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CONTROLLING ASSETS THROUGH AN INTERNATIONAL TRUST

 “Insanity is doing the same thing, over and over again, but expecting different results.” Albert Einstein
 
In earlier newsletters we’ve looked at many of the different benefits of an international trust for asset protection and risk management at home, and for living and investment diversification offshore. Today’s newsletter takes a peek at the practical aspects to see how it works with two different case studies.

It’s a little longer than usual, so let’s jump right in.

Controlling Assets Through an International Trust

International trusts first became popular over two decades ago as an excellent tool to obtain a high level of asset protection, while seeking privacy. Today, it's frequently asked how an international trust can be used for diversifying assets to avoid uncertainties at home. While every situation is different, there are some basic considerations to keep in mind. 

If privacy is important to you, an international trust can help keep prying eyes from knowing your every financial move. The trust itself is never recorded, not a public document, and under normal circumstances, there is generally no reason that the trust or the contents need to be disclosed to anyone.

Finally, estate planning has always been an integrated part of the international trust for retirement and inheritance purposes. The above are just a few reasons for using an international trust.

Looking through the Peep Hole

When I first review a new client’s personal financial situation, the starting point is always understanding the big picture. This means a complete list of all assets, how they are titled, and the value of those assets, is essential. It’s like looking from the outside in, rather than getting lost with the details from the inside. Perhaps the most important question to ask is…Why?

Having a good understanding of what makes an individual tick, and why, is critical in making good choices for a planning structure, whatever the motivation.

The Owner's Profile
 
By way of example, let’s say that Mr. and Mrs. Smith are young professionals. They own a home with $275,000 in equity (after the mortgage), and two real estate investment properties with $25,000 equity in one, and $290,000 in equity in the other. Personal property (jewelery, art, etc.) is valued at $35,000. The Smith's have accumulated $150,000 in tax-deferred investments (IRAs, pensions, 401Ks, etc), and another $225,000 in various stocks, bonds, and cash, acquired with
after tax dollars. Mrs. Smith also has a new start up business, but currently with very limited value.

Even if your assets are more or less than the above, the following concepts are similar.

Most of us would say that the Smiths have done fairly well with a current net worth of approximately $1,000,000. Since they have strong earning power in the years ahead, we will assume that mortgages and other debts will be paid down, after-tax investments will grow over time, and deferred income values will increase. Changes in the values and types in future years are certain to occur.

For now though, we use this snapshot of their financial situation based upon today’s values. Several examples follow of how they might use an international trust for investing and protecting assets.

Currently, the Smiths invest assets domestically, but seek some diversity offshore. As Americans, they've detected a prejudice offshore on the part of some overseas banks. Those offshore bankers have explained that the U.S. government has made it extremely burdensome for them to do business with U.S. citizens, while others have frankly stated they don’t want to do business with them because they are US citizens. They are becoming increasingly concerned about this, and are already beginning to feel like prisoners with U.S. border controls and compliance restrictions, which is discussed in an earlier newsletter.
 
The threats of currency exchange restrictions and foreign compliance requirements are already limiting their access to all international financial markets. They're frustrated, and want to avoid these problems.
 
We sympathize with Mr. & Mrs. Smith, and agree that the U.S. government’s heavy handed approach with U.S. citizens and taxpayers is a terrible assault on natural laws and liberties. The same is happening elsewhere in other Western cultures as Democracies and freedoms are under attack. I personally believe this will ultimately be the undoing of the U.S., since money - and people - always go where they are treated best.

The Smith's observations are more examples of how border controls, ongoing currency restrictions, and tax and offshore compliance, have all served to discourage some Americans from investing and living offshore. I can’t begin to share with you the seemingly endless number of conversations I have with good, honest people who have become innocently caught up in a maze of offshore regulations and compliance issues because the rules can be difficult to understand, even for the so-called ‘experts.’ Thus getting it right from the start is important.

 American Politicians Attack Foreign Nation’s Sovereignty
 
What’s worse is the U.S. government’s new efforts to force overseas banks and financial institutions in other sovereign nations to comply with the U.S. government’s heavy-handedness over their financial activities. The banks resent it immensely. But as discussed in earlier newsletters, the new FATCA law (Foreign Account Tax Compliance Act) will now require every overseas bank and financial institution to identify their American customers and report on their assets to U.S. tax authorities.

There will be huge unintended consequences with the new law: less foreign investment into the U.S. economy at a time when it is needed most; and less U.S. dollar investments offshore by timid U.S. souls. The confusion and complications will drive away business of entrepreneurs and investors around the globe. While Congress tries to sell FATCA as a benefit for the U.S. tax system, it will instead have tremendous negative impacts around the globe, and particularly for the U.S. economy.

