill Simon, during an investor meeting last month in Bentonville, Arkansas, predicted “a slightly inflationary environment in our food business.”

While apartment rents, a component of core inflation, rose less than 1 percent in the third quarter, the market is tightening as vacancies dropped for the first time in three years, Reis Inc. said Oct. 6.

Housing Outlook

“The housing situation is something that could turn around pretty quickly if we actually had any kind of job growth,” said Chuck Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.

Some investors have bet prices will rise. The U.S. Treasury Department Oct. 25 sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction. The securities drew a yield of negative 0.55 percent.

“The real ugly question is, will this ultimately end up being inflationary?” said Scott Minerd, the Santa Monica, California-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion. “In the long run, five to 10 years from now or in the next decade, this is going to be a massive problem.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net Scott Lanman in Washington at slanman@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

The sting in the tail risk

The sting in the tail risk

13/10/2010
By Zaki Abushal
Investor demand for protection from downside risk has led to a number of recent tail-risk protection launches. But as September’s equities rally puts hedge funds in sight of positive year-end performance, are many abandoning safety hedges for beta?

Fear is the hottest property on the market. At least it was before September’s equities market rally moved the goal posts a little. Hedge funds, asset managers and investment banks have traditionally made a habit of monetising the sentiment of the investor base very quickly, never more so than now. But this time it isn’t a case of investment banks shoving new products down the throats of customers; instead it’s the customers, and in many cases investors, that are desperate for protection. At the lowest extreme, they want to mitigate against downside losses but also against those rare fat-tail events that are so destructive.

The ever-popular sovereign CDS spreads shown in the table opposite are just one of many risk measures that are hovering at dangerous levels. Stephen Antczak, head of US Credit Strategy at Société Générale Corporate and Investment Banking (SGCIB), admits that hedging and tail risk is “the hottest topic around” and he and his team have been busy informing investors of just that. The interest was such that Antczak, who with his team covered the topic in the SGCIB’s Credit Market Insights series in August and then in the middle of September, decided to host a conference in New York last week and may even host a similar conference in London to account for the topic’s appeal.

Of course, hedge funds haven’t missed out on the phenomenon driven by investors desperate to secure their gains. Two weeks ago, HFMWeek collated the views of investors (Navigating the market, HFM 199) and found that, alongside the need for liquidity, the majority expressed a desire for tail-risk/long volatility products.
Only last week, AQR, the hedge fund shop that has successfully developed a mutual fund range, recently launched a new product consolidating the firm’s advocacy of risk parity products. Its aim: “to lower investors’ exposure to equity risk and reduce tail risk or volatile downswings”.

This has been reflected in recent launches. Capula Investment Management launched the Capula Tail Risk Fund in March this year and was managing around $400m in assets by July, and at the end of last month, Bennelong Asset Management announced it would launch a tail-risk protection fund at the start of October – the
Bennelong Tempest Fund. The fund has been constructed to protect against market stress and tail-risk events, primarily using long options across all asset classes. “We are worried about our exposure to asset prices that are supported by more cheap leverage being thrown at a leverage problem,” said Bennelong’s CIO Paul Henry. “The more we travel, the more we realise everyone is in the same boat. Now we are doing something about it.”

And that’s just the problem. Everybody is in the same boat, paying lip service to value of hedging but put off by the expense, particular of those one-off, fat-tail events. To make matters worse, it’s no secret that correlations between asset classes have grown and grown. September’s rally was welcomed pretty unanimously by commentators and hedge funds, but most of all by investors, who watched the YTD performance figures with trepidation, as they hovered in low single-digits. September did wonders for the anxiety of investors but it also proved that, despite endless talk of alpha, the vast majority of hedge fund managers were happy to jump on the beta train and, if they can, ride it to the end of the year. And since everybody’s pretty much in the same trades, the risk of significant draw-downs are accentuated.

Of course, this raises the question: would an investor rather risk it all and chase equities and performance to the end of the year or stop and hedge some of that exposure even if it comes at a significant cost?

Source: HFMWeek.com

QE2 is risky and should be limited

QE2 is risky and should be limited
By Martin Feldstein
Published: November 2 2010 20:50 | Last updated: November 2 2010 23:34
The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.

Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.

Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar.

The problem now extends to emerging markets, a group not directly affected in the last crisis. The lower US interest rates are causing a substantial capital flow to those economies, creating currency volatility. The economies hurt by the increasing value of their currencies are responding with measures to protect their exports and limit their imports, measures that could lead to trade conflict.

Ahead, when the US economy does begin to grow, the increased cash on banks’ balance sheets will make the Fed’s exit strategy harder. It was previously “cautiously optimistic” it would be able to contain the inflationary pressures that could be unleashed by banks with a trillion dollars of excess reserves. This will be harder if the amount of excess reserves is doubled. This could lead to much higher interest rates to restrain demand or to an unwanted rise in inflation.

Why is the Fed doing this? It is of course worried by the weakness of the US recovery. Fiscal policy is sidelined by the deficits projected for the years ahead. Traditional monetary policy has already done what it can: short-term interest rates are close to zero, commercial banks hold a trillion dollars of excess reserves, and the money supply is growing more rapidly than nominal gross domestic product. But the Fed leadership does not want to be seen to be idle when the economy is in trouble.

Although its real focus is on reducing unemployment, much of the rhetoric of Ben Bernanke, the Fed chairman, is about preventing deflation because some members of the Fed’s open market committee think the Fed should focus exclusively on price stability. But there is no deflation. Core consumer prices are rising and inflation is expected to average 2 per cent over the next 10 years.

Since short-term interest rates are already near zero, some economists advocate QE to reduce the real interest rate by raising inflation temporarily while holding the nominal interest rate unchanged. A 4 per cent expected rate of inflation for the next few years would turn a 1 per cent nominal interest rate into a real rate of minus 3 per cent, thereby stimulating interest-sensitive spending. But doing that would jeopardise the credibility of the Fed’s long-term inflation strategy.

Mr Bernanke’s argument for QE is based on the “portfolio balance” theory which stresses that, when the Fed buys bonds, investors increase their demand for other assets, particularly equities, raising their price and increasing household wealth and spending. Equity prices have already risen by 10 per cent since Mr Bernanke discussed this approach. But how much further will equity prices rise and what will that do to GDP?

