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THE STANDBY INTERNATIONAL TRUST ©

Until recently, there were basically two types of trusts integrating asset protection and estate planning: a domestic trust or an offshore trust. There are variations to both types, but for simplicity sake, most trusts fit into one category or the other.


However, today, there is now a hybrid option.


The domestic variety is generally more user friendly, tax compliant ‘light’, and with lower costs to set up and maintain, but comes with a higher risk of asset protection uncertainty. By comparison, the offshore variety, is significantly more reliable, offers superior asset protection and international investment diversification, but comes at a somewhat higher cost to set up and maintain.


Now, instead of choosing one or the other, you can have the benefits of both worlds, without the added risks and costs.


Today’s newsletter examines the Standby International Trust ©, and how it works.


First, some background.


For over thirty five years, I’ve prepared trusts of many different varieties for asset protection, estate planning, investment diversification, and for an endless number of other purposes. I was one of the first pioneers in the early 1990s that brought offshore trusts mainstream, and first coined the term ‘International Trust’ in early articles, newsletters, and books I authored during that time. So, as far as trusts go, even though I was born at night, it wasn’t last night.


During the 1980s the US litigation frenzy first took off and created a serious need to protect assets from frivolous lawsuits. From the need to defend wealth, asset protection strategies were developed. In the early years, the Cook Islands passed their Trust Act as an important tool for protecting wealth by using an offshore trust. Since then, other countries have enacted similar Trust Acts.


Since those early days, the need for genuine asset protection has only grown. Below first briefly explains the differences between the offshore and domestic trusts, which then gives way to a superior planning tool known today as the Standby International Trust ©.


The Offshore Trust Variety


Some of the benefits of using a trust registered offshore in certain venues include trust laws that do not recognize US judgments or judicial proceedings. This means that attempting to enforce a US judgement elsewhere is not possible. And if a judgement creditor and their lawyer wishes to enforce a judgement where an offshore trust is registered, they are forced to start all over again with their claim in that jurisdiction.  


And not only must the plaintiff pay all costs of litigation (including flying themselves, their lawyers, and the judges from New Zealand, to the Cooks to hear the claim), but plaintiff lawyer contingency fees are illegal, as a matter of law. The plaintiff must also post large cost bonds with the Cook Island's court. And short statute of limitations beginning from the date the trust was first registered may already preclude the claim.


These factors alone generally discourage plaintiffs and their lawyers from attempting to enforce a judgement offshore, and provides a renewed opportunity to discourage or settle litigation swiftly.


The above benefits are only the beginning.


Next, the requirements to attack an offshore trust under trust provisions are rigid (at least the type we implement for our clients), and, for example the Cook Islands statutory laws create extremely high barriers to hurdle before fresh litigation can commence. The bottom line is that litigation challenges look very daunting for even deep pocket plaintiffs looking to attack your assets. Even the US FTC learned the lessons the hard way.


Offshore asset protection venues offer superior asset protection and wealth preservation for offshore trusts. In the Cook Islands there are over 30 years of case laws reinforcing the asset protection features of an offshore trust. This is but one of many reasons that make the Cook Islands a leading venue.


With an offshore trust, assets can be located at home while seas are calm, or elsewhere in the world for investment diversification. Typically assets are transferred into a US or offshore LLC, wholly or partially owned by the trust. You then control the assets directly as the LLC manager when assets are not under threat. When properly implemented, LLCs offer an added layer of asset protection through Charging Orders Protection, which means that forced asset distributions are avoided.


And further trust controls occur when you act as the trust Protector. As the trust Protector, you maintain negative veto powers and controls over the trustees. For convenience and tax purposes, a US domestic trustee is also established as a co-trustee along with the offshore trustee.


If the offshore trust is treated for US tax purposes as a ‘US domestic grantor trust’ (the type we typically implement), the tax requirements are user friendly, and very minimal. This means the trust is tax neutral and treated by the IRS as the settlor's personal income and taxed accordingly. Since the early 1990s we have implemented the International Trust for our clients with the above features, and much more. Learn more at this link.