What’s happening is that the American government is simply trying to capture its citizens who live both inside and outside of America and monitor all financial transactions everywhere. If you think the burdens are heavy handed for U.S. citizens living at home, for those that live and invest part or full time outside of the U.S., it can be a real headache. For this reason, early advance planning to make sure that things are structured correctly, is important.

The bottom line is that more and more overseas banks simply don’t want the headache of dealing with American taxpayers, or the compliance issues that follow, and are increasingly turning away good potential U.S. customers. Americans make up only 4% of the global population and many of these banks believe there are far better global opportunities with the remaining 96% world population without dealing with draconian U.S. laws.

The above is why the Smiths, as U.S. citizens, are discovering that their money is not always welcomed offshore. “Yank Go Home.” Meanwhile, few realize - except for foreigners - that the United States still serves as the No. 1 tax haven for foreign investors across the world.

With all the at-home rules and regulations, is it still worth going offshore? You bet!

Improving Access to Offshore Opportunities

The Smith's currently own all of their investments in their name at home, and seek greater diversification and higher yields beyond the borders. An international trust structure can open the doors to quality global equities, bonds, currencies, and real estate across the globe, and with opportunities for better yields. New banking and trading accounts can be created through the trust structure allowing participation in investment grade opportunities that were previously closed.

They also seek greater protection against professional risks, and risks against their real estate investments, home, stocks, bonds, cash, and other personal property in a litigation-mad society. Since all of the assets are presently in their name personally, one lawsuit could wipe out everything overnight.

All great reasons for going offshore.

Since the Smiths are U.S. taxpayers, they and the trust will still be subject to U.S. taxes and compliance at home, but
diversification and greater investment opportunities can be achieved through an international trust. Once compliance is correctly set up, it's not nearly as bad as you imagine...but admittedly an irritant.

Aren't the risks already protected with insurance cover?

The Insurance Myth

A common misconception is that sufficient insurance will solve any liability or lawsuit concern. But what happens if the claim is excluded from coverage? Or, if the claim is in excess of liability limits? This is not uncommon as juries regularly hand out multi-million dollar awards. Or, even if the claim is covered, if the insurance company goes bankrupt and you are left defending the claim? Insurance companies can and do look back at the application, and if incomplete or incorrect statements were made, then they can void the policy, return your premium, and then there is no coverage.

Unfortunately, I have witnessed all of the above situations occur to unsuspecting good, honest people, time and time again.

It’s always a significant risk to hold title to your assets in your own name. Separating title from control is an important part of protecting assets. You control, but title is held through an international trust that you create....but first things, first.

There are pros and cons of the benefits of using domestic planning structures vs. international planning tools for owning assets. Suffice to say, while domestic structures have a benefit - something is always better than nothing – an international trust for owning and controlling assets is generally far superior than domestic planning for a long list of reasons. Go here to learn more. 

Case Study # 1 - Owning Assets Directly in the Trust

The first example of how the Smiths could use an international trust for their assets would be to re-title assets into a self-settled, international trust. This means placing title to the home, real estate investments, personal property, and stocks, bonds and cash directly into the trust. A properly structured international trust offers significant advantages over holding title to the property directly in their names. They would still be able to use the assets and maintain control as the trust protectors, and always consistent with the terms and provisions created in the trust documents.

A common misconception is that using an international trust means that you must transfer assets to a far away distant place. While locating assets offshore is always an option for the Smiths if they're looking to broaden investment horizons worldwide, or if assets are under threat at home, it’s not initially necessary. They can easily maintain investments exactly where they are currently located, with title in the trust. As their offshore comfort levels increase, investments can then be moved around globally with ease.

A properly structured international trust would permit Mr. & Mrs. Smith to continue to occupy the home, and provide investment directions concerning the stocks, bonds and cash. They could also readily receive cash distributions or loans from the trust principal for day-to-day living expenses. The big difference is that they have access to the assets through the trust, instead of their names personally. The basic trust structure, implemented with advance planning, is designed to achieve these goals.

One huge benefit in the above example is that if either of the Smiths are personally sued, they have significant opportunities to keep their investments out of the reach of certain creditors. Issues of fraudulent conveyances, collateralized assets, and other legal topics come into play, but are beyond the scope of discussion today. Still, an international trust is relatively uncomplicated, and a commonly used planning structure for holding assets and investment diversification. 

Drawbacks to Holding Assets Directly in the Trust

One drawback to the above example is that all assets are held directly in the trust as a group. This means that if a lawsuit is filed against the trust (as owner of the assets), all of the other assets in the trust could be subject to the claim. In other words, the investments may be protected from litigation if the lawsuit is filed against Mr. Smith personally, but there are always risks of a lawsuit filed directly against the trust with different investment classes, all with their own degrees of risk. This may be true even with the best asset protection trust registered in the best of trust protective jurisdiction. For that reason, how the trust is structured and where it is registered becomes very important for strong asset protection.