Neither theory nor past experience can answer the first question. Much of the share price increase induced by QE may already have occurred based on expectations. An optimistic guess would be another 10 per cent. Since households have about $7,000bn in equities, that would imply a wealth gain of $700bn, raising consumer spending by about one-quarter of one per cent of GDP, a welcome but trivially small effect on incomes and employment.

The other ways in which QE would raise GDP are also small. A 20-basis-point reduction in mortgage rates would have little effect on homebuying at a time when house prices are again falling. The increase in banks’ liquidity would do nothing since banks already have massive excess reserves. Big corporations are sitting on vast amounts of cash. Small businesses that are not spending because they cannot get credit will not be helped, because the banks on which they depend have a shortage of capital.

The truth is there is little more that the Fed can do to raise economic activity. What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits. Any QE should be limited and temporary.

The writer is professor of economics at Harvard University

Copyright The Financial Times Limited 2010.

Alaric Capital market comments June 2012

Americas

Economic data in States is starting to get weak and bond market was a proxy of this weakness as yield curve is USA continues to flatten with US 10 Year T-notes reaching all time record low yield below 1.5% . Chicago PMI fell for a third month in a row which is considering for recession sign in months ahead, Q1 GDP was revised down to 1.9% from 2.2% first estimated.  Weak economic data pushed equity markets even lower and S&P500 broke below its 200 DMA heading even lower in weeks ahead with possible interim target 1180 this summer.  Federal Reserve for the moment is not reluctant to introduce officially new round of QE as most analysts expected and these comments pushed precious metals prices lower last several weeks. Still economic data does not favor new round of printing press but this may change is weeks and months ahead.

Weak commodities have negative influence of Brazil economy and economic data coming from Brazil starting to confirm that. Brazilian slowdown in economic growth is expected to generate further easing of monetary policy and more fiscal and credit expansion.

Any positive developments in Eurozone debt crisis may lift the market as Europe was may driver of recent downside correction for equity markets in States. Investors will watch not only short term positives as pumping liquidity in banks but also long term actions as steps for fiscal and monetary union is troubled Europe

 

Asia

China’s economy is slowing more than expected and investors are pricing in possible stimulus actions. HSBC’ PMI decline to 48.4 in May from 49.3 in April which reflect difficult times for export industry in China. At the moment Bank of China is still reluctant to respond with new stimulus but we think this just a matter of time. Other export oriented countries in the region also feel the heat of European debt crisis and the global slowdown. Indonesia posted surprising trade deficit of $640 mn in April due to severe price declines of commodities.  Australian Central bank lowered the benchmark rates as weaker commodities prices and slowdown down in China have direct impact of export oriented economy. We think that RBA will continue to lower rates in months ahead as China is heading for hard landing and consequences for Australian economy will be big.

 

 

 

Europe

ECB is refusing to take actions on European debt crisis recent weeks without changes of fiscal union in Eurozone.  German Yield curve flatten further and it is basically flat at zero rates up to 5 year maturity. The panic in Europe is so big that German 2 Year yield went negative for first time in the history. Spanish debt continues to be under pressure with spread of 10 Year Spanish bonds over German bund reach almost 550 bps. Market is watching 7% handle which is considering critical point after that Spain may repeat Greece scenario.  Rhetoric is rising about the deeper institutional reforms to save the Euro. As ECB president Draghi said that eurozone’ current structure is unsustainable and urged leaders to clarify their vision for the future of the area. EU Commissioner Rehn said that the euro area has a significant risk of breaking up, while Spanish Economy Minister de Guindos said that the “battle for the future of the euro” will play out in Spain and Italy in the next few weeks. Meanwhile, German Chancellor Merkel said that “there are integration steps which will require treaty changes. We are not at that stage today, but nevertheless there are no taboos in our discussions.”. Euro area manufacturing contracted for a 10th straight month in May, with the German decline the biggest in 3 years. Italian unemployment rose to 10.2% in April.

 

 

United States: Offshore Asset Protection For United States Clients

Background

The explosive litigation industry in the United States, capricious legislative bodies, and the volatility of financial markets and economies have evoked a powerful response. The buzz word among lawyers representing clients at risk is “asset protection.” More than at any time in our legal history, attorneys are scrambling to find ways to protect and preserve the wealth of their clients. High net worth individuals perceive new and potentially devastating threats to their wealth, and creative lawyers must conceive and render more protective solutions. Traditional asset protection ranges from simplistic homestead and retirement account planning to family limited partnerships. Cutting edge approaches dictate the use of more sophisticated vehicles such as offshore trusts.

Legal Threats

Threats to individual wealth from litigation arise across the spectrum of contract and tort law. The plaintiff’s bar in the United States has been marvelously creative in its practice over the past decade. It has contrived new theories of liability in the malpractice, products liability, contract, securities, ultra vires, and employment areas and judges have accepted many such theories. The measures of damages (compensatory, punitive, and exemplary) for psychological, emotional, and other highly subjective injuries have also expanded tremendously.

Some causes of action stem from legitimate and expected contract creditors, such as those occasioned by consumer and bank debt or the breach of an obligation to perform. Less easily anticipated claims arise from guaranties, contingent liabilities, and joint and several partnership obligations. Debtors often can be surprised by the extent of this exposure and the reaches of creditors. For example, unexpected risks can derive from the financial failure of a partner or business associate, the judicial interpretation of a guaranty beyond its intended scope, or simply from the size and amount of damages awarded in business litigation judgments.

The extension of corporate liability to officers and directors also results in unpleasant surprises and economic losses. Shareholders, governmental entities, and business associates have successfully sued under theories of liability that render the corporate veil of limited usefulness. While perhaps justified, the government’s success in achieving personal liability judgments against former officers and directors of failed financial institutions dramatically exemplifies this trend.

Beyond the contract creditor and business claimant is the tort creditor. Numerous publications describe the unrestrained growth in tort litigation. Media headlines continuously report new theories of liability and astronomical damage awards. The United States enjoys the dubious reputation as the world’s most litigious society, and the prospects of meaningful tort reform appear bleak. Even with the Republican majority in Congress, tort reform legislation is currently limited in scope and halting in progress.

While liability insurance once provided the trusted shield from potential economic devastation resulting from a civil judgment, individuals with “deep pockets” are increasingly susceptible, irrespective of their insurance coverage. The escalating cost of premiums, the unavailability of coverage for some risks, and the routine denial of coverage by some insurance companies detract from the utility of traditional insurance.

