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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 newsletter we looked at the benefits of an international trust for asset protection and risk management at home, and for offshore living and investing. Today we look at the practical side with three examples. The first are two options using an international trust, and the third is with Standby International Trust 
©. It's a bit longer than most, so let’s jump right in.

Controlling Assets Through an International Trust

International trusts first became popular almost three decades ago as an excellent tool to obtain a high level of asset protection while seeking privacy. Today it's often 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. 

These are just a few reasons for using an international trust.

The initial review process. 

From my perspective, understanding the big picture is the starting point when reviewing a new client's needs and objectives. This means understanding the assets, how they are titled, and the value of those assets. It’s more about looking from the outside in, rather than getting lost in the details. 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.

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 still apply.

The Smiths have done well with a current net worth of approximately $1,000,000. They have strong earning power in the years ahead, and 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 their current financial snapshot 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 all assets domestically, but seek some diversity offshore. As Americans, they're concerned about domestic uncertainty, yet they're aware of an offshore bias by many overseas banks. Those offshore bankers have explained that the U.S. government has made it burdensome to do business with U.S. citizens, and some have refused to do business with them because they are U.S. citizens. At the same time the Smiths are becoming increasingly concerned about the changing landscape at home, and are beginning to feel like their freedoms are restricted by U.S. border controls and financial and tax compliance requirements.
 
The threats of currency exchange restrictions and foreign compliance requirements are already limiting their access to international financial markets. They're frustrated, and want to avoid problems in the days ahead.

 
Many sympathize with the Smiths, and agree that the U.S. government’s heavy-handed approach with U.S. citizens and taxpayers is an assault on natural laws and liberties. These threats are also occurring elsewhere in Western societies as Democracies and freedoms are under attack. Many believe this will ultimately be the undoing of the U.S., since money - and people - always go where they are treated best.

You, too, may have observed how border controls, ongoing currency restrictions, and tax and offshore compliance have all served to discourage some Americans from investing and living offshore.

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, lower risk, and higher yields beyond the U.S. 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-gone-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 the planning structure is correctly set up, it's not nearly as complicated as you might envision.

Aren't asset 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? And 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 there is no coverage. 

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

Case Study # 1 - Owning Assets Directly in the International Trust - the least preferred option.

The first example of how the Smiths might use an international trust for their assets would be to re-title assets directly 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. If properly structured, they could still use and control the assets as the trust protectors.

In this scenario, 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 and trustee, instead of their names personally. 

One 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 may 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 some looking to simplify life, travel, and minimize their day to day involvement with 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. While the trust offers superior asset protection from litigation risks, there are always risks when one person or one entity holds title to all assets. For this 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.

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 still a better way.

Case Study # 2 - The International Trust Structure - the preferred option.

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 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, such as LLCs, instead of owning the assets directly. Each LLC would then hold title to the different assets. Mr. & Mrs. Smith, as managers of the entities, would have direct day-to-day 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 LLCs.

There are different types of entities, but today, the LLC (limited liability company) is often the company entity of choice for a variety of good reasons. And when implemented correctly under the best venue – at home or offshore - charging order protection also offers an added level of asset protection to you and the assets. 

Importantly, by placing assets into an LLC or other entity - instead of owning them directly in the trust - you maintain direct control over the assets as managers of the LLCs. This option 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. 

By way of example, t
o protect the equity in the home, the Smiths place title in one LLC, and as managers they maintain control and right of occupancy. This effectively provides an opportunity for safe-guarding the equity in the home ($275,000) from the failings of other investments or lawsuits. If implemented correctly, this could also provide an opportunity to maintain the husband and wife $500,000 capital gains exemption when the home is sold.

The stocks, bonds and cash ($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. 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. Keeping these assets separate from riskier assets - like investment real estate, businesses and professional activities - is generally considered safe and conservative planning. 

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 consequences 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. 

Since all businesses and professions carry with them risk - even start ups with low revenues - it would be important to isolate a 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 may be an ideal entity. 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. And since LLCs are not created equal, 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. Foreign financial institutions may not be burdened with national biases or - for Americans - U.S. FATCA regulatory requirements. The Smiths as managers of the offshore LLC directly control the assets. However, 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.

Case Study #3 - the Standby International Trust - a better alternative to a domestic 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. 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 altered into an offshore trust.


At that time, all of the benefits of an offshore, international 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 ©.


To learn more about the Standby International Trust ©, follow this link.

Integrating the International Trust

Whichever of the three above options you think works best for you, integrating asset protection, investment diversification, and retirement and estate planning into an international trust are generally part of the planning process. An added benefit is that the trust agreement is a private document, 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, 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 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 Assets2nd edition,and Offshore Living & Investing, 2nd edition, 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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