Another drawback is that the trustee of the trust will need to be directly involved with all daily asset activities, since the trustee directly holds title to the assets. The trustees are limited by the terms of the trust as created, but they are still the direct owner of the trust assets in the above example.

Even with the above drawbacks, proper planning through an international trust can significantly mitigate your risks during litigation when assets are owned directly in the trust. If the trust is set up correctly, in a timely manner, and formed in an asset friendly jurisdiction, Mr. & Mrs. Smith could generally mitigate their risks, and substantially increase chances of success with the outcome from different challenges.

The more frequent use of an international trust directly owning assets is generally when all assets are low risk, liquid assets, such as cash, stocks, and bonds. In such cases, management and investment directives can be created with an independent financial adviser. The low risk asset class is considered less likely to be the subject of direct litigation as compared to real estate investments, or other active business or professional endeavors. But there is a better way.

Case Study # 2 - The Preferred International Trust Structure

There is a superior way for the Smiths to structure holding title and maintain control over different asset risk classes and equity through a trust - and obtain superior asset protection - along with all other benefits of an international trust. The following example is much preferred.

Since the Smiths have different types of assets with varying degrees of risk, a better structure would be to use an international trust to hold title to different entities, instead of owning the assets directly. Each entity in turn would then hold title to the different assets. Mr. & Mrs. Smith, as managers of the entities, would have direct control over the assets. And if the Smiths previously created a pre- or post-nuptial agreement, the segregation of assets could be maintained and controlled through different entities.

It is also important to note that proper planning always requires using the proper company entity type for any particular asset, sometimes motivated by tax considerations. There are many different types of entities, but today, without doubt, even the IRS agrees the LLC (limited liability company) is often the company entity of choice for a variety of good reasons. When implemented correctly under the best venue – at home or offshore - charging order protection also offers an added level of asset protection to the assets. 

Importantly, by placing assets into an LLC or other entity - instead of owning them directly in the trust - the Smiths now maintain direct control over the assets as managers of the LLCs. The title to the assets is also another step away from a frivolous litigant. This type of planning offers far greater flexibility than when assets are held directly in the trust, if for no other reason than the trustees do not need to be involved with day-to-day decisions.

Diversification of investments and superior
asset protection can easily be accomplished. And almost any type of ‘after-tax’ asset could be placed into an entity, meaning ‘tax-deferred’ assets are not a good choice.

To protect the equity in the home, the Smiths place title in one LLC, and as managers they maintain control and right of occupancy. This could effectively provide an opportunity for safe-guarding the equity in the home - $275,000 - from the failings of other investments or from Mrs. Smith's professional career. If created correctly, this could also provide the best opportunity to maintain the husband and wife $500,000 capital gains exemption.

The stocks, bonds and cash totaling $225,000 should be held in a ‘nest egg’ LLC, with the Smiths as managers to maintain direct control over the assets and investment decisions. Keeping assets such as stocks, bonds and cash separate from riskier assets - like real estate, businesses and professional activities - is generally considered safe and conservative planning. The other personal property totaling $35,000 (the jewellery and art) could also be placed within this same LLC, so long as none of these assets had any high risk factors.

As manager of the ‘nest egg’ LLC, they can easily make trades and other investment decisions within the investment portfolio. And since the overall structure is generally set up as tax neutral (partnership or disregarded tax entities), all income and expenses pass through each entity, through the trust, and then are picked up on their personal tax returns. To complete the thought: a corporate tax entity election is possible for an LLC, but care must be taken to avoid negative tax consequences for certain asset types. Certain types of assets could have negative tax consequence if placed into the wrong type of entity - or if the wrong entity tax election is made - so care must be taken with the type of assets transferred into an entity.

Another important question to consider is how to treat the two real estate investment properties. For example, should they both be held in one LLC? Or, should they be separated into two different companies?

A good argument for placing each real estate investment into its’ own LLC is that claims or litigation against the asset with only $25,000 in equity will not expose the other asset with $290,000 in equity. A disadvantage is the small added cost and additional reporting requirements, which are generally minimal.

Alternatively, the Smiths could elect to keep both real estate investments in one LLC now if the lesser equity investment is lower risk, and then segregate them in the future if risks intensify, or as equity value increases. Otherwise, two separate LLCs would be a better risk-adverse choice. As managers of the LLCs, they continue to manage and make decisions with the real estate as before. The main difference is that as the manager, they make these decisions on behalf of the LLC.