In addition to the potentially disastrous effect of tort, contract, and business liability, there is increasing concern about what might be called regulatory (or legislative) liability, evidenced in recent years primarily in the form of the United States environmental statutes. Landowners, whether individuals or businesses, may be liable under federal law (e.g., CERCLA, the Comprehensive Environmental Response, Compensation and Liability Act1) or state law for environmental hazards on land that they own. This liability can apply regardless of whether present owners created the hazard or whether they acquired the land with knowledge of the hazard. Furthermore, liability can be imposed under such laws on former landowners or, in the instance of corporate landowners, on directors or shareholders if they had substantial “control” over the land.2

Business owners perceive other legislative liabilities in the form of the Americans with Disabilities Act3 and the Family Medical Leave Act.4 While motivated by praiseworthy aspirations, these acts have an economic impact on business and create additional causes of action.

Another contemporary concern in the area of claims on wealth comes from the divorce court, not because divorce claims are new, but because they are so prevalent. Judges and legislators are understandably anxious to protect a nonworking spouse, but even carefully planned premarital arrangements (with both spouses represented by counsel) often fail to withstand judicial scrutiny. Moreover, the evolution of interspousal tort liability claims (e.g., intentional infliction of emotional distress) in some cases effectively renders premarital agreements meaningless.5 Lawyers find planning in this area very challenging, and concern is not necessarily limited to the client or even the actions of the client’s spouse, but often includes concern for children whose inheritance the client wishes to protect from loss upon divorce.

Compulsory dispositions, whether inter vivos or testamentary, present a more familiar asset protection problem. However, our highly mobile society and the related fact that clients increasingly have assets in more than one jurisdiction have generated a new awareness of this issue. Most civil and common law jurisdictions have statutory provisions for forced dispositions at death or upon the termination of marriage. Common law legal systems recognize dower and curtesy rights, and civil law systems usually incorporate forced heirship concepts. In community property states, these battle lines are drawn along the character of the property, that is, the determination of whether it is separate or community property. Movement by a married couple from one jurisdiction to another complicates the nature of property and marital rights as well as rights of heirs and legatees. Today, clients seek to insure that property passes to the intended beneficiary rather than to a claimant under these various theories.

Many wealthy individuals view the United States legal system as facilitating the capricious redistribution of wealth. At a minimum, its judicial and legislative branches operate unpredictably and can have dramatic economic consequences to an individual’s net worth.

Economic Threats

The preceding section examined contemporary legal threats to wealth. In a different, but in a no less modern or serious vein, exist what might be classified as economic threats. Despite its current strength, concerns about the United States economy remain. Troubling issues include weaknesses in the social security and health care systems, the interest on the federal debt, and the United States government’s propensity, albeit high-minded, for throwing money at a current crisis, whether national defense (e.g., the Gulf War) or internal calamity (e.g., the Mississippi River floods of 1993 and annual hurricane disaster relief). In addition, despite reform efforts, the foreign trade imbalance also continues to haunt the economy.6

The historical performance of certain foreign currencies, notably the Swiss franc, suggests that long-term investments denominated in such currencies are prudent. During the 1970′s, for example, the Swiss franc appreciated against almost every major currency in the world.7

Prominent investment strategists believe that meeting the primary goal of investment, high return with acceptable risk, requires international investment. By mixing foreign and domestic investments, United States investors achieve superior diversification, thereby lowering risk. Consequently, reputable investment strategists are recommending that such investors place anywhere from 20 percent to 30 percent of their equity investments in foreign stocks.

A significant segment of the United States investment advisor community foresees economic threats to wealth and encourages foreign diversification. The existing risks would be exacerbated by potential foreign exchange controls or related legislation. Early planning potentially allows an investor to achieve diversification and minimize the consequences of possible currency devaluations.

Political Threats

Citizens of countries in Latin America and the Middle East have a long history of using asset-protective planning to deal with revolution, governmental expropriation, and other attacks on private wealth occasioned by unstable governments or civil unrest. While such political extremes are certainly less likely to occur in the United States, concern about the domestic economy and its tax structure has caused individuals to consider expatriation (or perhaps repatriation, for foreigners living in this country).

There has been a sharp increase in clients seeking expatriation advice. Anecdotal reports among lawyers in this field suggest that citizens increasingly are discouraged about the United States’ inability to solve its domestic problems, the readiness with which Congress adopts a “tax-the-rich” approach, and the confiscatory nature of the wealth transfer tax system. Business owners express frustration at the cost of operating in a litigation-prone society with a government that is antagonistic to their needs. Congress, concerned about the economic impact of this trend, has tightened the tax rules governing tax motivated expatriates and has recently passed an immigration law prohibiting re-entry by such expatriates into the United States.8

While forfeiture of citizenship carries a profound emotional price for some citizens, others view it as just another business decision. Political threats, whether real or perceived, drive personal and economic decisions. Reconsideration of citizenship is becoming a reality in the United States.

The Multiple-Entity Theory of Asset Protection Planning

Lawyers who counsel high net worth individuals should be attuned to the potential consequences of these legal, economic, and political threats. To help clients protect their wealth from depletion by virtue of these threats, for example, at the hands of future judgment creditors, sophisticated attorneys engage in “asset protection planning.” This planning optimally involves aggressive, “multiple-entity” structures that include the use of limited partnerships, corporations, trust arrangements, foundations, retirement plans, life insurance, and the like. While multiple entity structures enable both tax planning and orderly wealth transfer, they also facilitate the additional benefit of asset protection.

“Multiple-entity” planning dictates that wealth should be segregated and placed in isolated, sheltered compartments, with each compartment legally and physically unconnected to the other, thus preventing claims against one entity from affecting the others. Opportunities for this planning abound in domestic legal vehicles such as corporations, limited partnerships, limited liability companies, limited liability partnerships, trusts for the benefit of third parties, retirement plans, life insurance, annuities, homesteads, spousal arrangements, inheritances, and foundations.

Permutations and combinations of entities and venues offer even more asset protection. For example, one should segregate passive assets from those with greater intrinsic liability exposure (e.g., compartmentalize listed securities in an entity that is separate from a general business entity) and segregate the categories of the latter from themselves (e.g., create separate limited partnerships for parcels of real estate, each of which has its own inherent risk or liability). Clients who have asset protection concerns should also consider having limited partnership interests held by trusts. It is also prudent to incorporate or form limited partnerships in hospitable jurisdictions such as Alaska, Delaware, and Nevada. When added to this form of domestic planning, the foreign solution of an offshore trust represents yet another protective compartment.

