An offshore LLC is an advanced form of asset protection. We use Nevis LLCs for our choice of an offshore LLC. A Nevis LLC is a limited liability company established Nevis, W.I. for asset protection purposes. In general, a limited liability company (LLC) is a popular business planning tool. Many lawyers use the LLC (as an alternative to Subchapter S corporations) as the preferred legal entity for new businesses. Asset protection attorneys also use the LLC as a legal tool for domestic asset protection planning. Membership interests in a limited liability company are not exempt from execution or attachment by judgment creditors, but Florida law gives creditors limited remedies against a debtor’s LLC interest.
Florida Statutes restrict a creditor’s remedy to what is known as a “charging lien” against the LLC’s cash distributions. In the event the LLC manager chooses to make no distributions, the member’s creditor gets nothing. There is an IRS revenue ruling that held that in the event an LLC has taxable income allocated to a debtor/member, but the LLC makes no distributions which are attachable by a charging lien, the member’s creditor is responsible for the member’s income tax liability even though the creditor receives no distributions by virtue of its charging lien. However, more recent court decisions suggest that a creditor is not liable for taxes on income the creditor does not receive as a result of a charging lien.
Nevis Limited Liability Companies
Establishing an LLC in an offshore jurisdiction gives another layer of asset protection. The Island of Nevis, in particular, has enacted favorable LLC laws in 1995. The Nevis Assembly amended the Ordinance in 2015 to improve the asset protection benefits of a Nevis LLC. Most importantly, Nevis, like Florida, permits a single-member limited liability company. Nevis law also establishes a charging lien as a creditor’s exclusive remedy to attack a debtor’s ownership interest in a Nevis LLC including single-member LLCs. Charging liens in Nevis expire after three years and are not renewable.
A transfer of assets by a U.S. citizen to an offshore single-member LLC does not have any adverse tax consequences otherwise associated with the transfer of assets to other offshore entities. It is unclear whether a Nevis court would even recognize a Florida judgment giving rise to a creditor’s request for a charging order. Officials in Nevis have told me they know of no instance where a U.S. creditor has obtained a charging lien through Nevis courts to enforce a U.S. judgment.
Under the 2015 amendment, fraudulent transfer actions brought in Nevis are subject to a two year statute of limitations. The creditor must prove beyond a reasonable doubt that the debtor transferred assets to a Nevis LLC to hinder or delay creditors. The 2015 amendment requires a creditor to post a cost bond of before bringing any action to collect a judgment against a member of a Nevis LLC. The bond used to be subject to a maximum of $100,000 but in 2018 the ceiling has been eliminated and Nevis courts may impose a higher bond requirement.
On the other hand, a 2015 Florida court has held that a creditor can foreclose a debtor’s interest in a single member LLC through Florida court proceedings. The court held that LLC interests are intangible personal property that is subject to the jurisdiction of courts where the debtor resides. A debtor’s interest in a multi-member LLC would be subject to a Florida charging lien. This court, and some other courts around the country, have found that because the LLC is not a party to charging lien actions, a U.S. court does not need to have jurisdiction over the Nevis LLC in order to charge the debtor’s interest. Other courts have reached the opposite result holding that charging liens must be filed in the jurisdiction where the LLC was formed. Still, it is unclear how a U.S. creditor enforces a U.S. charging order against a Nevis manager holding assets outside the U.S.
In many instances, a Florida debtor will get a better result by forming a certificated Nevis LLC; the certificated LLC issues physical certificates of membership which are deemed to be the sole evidence of LLC ownership. Certificated LLC interests are similar legally to bearer bonds or bearer stock certificates. The debtor can locate his LLC certificates in Nevis or other jurisdiction outside of Florida. There is case law holding that a creditor must seek a charging order in the jurisdiction where the certificates are located. It is unclear whether a court could compel replacement certificates to be issued and located within Florida.
There are parts of the 2015 amended Nevis LLC law that help protect against a creditors efforts to attack Nevis LLC interest in U.S. courts. The 2015 Nevis LLC law provides that if a member’s interest is subject to a charging lien the interest may be redeemed by other non-debtor members or by the member himself with other assets including exempt assets. Also, the amendment states that distributions payable to the charged member may be offset by calls for additional capital contributions. These two provisions arguably concern the LLC’s “internal affairs” among its members. It is well-settled law in most U.S. jurisdictions that internal affairs are governed by the law of the jurisdiction where an entity is created as opposed to the jurisdiction where member/owners reside.