Another important question is whether the Smiths should continue to personally own the start up business, or place it into an LLC of its own? Since all businesses and professions carry with them risk - even start ups with low revenues - it would be important to isolate the business or professional practice into its own LLC with charging order protection. Why take on unnecessary risks, even if you think it might be small? And as time goes on, the accumulated risk grows as a ‘tail’ from earlier activities.

Great care must be always be taken with transferring investments that could be considered tax-deferred. Thus, transferring the $150,000 tax-deferred investments into another entity could, and probably will, trigger negative tax consequences. However, there are some exceptions to this rule, particularly if either of the Smiths were taking distributions at retirement age.

And too, since Mr. Smith desires to start accessing international markets, an offshore LLC would be an ideal entity of choice. In addition to U.S. LLCs with differing degrees of benefits, there are some 45 plus countries that also allow for the formation of LLCs. But not all LLCs are created equal, so great caution must be used with the choice of jurisdiction. If an offshore LLC is formed for international investing - for example in Nevis - the ‘customer’ would be a Nevis company. As a result, the foreign financial institutions would not be burdened with national biases or - for the American - U.S. FATCA regulatory requirements. Naturally, Mr. Smith would be the manager of the offshore LLC, directly controlling the assets. And as a U.S. taxpayer, there would still be U.S. income and compliance reporting requirements at home.

Does it sound like we are complicating life using an international trust with LLCs for investment purposes? Not really. It’s actually simpler than it first appears.

To a great extent we have actually helped simplify life if you seek asset protection, or are looking to diversify internationally. And too, once an individual’s structure is properly set up, tax advantages are more easily identified and achieved, instead of being overlooked. It’s not that they are ‘magically’ created, rather they are better organized and not over-looked. Then once you gain more confidence in investing beyond the borders, diversification and better yields are often more easily attained.

Integrating the International Trust

As noted earlier, integrating asset protection, investment diversification, and retirement and estate planning into an international trust are generally part of the planning process. An added benefit to using an international trust is that the trust agreement is a private document. It is not filed in a public domain, thus achieving greater levels of privacy.

Naturally, the terms of the international trust must be carefully drafted, and the entity formalities - when first created and during their life cycles - must always be satisfied. A ‘one-size fits all’ plan should be avoided, since it rarely fits anyone.

And importantly, when your international trust structure is created, it needs to be flexible enough to allow you to adjust to your personal, business and professional objectives as they change over time. While there are common themes that run between many individuals, everyone is different. Customizing your plan to meet your needs is essential.

In summarizing how to manage and invest assets through an international trust, start with the best international trust structure available to hold title to entities that own the assets, and then maintain control over the assets as manager of the entity, and maintain control over the trustees as the trust protector. Make certain that a qualified international professional customizes your plan to your needs when creating the structure.

Visit here to understand the best ways to achieve quality planning. Careful planning for future flexibility should always be considered to allow your structure to adjust to the changes in your assets and investment objectives, the changes in asset values - or changes in the assets themselves - and the challenges that occur during your lifetime.

The Kiss Method- Keep it Simple Stupid

For the above reasons, and more, our U.S. clients generally create an international trust that qualifies as a U.S. domestic grantor trust under the U.S. tax code. It is then registered in the most favorable asset protection trust law jurisdiction. The compliance issues are user friendly, unlike ‘foreign’ trusts for tax purposes.

At the end of the day, we all like to keep things less complicated, and particularly under the IRS radar screen. With so many benefits available when using an international trust, it is surprising there are still some that continue to question these benefits, even against a long, solid track record.

If you are interested in learning more about international planning, start with these tips. If you what to learn more, then How to Legally Protect Your Assets and Offshore Living & Investing are two great books to help you get started.

And if you would like to get serious about how you can protect your hard-earned assets, then please contact me to discuss how you can proceed with a confidential initial review.

Until next time….
 
David
 

David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)

For more information visit www.DavidTanzer.com or email to Datlegal@aol.com. David is the author of “How to Legally Protect Your Assets” and “Offshore Living and Investing.”

David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com

Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272

Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328

Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999

(Licensed to Practice Law in U.S. States & Federal Courts; Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; & Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

(c) Copyright by David A. Tanzer & Associates, P.C. All rights reserved. Except as permitted under the United States Copyright Act of 1976, as amended, and pursuant to the laws of all countries, no part hereof may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, electronic or otherwise, without the prior written permission of David A. Tanzer & Associates, P.C. Reprint in whole or part strictly prohibited unless prior written permission is granted. International Copyright protected under the Berne Convention, Universal Copyright Convention  and laws of all other Copyright protected countries, and consistent with the World Trade Organization TRIPS.

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