Asset Protection as a Goal

“Asset protection” has always been implicitly embodied in estate planning. That is the very essence of the estate planning exercise: to preserve and transmit wealth. Prior to 1980, United States clients primarily focused on minimizing taxes, but since the early days of trust law, originating in England, the overriding goal has been the security and protection of wealth. Elementary to trust law is the notion of management of wealth for the beneficiary whose enjoyment might otherwise be compromised by disability, inability, other compelling commitments, personal factors, or external threats. In short, a dominant theme of trust law is asset protection.

During the 1980s, estate planning lawyers in the United States developed greater sensitivity to the issue of asset protection. The economic failures of that decade saw many entrepreneurs pushed to the brink of, and into, bankruptcy. As clients plunged into financial turmoil and tapped dwindling financial reserves, some clients and their counselors were gratified that prior estate planning arrangements prevented total disaster. Perhaps these measures were initially motivated by tax considerations, but nevertheless they provided a shield from creditors.

Arrangements such as minority trusts, “Crummey” trusts, life insurance trusts, life insurance planning, retirement plans, family limited partnerships, small business corporations, professional corporations, spousal gifts and trusts, and foundations, while born out of tax creativity, preserved some portion of the family wealth from creditors and bankruptcy trustees. The lessons from the eighties were not lost on practitioners. Estate planners now integrate these tools into their planning, having a sharp focus on both the tax collector and the potential creditor.

U.S. Domestic Strategies

The laws of the fifty United States vary markedly in what they offer by way of protection from the claims of creditors. Texas and Florida have debtor-friendly legal climates and, therefore, offer the most sanctity. Similarly, the beneficial aspects of Alaska, Nevada, and Delaware corporate and partnership law invite the use of those jurisdictions when appropriate. Domestic solutions, if properly implemented, can provide extensive asset protection opportunities.

Domestic asset protection planning vehicles exist in every state, but the asset that is shielded in one state may be exposed in another. The nature of the client’s wealth and sources of income dictate the nature and extent of the coverage. Whether the means are modest or substantial, the variety stemming from the laws of the fifty states produces widely differing results. It is important to know not only what is available in one’s own state, but it is also important to understand the protections available in other jurisdictions as well.

Foreign Strategies: The Offshore Trust

When domestic strategies fail to meet all of the client’s needs for asset protection, the offshore trust, when properly structured, can serve as a highly successful asset protection vehicle. Because an offshore trust is jurisdictionally severed from the United States, it is a less accessible target than a domestic vehicle from which to satisfy a future judgment or claim. The legal difficulty in penetrating the trust might deter a potential future claimant from pursuing action, or at least influence a more favorable settlement for the defendant. With varying limitations and risks in different foreign jurisdictions, an individual can create a protective trust or trust-like entity and yet remain a beneficiary eligible to receive distributions.

Economic goals also are attainable through the use of a foreign trust. For example, engaging a foreign money manager to oversee the investment of a portion of one’s assets is likely to enhance economic wealth preservation because it enables international diversification. Such an advisor, with ready access to local information and to facts or insights about the business personnel, and performance of the stock or bond issuer, has a decided advantage over United States money managers who are trying to make investment decisions from abroad. In addition, foreign portfolio managers have different antecedents, training, and philosophies than their United States counterparts. With such backgrounds, these professionals structure investments with a local focus and the client achieves correspondingly greater economic diversification.

A United States investor may not necessarily need a foreign legal vehicle, such as a trust, to take advantage of foreign money management; on the other hand, it might be required. Due to the Securities and Exchange Commission’s regulations, foreign investment managers, whether fund managers or individual portfolio managers, may not be able to make their products and/or services available to a United States investor, but can make them available to foreign trusts and foreign corporations, even if owned or controlled by a United States person. Furthermore, in civil law countries, achieving liability protection or dealing with a legal system that does not readily recognize trusts strongly suggests using a foreign corporation. For example, investing in Switzerland frequently is accomplished by a foreign trust through a subsidiary or ancillary foreign corporation. In addition, using an offshore legal vehicle can serve to avoid or ameliorate the effect of exchange control laws and local foreign taxes. Finally, if the corpus represents a substantial block of wealth, estate planning concerns will likely require the use of a trust as a necessary component of a coordinated estate plan to reduce taxes, plan for tax payments, and facilitate the orderly disposition of assets at death.

Because an offshore trust substantially facilitates a United States person’s ability to expatriate, it also “keeps options open” for progressive clients. That is, a properly structured offshore trust establishes a new set of financial and legal relationships and expedites further movement of a client’s wealth to a new base in the event the client makes the final decision to expatriate.

Indications for Use

Offshore trusts are appropriate in a variety of situations, but the two reasons expressed by United States clients most often are (1) asset protection, and (2) meaningful economic diversification. When the first reason is present, legal advice begins with the issue of present and existing or known potential creditors and corresponding fraudulent transfer exposure. If that obstacle is successfully hurdled, the attorney should ensure that there are not sufficient domestic asset protection solutions before embarking on the offshore exercise.

Having focused on the two most prominent indications for using an offshore trust, companion factors for creating such a vehicle also exist. Neither the client nor the advisor should manufacture any of these reasons, but it is not improper to take advantage of legal opportunities to protect assets, and if the trust is later challenged, the existence of non-asset protection motivations will help counter charges of fraudulent intent.

Non-asset protection motivations might include:

  1. economic diversification;
  2. achieving financial privacy or anonymity with respect to wealth;
  3. avoiding forced dispositions;
  4. premarital planning;
  5. preserving entitlements (e.g., Medicare and Medicaid);
  6. marital property planning (e.g., establishing a vehicle for partitioning community property, spousal gifts, and marital trusts);
  7. tax planning, (e.g., qualified personal residence trusts, marital trusts, life insurance trusts, exemption equivalent trusts, and generation-skipping transfer tax exemption trusts);
  8. planning for the contingency of changing one’s domicile or citizenship;
  9. participation in investments not otherwise available to U.S. investors;
  10. pre-planning in anticipation of currency controls or restrictions on the ownership of bullion; and
  11. liability protection, tax planning, or strategic advantage in the context of an active trade or business abroad.

Conceptual Issues in Offshore Trust Planning

The basic difference between foreign trusts and domestic trusts in the context of asset protection derives from the common law United States rule (adopted by the Restatement of Laws) that a person may not create a valid spendthrift trust for his own benefit.9 In large measure, this rule has prompted exploration of offshore options. In some foreign jurisdictions, there is simply no equivalent law. Although many jurisdictions had once adopted such measures, they have been abrogated or compromised by statute.