And if for US tax purposes the trust is treated as a ‘foreign trust’, there are several IRS reporting and compliance requirements that must be completed annually. There are added protective benefits for this election, but we leave this discussion for another day, and for now we keep things simple.


For some individuals, a drawback to the offshore trust is the added cost when first created, and then annually to maintain. For individuals motivated to keep assets close to home and costs at a bare minimum, they often opt for the domestic trust variety, which is noted next.


The Domestic Trust Variety


US trust laws for over the past 200 years have not been useful for protecting assets. One reason is that trust settlors have been prohibited by US trust laws from creating a trust that restricts or prohibits creditor’s claims against assets placed into the trust. So call self-settled trusts for asset protection never existed domestically throughout American trust law history. But now, in marginal ways, that has started to change, albeit a long way to go.


Stemming from the litigation frenzy that began in the 1980s and 1990s, during the past two decades several US trust companies saw an asset protection market to tap into, and state treasurers saw tax revenues to reap. In 1998, Alaska passed the first US state domestic Trust Act for asset protection purposes that looked to compete against the offshore trust variety. Since then, 15 other states have passed legislation allowing for some version of the US domestic asset protection trust.


As a result of increasing government pressures wrapped in xenophobia in the US, the US domestic trust variety started to become popular with lawyers and their clients during the past decade. But often the lawyers marketing domestic trusts have no background in litigation, have limited training in asset protection strategies, and have little or no knowledge or experience with offshore trusts. Yet, the domestic trust was seen as an easy way for some law firms to ramp up services and revenues for those clients looking to protect their assets domestically in a simple, cost effective fashion.


Domestic trusts are frequently marketed to American clients with the added benefit of keeping assets in the US to minimize costs and avoid offshore compliance matters. In some circumstances the assets are held directly in the trust, and in other cases held in US LLCs. It is no surprise why the domestic trust has become popular. But the question remains is why you would want to keep assets in the same place where a threat arises?


Like anything in life, you get what you pay for. Often, domestic trusts are nothing more than standardized, boilerplate documents provided at reduced prices. The lawyer - or more commonly the clerical staff - fill in the blanks, change names, and magically the client is supposed to be protected.


If things were really that simple.


The reality is that, too frequently, pure domestic trusts often create nothing more than an illusion to a client that their assets are protected in a fashion similar to offshore trusts. But they are not.  


Follow this link for what to look for in an asset protection planner.


And unfortunately, there are a number of serious problems with the domestic asset protection trust variety. One problem is that under Article 4, Section 1 of the U.S. Constitution, each state is required to honor the judicial proceedings of every other state, known as the Full Faith and Credit Clause. This means that a claim against you or the assets can be adjudicated in a state where no asset protection exists, and then the state where your trust is registered must honor the judgment. That’s not a good plan.


Another problem is conflict of law issues arising between different state's laws. Another is fraudulent conveyances laws. And bankruptcy ‘claw back’ provisions are yet another. And too frequently ‘results-orientated’ judges create more problems to a successful outcome bringing their personal biases into the courtroom.


Any one of the above problems leave the domestic trust vulnerable to attack by plaintiffs and lawyers going after your assets, in or out of state, particularly when assets are primarily limited in the same country where you reside, and the threat arises.


As such, we have never believed that a standalone, pure, domestic asset protection trust strategy with assets in the US should ever be used for serious asset protection planning. Please read the last sentence again.


However, a trust that has the combined features of the simplicity and lower costs found in a domestic trust, with a standby provision to switch it to an offshore trust offering superior asset protection, is now a very valuable option.


The Standby International Trust ©


Think of having the benefits of both trust worlds, without the downsides. This means having superior protection, with simplicity and lower costs.


In a nut shell, you implement a domestic trust that costs less, and is easy to maintain. Yet the trust includes all the added asset protection and estate planning features found in an offshore trust, without the offshore asset protection being activated until needed. The added feature is a standby provision, so that when a threat appears the trust can be immediately altered into an offshore trust.


At that time, all of the benefits of an offshore trust are designed to come into play. However, no offshore added costs and compliance requirements arise until, or unless, the standby provision is exercised.


