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WHICH IS BETTER: US or INTERNATIONAL TRUSTS?

Asset protection threats today lurk around almost every corner. A common question is whether a U.S. domiciled trust or an international trust is better, and why?

Originally, asset protection trusts were designed and implemented to defend against frivolous lawsuits, disgruntled spouses, revengeful employees and contract disputes, embittered business or professional partners, and a long host of other common threats.

Today, many individuals place at the top of the list of asset protection concerns social unrest, government assets confiscation, unsettled political leadership, saber rattling around the world, and an endless list of currency and border controls.

Our newsletter today looks at what is better to protect assets: a U.S. trust or an international trust? And is there really a difference?

First, U.S. Trusts Background

In 1997, Alaska was the first U.S. state to enact laws allowing protection for self-settled trusts, and was shortly followed by other states. These trusts are typically referred to as the domestic asset protection trust, or simply ‘DAPTs’.

DAPTs are now allowed in seventeen U.S. states: Alaska and Delaware 1997, Rhode Island and Nevada 1999, Utah 2003, Oklahoma 2004, South Dakota and Missouri 2005, Wyoming and Tennessee 2007, New Hampshire 2009, Hawaii 2010, Virginia 2012, Ohio 2013, Mississippi 2014, West Virginia 2016, and most recently Michigan in 2017.

As a simple rule of thumb, if a lawyer practices in any of the above states, they would most likely recommend their state out of convenience. Or, following a meeting with a trust company representative from a different state at a legal seminar, or following a sales visit to the lawyer’s office. But does convenience mean that the state asset protection laws are the best?

The states that rank highest in asset protection are often considered the most debtor-friendly. For example, in some states there are ‘no exception’ creditors, meaning you can keep your money out of the hands of ex-spouses claiming alimony and child support. Even pre-existing tort claims are exempt. In other states, creditors can reach into trust assets without proving fraudulent transfer. And in all states, creditors can reach the trust assets if they can prove a fraudulent transfer.

Each state attempts to strike a balance between debtor and creditor rights. The more that balance favors the creditor, the more it weighs against you. Sometimes the statutory differences appear small, but in practice they can make a huge difference as to whether you keep or give your money to someone else.

When you live in one state, have assets in different states, and whether a claim is filed against you in your home state or in another state, it results in huge uncertainties as to which state, and how, a judge applies the law. Ultimately, these variables impact the protection of your assets.  

Enter the Uniform Voidable Transfers Act

The Uniform Voidable Transfers ACT (UVTA) replaced the Uniform Fraudulent Transfer Act (UFTA) to offer clarity to a misunderstood body of law. Many legal problems arose nationwide following revisions to the Bankruptcy Act, which provided that many self-settled trusts were voidable with no time limits for common claims that asset transfers were fraudulent.

The Bankruptcy Act provided that a person living in one state without DAPTs could not utilize DAPT laws from another state. Some states have enacted UVTA, and others are in the process.

As recently as 2010, some cases involving the early formed DAPTs were beginning to make their way through the U.S. court system. The outcomes of the DAPTs have not been promising. State and Federal judges and bankruptcy trustees applied the 2005 amendments to the bankruptcy laws to seize assets conveyed to a DAPT. When all parties, all assets, and all claims were located in the same state where DAPTs were recognized, there were some favorable outcomes. But overall, results have been very inconsistent.

One promising Nevada case arose in May 2017 in Klabacka v Nelson, which offers some future hope for some Nevada DAPTs. In that case, narrowly construed facts for the two separate trusts created by a husband and wife withstood judicial scrutinty, but only after a lengthy and expensive appeal to, and being overturned by, the Nevada Supreme Court.

How U.S. Trusts are Limited

There are huge differences in the asset protection statutory laws offered by different states. And even in the best case scenario of the recent Nevada Klabacka case demonstrates that judicial enforcement is sketchy – and difficult - at best. And there are even bigger differences between an International Trust vs a trust registered in a U.S. state, as noted below.

In addition, consider the following list of other DAPT shortcomings:

First, there are conflict of law issues between states, as pointed out above. But it gets even more complicated when there are multiple venues and multiple parties involved in different states. The question becomes: which state law applies?

Next, the Full Faith and Credit laws come into play. The Federal laws require judgments in one state to be recognized and enforced in another state. How can that serve as quality asset protection?

Then there are always results oriented activist judges to be concerned about. In other words, for whatever reason the judge may be predisposed towards a certain outcome, and the facts and laws fall into line with their thinking. This is even more of a problem when judges are more consciously concerned with the results and not following the law.