Going offshore to accomplish what cannot be achieved domestically explains the principal reason why foreign “asset protection” trusts elicit a more indignant response from the plaintiffs’ and creditors’ rights bar than do the traditional methods of asset protection. Many among that group would claim that a transfer to an offshore trust has no other purpose than to impede creditors’ claims, and, therefore, should be deemed a fraudulent transfer.

Observers advocating the rights of individuals to protect assets view the situation differently. That is, in today’s business setting, a transfer to an offshore trust should not be characterized as a fraudulent transfer as to any creditor unless the creditor is known or reasonably knowable. In fact, in light of the following observations, one might validly challenge the arguably expansive scope of fraudulent transfer law.

Fraudulent Transfer Issues

The Statute of Elizabeth is a sixteenth century, seven-paragraph act that is the antecedent of modern fraudulent conveyance law. Conveyances, alienations, etc., designed to “delay, hinder, or defraud creditors” are declared “utterly void.”10 The Act includes criminal and civil penalties. With almost four and three-fourths centuries of tradition, is it any wonder that sole purpose asset protection trusts (discussed below) stir the emotions of creditors and their lawyers? Yet those who righteously criticize “asset protection trusts” should consider the environment of the late twentieth century juxtaposed against the environment that produced the Statute of Elizabeth and its modern equivalents, the Uniform Fraudulent Conveyance Act and the Uniform Fraudulent Transfer Act.

In 1570, it was extremely difficult to secure detailed information about a prospective business associate. Lacking were the Dunn & Bradstreet and TRW services with computer database power that can furnish extensive business, personal, and financial information, not to mention the modern practice (or requirement, in some cases) of due diligence. Also lacking were laws which provide penalties for supplying false financial data.11

A strong argument can be made that the modern variants of the Statute of Elizabeth should be interpreted in the current setting. Without question, known and reasonably knowable creditors should be protected from fraudulent transfers. But is a creditor remote in time and events from the moment of a transfer also entitled to such unlimited, broad-based protection?

Lawyers facing the constraints of the rule against self-settled spendthrift trusts and broad reaching fraudulent transfer laws wonder how they can possibly justify transfers offshore. Is it not clear that the only purpose is to defraud creditors? There is tension in the areas of fraudulent transfer and bankruptcy law because it would appear that these laws are susceptible to the interpretation that they protect unknown, future, potential creditors, no matter how remote in time from the date of the transfer. Historically, courts have not so interpreted the statutes; rather, they have focused on the relative proximity to known, or at least reasonably knowable, creditors. Unknown, future creditors removed in years and in events from the transfer have not been protected by the courts and, indeed, should not be. Nothing states that one must preserve one’s assets for unknown future claimants. If this were not the case, inter vivos dispositions of all sorts would be prohibited, whether gifts to children or friends, charitable contributions, or the settlement of trusts for the benefit of others.

The idea of preserving one’s wealth for unknown, future creditors also is contrary to fundamental concepts in the common law. Limited liability is a concept that always has been allowed and even encouraged by limited partnership and corporate law. Spendthrift trusts are time honored, wealth-protective vehicles. Homestead law provides a further example. The law simply does not require one to put all of one’s assets at risk. Furthermore, if a client passes the balance sheet test (i.e., the transfer does not render the transferor insolvent) and there is no claimant on the horizon and no misrepresentation to creditors or claimants, the client is merely prudently positioning assets.

As previously noted, the issue of whether the purpose of the transfer was to impede creditors’ rights can be diffused to a certain extent, if not eliminated, if there are motivations for the creation of a foreign trust that are not directly related to asset protection. However, other attributes of sole purpose asset protection planning bear examination.

The “Sole Purpose” Asset Protection Trust

Sole purpose asset protection trusts are offshore trusts created with the sole purpose of defeating the claims of future creditors. Thousands of such trusts currently exist and new trusts are created daily. Driven by professionals and business owners who fear the United States litigation and legislative environment because they perceive it as plaintiff-oriented, unlimited in damage awards, and creditor-friendly, sole purpose asset protection trusts are a growing industry.

The legal community has responded to this pent-up demand. Foreign trust specialists have evolved within law firms, and, indeed some firms practice nothing but sole purpose asset protection planning. Traditional offshore jurisdictions have, in many cases, enacted legislation expressly designed to attract offshore trust business, and trust companies and banks have positioned themselves to market, accept, and serve this business.

Foreign trust law has changed rapidly in the last few years and will grow even more briskly for the balance of the decade. As a result, more court cases involving a United States creditor seeking to reach assets held in an offshore asset protection trust will be filed, tried, and appealed.12 On the domestic legislative front, rhetoric abounds for tort reform designed to reduce the need for asset protection trusts. On the foreign front, jurisdictions will witness a continued honing of statutes in the near term and the adjudication of litigation locally brought and tried. This area of the law is destined for rapid evolution.

Response from attorneys in the United States to these changes varies dramatically. Some express gratitude that at last hard-working, community-serving, business and professional people have a weapon like an offshore trust with which to defend themselves. Others, citing the more than 400-year history of the Statute of Elizabeth, profess moral indignation at the idea that any honest citizen subject to the Anglo-Saxon legal framework should attempt to place wealth beyond the reach of creditors, even unknown, potential future creditors. The legal debate resonates with more than usual emotion.

Due to the attorney’s potential exposure as a co-conspirator defendant in a scheme to defraud creditors, most attorneys working in the offshore trust area proceed cautiously. Participation in a fraudulent transfer arrangement can result in civil and criminal consequences and disbarment. Arguably, that is the greatest risk associated with counseling clients in connection with sole purpose asset protection trusts.

Importing the Law v. Exporting the Assets

There are two fundamental, and at times conflicting, methods of achieving asset protection through a foreign trust. The first method is to place the assets in a trust governed by the laws of a foreign jurisdiction that names a foreign trustee and to arrange the entire configuration so as to sever all jurisdictional ties with the United States federal and state judicial systems. This method requires a claimant seeking to satisfy a United States judgment to travel to the trustee’s jurisdiction in an effort to enforce the claim, an environment in which chances of success are bleak and costly. Using this method one “exports the assets” to a foreign trust.