Nevis LLC Management
Under Nevis law, the manager of the LLC does not have to be a Nevis resident or a Nevis business organization. A Nevis LLC’s manager may be the debtor/member herself or any other individual located either in the United States or a different foreign jurisdiction. A debtor serving as LLC manager has substantial control over the Nevis LLC and is able to physically maintain assets anywhere in the world. A Nevis LLC can own assets in the United States, Nevis, or anywhere else in the world. For example, a Nevis LLC may have a Florida bank account, or if appropriate, it may open an offshore account in Nevis or another popular banking center such as Switzerland.
A debtor serving as manager of his own Nevis LLC maintains control over LLC assets, but he does not have the best asset protection. A Nevis LLC provides optimal protection if the debtor appoints as either the initial or successor manager an individual or company outside of the United States. No U.S court has jurisdiction over a foreign manager. The foreign manager will have control over all Nevis LLC assets. An effective LLC operating agreement provides that the foreign manager cannot be removed by the debtor/member. It is critical that the U.S. debtor be willing to trust a foreign LLC manager if an aggressive creditor threatens to attack the Nevis LLC. Some debtors have friends or relatives living in foreign jurisdictions whom they appoint as initial or successor managers.
U.S. debtors must exercise their own due diligence to investigate and interview offshore companies that provide LLC management services. There are many reputable companies, but each person needs to take the time to interview companies who will have control over assets transferred to the Nevis LLC. You should not rely solely on referrals from your friends or your professional advisers in selecting an offshore manager for a Nevis LLC. You will find that the offshore manager will conduct more investigation and due diligence about you, the customer, than you will ever do about them. Offshore management companies are very careful about with whom they do business.
Asset management within a Nevis LLC is similar to discretionary financial accounts offered by most U.S. financial institutions. A discretionary account is when you, the client, appoint a financial entity to invest your money on your behalf. If you appoint a financial company as offshore manager of your Nevis LLC, the management company and its employees do not actually manage the LLC assets. Instead, the LLC manager hires a financial institution outside the U.S. in a discretionary capacity.
Just as is the case in U.S. discretionary accounts, you set the direction and limits of financial investment within a Nevis LLC. You can instruct the money manager about degree of risk, percentage of cash invested in either stock or bonds, amount of investment in U.S. or international equities, income tax strategies, and general risk appetite. The money manager of the Nevis LLC can send monthly statements and trade confirmations if requested.
A Nevis LLC may require filing of additional tax forms with the IRS. For example, a single member Nevis LLC must file IRS Form 8832 to be a “disregarded entity” although domestic LLCs are “disregarded for tax purposes by default.” Although a Nevis LLC should have no effect on U.S. income tax, people should consult their CPA regarding the filing tax reporting forms after setting up a Nevis LLC.
Nevis LLC vs. Cook Islands LLC
The Cook Islands LLC law is also favorable for asset protection. The Cook Island law has similar asset protection benefits and barriers to collection. Nevis, however, has an important practical advantage. As stated above, offshore LLC asset protection works best if the debtor relinquishes control over the LLC and all LLC assets to a foreign management firm or person. Selection of the offshore manager is very important. As stated above, it is important for the LLC members to investigate potential offshore managers, and the members best should personally meet and interview the manager at the manger’s office. In addition, a member may want to visit the LLC manager during the legal defense of an LLC membership interest or to access money held in the name of the offshore LLC.
The Cook Islands are physically situated in the South Pacific Ocean near New Zealand. Travel to the Cook Islands is long and expensive. Nevis is situated in the Caribbean Ocean and can be reached by a short plane ride from Puerto Rico. It is much easier, faster, and less expensive for a U.S. person to visit a manager located in Nevis than it is to meet a manager in the Cook Islands. The accessibility of Nevis LLC managers outweighs any theoretical legal advantage that arguably favors the Cook Islands LLC jurisdiction.
Important Things To Remember About Nevis LLC
There are five important things to remember about Nevis LLCs:
- A debtor should not serve as LLC manager if asset protection is primary purpose of Nevis LLC;
- Nevis LLC can hold assets in any jurisdiction; best if assets not held in U.S. financial institutions;
- Multi-member LLCs are required to file information reporting forms with IRS;
- Transfers of assets to a Nevis LLC can be attached as a fraudulent transfer;
- Realistic goal of Nevis LLC is to improve asset protection defenses and negotiating position for purpose of debt settlement.