When the standby provision is exercised, the trust can become a full-fledged International Trust, as we have created for many individuals seeking superior asset protection during the past thirty some years.


In essence, the original domestic trust stands by ready to become an International Trust at your demand. Hence the name: the Standby International Trust ©.


How Does the Standby International Trust © Work?


As noted above, the original trust documents contain a standby provision to alter or change the trust. Until such time, you have the benefits of simplicity and lower costs. Then when you, the assets, or the planning structure are under threat, you can utilize the benefits of an International Trust.


Until the standby provision is exercised, the offshore trust asset protective provisions remain dormant. Only when the standby provisions are called upon by the trust Protector – generally you, or your selected successor trust Protector – do they become active. And only then does an offshore trustee replace a domestic trustee. In some cases a personal domestic trustee (a friend, relative or colleague) can continue to act as a domestic trustee, but they too can be terminated, if necessary.


The Standby International Trust springs into action not only through the trust provisions, but through the added documentation that makes it occur.


There are different options for an offshore trustee replacing a domestic trustee. For example, an offshore trustee can be designated when the trust is first implemented and they remain on standby until called upon. Or, an offshore trustee can remain unnamed, and decided upon when needed. Alternatively, a trustee can be selected now, but altered in the future.


The pros and cons to each standby foreign trustee option can be weighed to fit your circumstances.


Typically the assets would be in the US when the trust is first implemented. And initially they could continue in the US when the standby option is exercised. At that time you can decide whether to keep the assets at home, or move them offshore, but when exercising the standby option you would minimally consider the options for relocating assets to safer shores at a later date, if required. Naturally, you could also elect to relocate the assets at that time.


A decision could also be made whether to create one or more new offshore LLCs. Assets could be transferred from an existing trust domestic LLC to a new trust offshore LLC. If a new offshore LLC is created, you can also determine whether it is appropriate that you act as the offshore LLC manager controlling and managing the assets, or whether a different option is more desirable.


So long as the assets remain within the trust structure, the date the trust was first created continues as the trust formation date even when exercising the standby feature. This is consistent with statutory trust law features found only in select offshore jurisdictions. What’s important about this feature is that it mitigates or avoids claims of fraudulent transfers. In other words, the assets were in the trust and remained in the trust, and only certain trust options were exercised.  


As another standby option, you can elect - for US tax purposes - to maintain the trust as a US domestic grantor trust, or to include the added benefits of a true foreign trust (for tax purposes), if desired. 


With the overwhelming number of trusts we’ve created over many years, the mere fact of assets being held inside an International Trust – whether on standby or initially - is often enough to discourage even the most determined plaintiff and their lawyers to bring about a low cost outcome to a claim.


And if extra-ordinary litigation circumstances arise, there always remains a number of different asset protective measures that can be exercised. The circumstances, the asset types and values, and your objectives, will ultimately determine which, if any, of the more aggressive offshore asset protective measures become necessary.


The Standby International Trust © provides numerous standby options to flee to safety.


The bottom line is that when a threat arises against you, your assets, or the trust, a more aggressive trust structure remains on standby. Until such time, you can minimize the costs, and keep life simple.


Instead of a black or white domestic or offshore trust, think of the Standby International Trust © being on standby, in Technicolor. All the benefits, without the negatives.


The cost to establish the Standby International Trust © can save you several thousand dollars to establish and to maintain.


One caveat – timing is everything. This include taking the necessary steps now is essential so that when a threat arises, your Standby International Trust © is ready to protect you, your hard earned assets, and your family in the years ahead.


Start Now


If you’d like to learn more and discuss your planning objectives in a confidential initial review, contact me here.


The book How to Legally Protect Your Assets, 2nd edition, explains how you can use an International Trust to accomplish your objectives. Offshore Living & Investing, 2nd edition, takes it to another level.


And there are more International Trust tips which can be found at our site DavidTanzer.com. Both books are available at reduced prices right here at our web site in quality soft cover, pdf, or Kindle.


And visit our site for nearly 100 other complimentary Past Articles.


Until next time…


David