The second alternative is to select a foreign jurisdiction with a favorable body of trust and fraudulent conveyance law (i.e., specific and aggressive with regard to creditor’s claims, fraudulent transfers, and the like) enacted to be protective of the settlor and the beneficiaries. The settlor implements the foreign trust in conjunction with a United States family limited partnership or other domestic legal entity that holds some or all of the settlor’s assets. The settlor conveys all or a portion of the domestic limited partnership interests or the domestic corporation’s shares to the foreign trustee.

Under this arrangement the hard assets remain in the domestic partnership or corporation and, therefore, physically situated in the United States. Of course, being situated in the United States, the assets are theoretically susceptible to local in rem proceedings. The goal, however, is that the impediments of the specific and aggressive foreign law will have been brought “onshore” to the United States; that is, the local court will apply the foreign law that is the governing law of the trust to matters involving trust assets. In theory, even the prospect that a court would apply the aggressive foreign laws should severely discourage the claimant. Using this method, one “imports the foreign law.”

When one imports the foreign law, it may still be possible to export the assets at a later time. That is to say, if the structure initially involves retaining the hard assets physically in the United States, but a problem subsequently arises, the assets can at that later date be moved offshore. The risk, of course, is that the assets will be frozen by a court order before they can be moved. Some assets are difficult or impossible to move, for example, real estate or a professional practice. Hypothecation of such assets and removal of any cash may provide some flexibility. When one uses this method, the timing of when to trigger the removal becomes very critical.

Under either method, the practitioner and client should not take great comfort in the fact that the assets that are potentially subject to collection are offshore (either physically or technically) or that the arrangement was made in great secrecy. While secrecy should be the rule, it is prudent to assume that all facts surrounding the foreign trust will be discovered. A competent, aggressive attorney for a judgment creditor will not be daunted by foreign law or an exotic structure. One should assume full disclosure; if the structure’s legal foundation is solid, the trust should work nevertheless. Indeed, in some cases, early disclosure may facilitate a prompt and economical settlement.

If the assets are physically offshore, a claimant or creditor pursuing the assets typically will have to do so in the jurisdiction that is the situs of the trust. Most jurisdictions will not enforce foreign judgments or will only do so after the case is retried under local law. In some countries, contingent fee contracts are not permitted, and plaintiffs are required to make substantial down-payments (e.g., ten to fifteen percent of amount claimed) as a condition precedent to filing a lawsuit.

Aggressive v. Non-Aggressive Legislation

Previously discussed were the two alternative theories of “exporting the assets” and “importing the law.” In importing the law one seeks the protection of those jurisdictions with aggressive asset protection legislation (such as the Cook Islands, Gibraltar, and the Bahamas). Alternatively, if “exporting the assets” is selected, the client will take comfort in the fact that jurisdictional ties will be severed and that there is greater security for one’s assets in the established financial centers (such as The Isle of Man, one of The Channel Islands, Bermuda, or Liechtenstein).

A client should consider the argument that even if the sole objective is asset protection, selecting a jurisdiction that has aggressive legislation is not necessarily the most appropriate action. A potential claimant could assert that the presence of aggressive asset protection legislation is the only reason one selected such a jurisdiction, thereby possibly supporting a fraudulent transfer claim.

Nest Egg v. In Toto Planning

What percentage of a client’s assets should be offshore or in an offshore structure? Some attorneys argue that placing virtually all of one’s assets in a United States family limited partnership and then transferring nearly all of the limited partnership interests into a foreign trust provides substantial protection, even if the underlying assets are located within the physical jurisdiction of United States courts. While this approach may ultimately be successful, it has not been judicially tested. Indeed, the very possibility of judicial attachment of assets on the basis of in rem jurisdiction arguably places the “in toto” approach at or near the “less creditor protective” end of the offshore planning spectrum.

At the other, “more creditor protective,” end of the offshore planning spectrum, representing perhaps the most conservative philosophy, is the “nest-egg” approach. This strategy contemplates that the client place a limited percentage of his assets in an offshore trust, severing all jurisdictional ties, and locating the cash, stocks, or other wealth physically offshore. Moreover, the arrangement would have well-documented purposes other than, or at least complimenting, asset protection.

The “nest-egg” approach will be less likely to cause fraudulent conveyance claims because the client, by definition, would remain solvent after funding the offshore trust. Furthermore, a well-developed body of conflicts of law cases, relatively speaking, in the area of offshore trusts does not exist. With respect to in toto-type arrangements, all or a large portion of a client’s wealth is ostensibly subject to the law of the foreign trust’s situs. However, the assets would remain physically within the United States, and a potential conflicts of law analysis by a court that favored application of the law of the jurisdiction in which the assets are physically located would arguably pose too great a risk. This uncertainty must be considered in determining how much of one’s wealth should be subject to the risk of an unfavorable outcome of a conflicts of law analysis.

Control

Maintaining control, an overriding pre-occupation in offshore planning, has an inverse relationship to achieving asset protection. Most clients resist surrendering control of their assets to a foreign trustee; however, that sacrifice must be made to achieve the protection afforded under the approach of “exporting the assets.” Accordingly, clients seek ways to retain (or to cede to some family member) the power to influence or control the foreign trustee. Axiomatically, the more the client relinquishes control, the more effective the asset protection of the structure becomes. Conversely, when the client retains more control, the level of asset protection falls. A spectrum of intermediate arrangements exists between the client being trustee and having complete control and the naming of a foreign trustee who has complete control. There are a number of specific methods of addressing the control issue (protectorships, letters of wishes, advisory committees, co-trusteeships, and the like), but ultimately the attorney determines where to draw the line of control in order to avoid rendering the trust a sham that is not defendable in court.

Sham Arrangements

When a trust is designed to allow the settlor some measure of control, regardless of how elaborately structured or formally observed, the possibility that the trust can be attacked as a sham either under United States law or applicable foreign law arises. Generally, the trust becomes vulnerable if the settlor is aggressive about retaining control. If the arrangement is ultimately controlled by the settlor and if the settlor has in effect complete beneficial enjoyment, a court could easily render the entire structure a sham and order turnover of the assets upon a judgment creditor’s demand.13 In effect, when significant control is maintained, overcoming a sham argument presents a serious challenge.

Beneficial Enjoyment

In addition to wishing to maintain control, clients generally want to retain, either currently or prospectively, the right to beneficial enjoyment of the trust assets. The concept of shifting, expanding, and contracting beneficial enjoyment may be new to the United States trust practitioner; however, it is commonly used in foreign trust planning.