Further, if assets were not conveyed timely or properly, then fraudulent conveyances statutes may apply. This means that an asset transfer becomes easy to unwind, particularly in a DAPT, or when the assets remain in the same jurisdiction.

Various 'claw back' provisions under local and federal bankruptcy laws can also create problems with earlier transfers.

And placing all nest egg assets in one stateside trust basket is not a good plan.

What’s essential to know is that an International Trust utilizing the laws of asset protection from a jurisdiction outside of the U.S. is not restricted by the above issues when protecting your assets. 

What Difference is the International Trust?

With an International Trust there are plenty of opportunities to transfer liquid assets offshore away from prying eyes, or to encumber hard assets like equity strips with an offshore bank. The transfers can be free of U.S. fraudulent conveyance laws.

Not recognizing U.S. judgments in the venue where your trust is registered is another important benefit.

Asset protection trusts registered offshore can be more effective if the trustee, trust protectors and assets are beyond the reach of U.S. courts. So long as these conditions are present, harsh U.S. laws may be of little practical benefit to a creditor or plaintiff.

And often these measures alone are enough to discourage even the most determined litigant.

What’s more, while unencumbered International Trust assets located in the U.S. might still have limited protection when real estate is located in the U.S., the effectiveness can be found in encumbering the real estate by various forms of equity stripping. HELOC and back-to-back loans are just two examples. And when properly and timely implemented, the trust settlor - that's you - can remain outside the heavy-hand of a U.S. court.

Cash and other liquid assets should be a mouse click transfer away to a protective account in another venue offshore. Proper advance planning makes all the difference in success.

Unfortunately, today, there are inexperienced planners setting up trusts with little or no experience in litigation, international laws, or asset transfer laws. Here is a link in what to look for in a good planner.

Why an International Trust?

One of the many distinguishing trust features between DAPTs and an International Trust is that the trust registered outside the U.S. protects the trust settlors from creditors and litigants wherever located.

And international self-settled asset protective provisions have been the long-term norm across the world throughout trust history going back as far as the early trusts used by the Romans, and later expanded upon by the British. However, the troubling limitations on protecting assets in the U.S. is an exception to the long held rules of trust law, which were originally intended to protect assets.

And Why Now?

International Trusts are nothing new.

For well over two decades I’ve long argued that DAPTs are marginal candidates, at best. At worst, they are nothing more than a false sense of security. And the record for sustaining these DAPTs, going forward, is not promising.

In my humble opinion, these DAPTs should properly be labelled as DAFTs. An old English slang term - daft - used to describe something that is mad, crazy, foolish or outright stupid. And we seem to be surrounded by dafts everywhere.

Why would you want to try and protect your hard-earned assets in the same venue where the problems persist? That’s being hopeful, and hope is not a plan.

Long Term, it's the International Trust

A trust registered outside of the venue you reside, can still use a local, U.S. domestic trustee at home. For Americans, it means registering your trust outside the U.S., with your local trustee at home, and maintaining the trust as a U.S. domestic trust for tax purposes. This also means it is not a foreign trust for tax purposes. And this results in availing the assets and the trust to the asset protective measures located offshore, as needed.

Numerous examples are covered in the book How to Legally Protect Your Assets, 2nd edition. 

What’s more, this means you have the ability to take advantage of more favorable statutory asset protective laws than found anywhere in any of the U.S. states, and in a venue where U.S. court judgments and jurisdiction are not recognized.

Then, when a threat materializes, there are numerous steps you can elect to implement to protect assets at home. Transferring liquid assets offshore and encumbering equity in real estate are just two examples to protecting assets. There are many other options outlined in How to Legally Protect Your Assets.

And until a threat materializes, you can still maintain direct control over the assets as an LLC manager, and over the trust and trustees as the trust protector.

The above are only a few of the many benefits of an International Trust. Go here or here to learn more. And yes, going offshore is still perfectly legal.

One of the most important steps to achieving good results is to take steps now, well in advance of future problems. If you wait until it's too late, then there is not much that you can do other than damage control. Take action today, while the seas are calm and before the storm sets in.

To learn more about both stateside and offshore planning visit DavidTanzer.com. There are plenty of good complimentary articles found here.

To start learning how to protect your assets How to Legally Protect Your Assets, 2nd edition, is a good start.

To learn more about living and investing from an international perspective, read Offshore Living & Investing, 2nd edition.

Both books are now located on our site at substantially reduced prices in Kindle, pdf and quality softcover.

Or to learn how you can get started with an initial review for your planning, contact me at this link.

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
 
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(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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