A common device for obtaining asset protection while maintaining benefits is a provision that creates a term during which the beneficiaries are individuals other than the settlor. During this term, the settlor has no rights to income or principal. In addition, upon the occurrence of certain events, this term can be extended. Under this arrangement, the settlor has no interest that claimants can reach. The term could coincide with, or at least be sensitive to, the foreign jurisdiction’s statute of limitations period.

An easy and related solution is to have the settlor be one of a permissible class of beneficiaries. The trustee would have complete discretion regarding distributions of income. In addition, the trustee would be given the authority to remove at its discretion a beneficiary from the permissible class and to substitute new beneficiaries, including charitable beneficiaries.

Another option would allow the settlor to be a beneficiary until an event that triggers a new class of current beneficiaries occurs. For example, if a claimant secures a judgment against the settlor, the settlor’s beneficial interest in the trust automatically becomes either eliminated or the last to be recognized under the terms of the trust, and a new class of beneficiaries is established.

Selection of Jurisdiction

Overview

Many nonlegal issues affect the selection of the situs of an offshore trust. The following are issues that might affect the choice of a trust situs: political stability, economic stability, taxes, costs, and fees, prospects for future taxation, tax treaties, exchange controls, business environment, legal framework, transportation facilities, and language. Some of these issues are subjective, dictated primarily by the motivation of the client. The attorney should consider all facets in the selection of the trust’s venue.

Political Stability

Political and civil stability of the prospective jurisdiction should also be a serious consideration. For example, practitioners frequently select Panama as an offshore or tax haven country. Indeed, the “tax haven business” is a large part of Panama’s economy, but its historical instability is troubling in the offshore trust context. Unlike an offshore corporation which may be able to transact business without any contact with the host jurisdiction, an offshore trust typically will have a trustee and perhaps other professionals resident and active in the host country. A political crisis may cause irreparable delay for urgent trust business.

Economic Stability

Economic stability in a small jurisdiction is typically integrated with political stability, but not always. In some of the island nations, one exists without the other. Both are a prerequisite for an offshore trust situs.

Ideally, the locale should have a certain economic substance measured by the status of its population, domestic output, infrastructure, and professional community. For example, Cyprus, irrespective of its other advantages and disadvantages, has developed a diverse economy, separate and apart from its business as an offshore financial center. Liechtenstein has as well. In addition, both nations possess legal independence and participate as members of the United Nations. Many other jurisdictions possess stable economic and political environments, and such issues merit serious consideration before establishing a foreign trust.

Influences of Other Countries

Most offshore jurisdictions are small countries or dependencies that are subject to the economic influence of larger nations. The United States, for example, has the potential to force policies, such as the Caribbean Basin Initiative, on Caribbean island countries because of their dependence on United States tourism. Also, many jurisdictions have some legal and economic ties to the United Kingdom.

The impact of these relationships should be reviewed and evaluated. For example, if a United States agency (e.g., the Environmental Protection Agency or the Resolution Trust Company) is a claimant, its enforcement power may have more sway in the Caribbean than in Europe. Similarly, given that the United States and the United Kingdom have signed an enforcement of foreign judgments agreement, an attorney should consider under what circumstances the protocol might apply to British Dependent Territories.

Perhaps deserving special attention is the fact that for many of the countries with ties to the United Kingdom, the court of last resort is the Judicial Committee of the Privy Council, which sits in London. There is no clear indication as to the policy of the Judicial Committee in relation to the legislation of dependent territories and independent members of the Commonwealth. In some instances the Privy Council has been willing to overrule colonial courts and in others, it has exercised great deference to them.14

Choosing a Jurisdiction

Selection of a jurisdiction is a significant challenge. Due to the logistical difficulties of having reliable contacts in every possible country and due to the burden of trying to follow the laws and the political and economic climates of many jurisdictions, it is very tempting to select one country and then do “cookie-cutter” structures for all clients. This temptation should be resisted, however, and research regarding the legal and nonlegal issues relevant to various jurisdictions and specific client needs is essential.

Size of Trust Corpus

Individuals should be prepared to put a minimum of $1,000,000 into an offshore trust. Generally, costs, more than any other factor, dictate a minimum corpus in this range. However, individuals have funded foreign trusts with much more modest amounts (for example, $100,000). If an individual desires to fund a trust at a modest level, other alternatives should also be explored. For example, foreign life insurance arrangements may provide asset protection and economic diversification without the commitment to the substantial costs of an offshore trust. In addition, a life insurance arrangement adds the additional element of income tax planning.

Conclusion

Asset protection has always been at the heart of estate planning, and it deserves significant attention. Though estate planners have traditionally guarded family wealth from the tax collector, the spendthrift, the imprudent trustee, and intra-family predators, the current legal environment presents new and perhaps more dangerous threats to wealth. Fortunately, as long as the implementation of an asset protective structure precedes creditor problems, a full range of opportunities exists, including offshore trusts.

Footnotes

1 42 USC §9601.

2 See Michigan Natural Resources Comm’n v. ARCO Indust. Corp., 723 F. Supp. 1214, 1219 (WD Mich. 1989) (using “position in the corporate hierarchy and percentage of shares owned” as consideration in determining individuals’ liability). See also United States v. Northeastern Pharmaceutical & Chem. Co., 579 F. Supp. 823, 848 (WD Mo 1984), aff’d, 810 F.2d 726 (8th Cir.1986), cert. denied, 484 U.S. 848 (1987) (“An employee of a corporation can be personally liable for activities over which he had direct control and supervision.”).

3 42 USC §12101.

4 5 USC § 6381.

5 See, e.g., Geyelin, Divorcing Couples Wage War with Domestic Torts, Wall St. J., Feb. 2, 1994, at Bl. See also Moran v. Beyer, 734 F.2d 1245 (7th Cir.1994).

6 See, e.g., Greenberger, U.S. Trade Gap Hits Eight Year High in 1996, Widened by Rise in Imports, Wall St. J., Feb. 20, 1997 at A2.

7 Lattman, The Swiss franc – You Can Bank On It Still, 27 Offshore Investment 19 (1992). However, in the past dozen years, the Swiss franc has stabilized against the U.S. dollar.

8 8 USC §1182 (a)(10)(E).

9 Restatement (Second) of Torts §156 (1959). Cf. 1997 Alaska Sess. Laws, Ch. 6. (H.B. 101); Del. Code Ann. tit. 12, §3570 et seq. For a general discussion of the issues facing domestic asset protection trust statutes see Giordani & Osborne, Stateside Asset Protection Trusts: Will They Work?, Est & Pers Fin Plg (West Group, Nov.-Dec. 1997); Giordani & Osborne, Will The Alaska Trusts Work?, J. of Asset Protection, Sept.-Oct. 1997, at 7.

10 13 Eliz c5 (1570).

11 See, e.g., 18 USC §1014.

12 See, e.g., Duttle v. Bandler & Kass, 999 F.2d 536 (2nd Cir.1993) (assets of Liechtenstein trust created by fraudulent conveyance reached by settlor’s creditors). See also In re B.V. Brooks, 217 B.R.98 (1998) (stock certificates transferred by debtor to his wife which she then transferred to offshore trusts that named debtor as beneficiary were held to be bankruptcy estate property because (1) the trusts were self-settled, and (2) the trusts’ spendthrift provisions were not enforceable under Connecticut law, which the court applied in lieu of the governing law of the trusts).

13 See Hayton, When is a Trust not a Trust? Strategic Uses of International Trusts, IBC Conference, London, Dec. 1993.

14 See generally W.S. Clarke, The Privy Council, Politics and Precedent in the Asia-Pacific Region, 39 Int’l. & Comp. L.Q. 741-56 (1990) (discussing at length the often dichotomous view taken by the Privy Council concerning the high courts of former colonies).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Q3 ’09 adds 9% for Alaric Accounts

Q3 ’09 adds 9% for Alaric Accounts

Payrolls in U.S. Decline 11,000; Unemployment at 10%

Dec. 4 — Employers in the U.S. cut the fewest jobs in November since the recession began and the unemployment rate unexpectedly fell, signaling the recovery is lifting the labor market out of the worst slump since World War II.

Payrolls fell by 11,000 workers, less than the most optimistic forecast among economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The jobless rate declined to 10 percent.

Stock futures soared, the dollar strengthened and Treasuries declined as the report indicated companies may start hiring again after the labor market shrank by 7.2 million jobs since the recession began in December 2007. Hours worked, wages and staffing at temporary employment agencies all rose.

“With firms seeing profits improving we’re starting to see a much brighter labor market,” said Stefane Marion, chief economist at National Bank Financial in Montreal, whose forecast for a 30,000 decline was the most accurate. “Confidence has been restored and firms now have started to redeploy their cash.”

Futures on the Standard & Poor’s 500 Index added 1.4 percent to 1,113.80 at 9:14 a.m. in New York. The dollar strengthened to 89.57 yen, from 88.26 yesterday. The yield on the government’s 10-year note increased to 3.47 percent from 3.39 percent late yesterday.

Traders increased bets that the Federal Reserve would tighten monetary policy in the third quarter of next year. Yields on the September federal funds futures contract rose by 9.5 basis points. A basis point is 0.01 percentage point.

Record Low Rates

Federal Reserve Ben S. Bernanke has pledged to maintain record-low interest rates until joblessness subsides, even as a recovery takes hold.

Revisions added 159,000 to payroll figures previously reported for October and September. The October reading was revised to show a 111,000 drop in jobs compared with an initially reported 190,000 decline.

Payrolls were forecast to decline 125,000, according to the median estimate of 82 economists surveyed by Bloomberg News. Estimates ranged from decreases of 30,000 to 180,000.

The jobless rate was projected to hold at 10.2 percent. Forecasts ranged from 9.9 percent to 10.4 percent.

The number of temporary workers increased 52,000 in November, the biggest since October 2004 and the fourth straight rise. Payrolls at temporary-help agencies often turn up before total employment because companies prefer to see a steady increase in demand before taking on permanent staff.

The average work week grew to 33.2 hours in November from 33 hours, the biggest rise since March 2003. Average weekly earnings rose to $622.17.

Software Exporter

Some companies are adding workers. Infosys Technologies Ltd., India’s second-largest software exporter by revenue, plans to add 1,000 employees in the U.S. in the next four to five quarters, said Chief Financial Officer V. Balakrishnan.

Government adjustments subtracted 91,000 jobs from the unadjusted November payroll number, about in line with the historical figure. This indicates the seasonal adjustment issue may not have played much of a role in last month’s data.

Today’s report showed factory payrolls fell 41,000 after decreasing 51,000 in the prior month. The median forecast by economists called for a drop of 45,000. The decline included a drop of 6,300 jobs in auto manufacturing and parts industries.

Sales of cars and light trucks increased for a second consecutive month in November after plunging in the wake of the government’s so-called cash-for-clunkers incentive plan. Vehicles sold at a 10.9 million annual pace last month, up from a 10.5 million rate in October.

Builder Payrolls

Payrolls at builders declined 27,000 after falling 56,000. Financial firms decreased payrolls by 10,000 for a second month.

Service industries, which include banks, insurance companies, restaurants and retailers, added 58,000 workers after adding 2,000. Retail payrolls decreased by 14,500 after a 44,200 drop.

Angela Renee Elliott, a 40-year-old accountant and bookkeeper from Wyoming, Ohio, said she’s sent between 100 and 150 resumes after losing her job in April. This is the first time she’s been unemployed in her 17-year career.

“I’m feeling pretty good and have seven interviews” already completed or planned, Elliott said in an interview, after posting her resume online on Nov. 21. “I believe I’m going to have a full-time. I’m keeping my fingers crossed.”

Even so, “it’s going to get worse before it gets better,” she said of the national job market and economy.

Government payrolls increased by 7,000 after a 46,000 rise in the prior month.

Underemployment Rate

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — fell to 17.2 percent from 17.5 percent.

Economists surveyed by Bloomberg last month projected the jobless rate will exceed 10 percent through the middle of next year even as the economy expands 2.6 percent in 2010.

The U.S. economy expanded last quarter for the first time in a year, growing at a 2.8 percent pace as government incentives spurred consumers to spend more on homes and automobiles.

Some companies such as Harley-Davidson Inc. are among those continuing to trim staff to wring out additional cost savings and stem losses. The biggest U.S. motorcycle maker yesterday approved a restructuring plan at its largest plant, in York, Pennsylvania, which will result in the loss of about 950 union jobs.

“A restructured York operation will enable the plant to be competitive and sustainable for the future, and the new labor agreement is critical,” Chief Executive Officer Keith Wandell said in a statement. The Milwaukee-based manufacturer is cutting costs after nine straight quarterly losses.

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