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Our newsletter today unravels the mystery surrounding an International Trust. We take a closer look at some of the provisions and design variables in structuring an International Trust that can make it more effective and valuable for protecting and preserving your assets.
The newsletter is a tad longer than usual - but packed with useful information. So sit back, and enjoy your coffee or favorite beverage of choice, as you read through.
In a nut shell, an International Trust is designed to protect and preserve family assets by using long established legal techniques to accomplish a particular set of objectives. To reach your goals, choosing the best trust structure and laws - at home and abroad - are critical parts of the planning process.
Proper planning and implementation typically allow for a family trust to protect and preserve assets for later years, as part of a risk mitigation strategy, for retirement, to minimize or even avoid estate taxes and probate, and for post-death distributions for family members and/or charities.
Many individuals use the trust structure as part of a diversified international asset investment portfolio. Others use it for pre-migration planning when considering investing or living part or full time abroad. And most use it for greater privacy and enhanced asset protection.
When trusts are used for asset protection, the key is to be proactive before a lawsuit strikes. And when used as part of a pre-migration strategy, before living offshore.
While litigation problems come and go for professionals, business owners, and investors, it’s always important to get it right from the beginning. Even semi-active - or semi-retired - individuals with assets are lawsuit targets for no other reason than they own assets. Good business practices are always an integral part of proper implementation of a planning structure to avoid or mitigate risks, from whatever source.
Proper planning begins with segregating assets by asset types and risk classes, creating the proper entity to hold title to those assets, and selecting the proper venue to register the entities. But often overlooked is making sure that the formalities of the planning structure are complete and current to avoid claims that the planning structure is nothing more than your alter ego. And keeping government compliance satisfied, watching what you sign (e.g. avoiding personal guarantees), and planning and working around new risk exposures when asset values increase - as well as new risks that might arise - are a few more initial planning considerations.
Of course knowing who you are doing business with is always important, but good things change, and stuff happens. Many have learned the hard way that sometimes the best customer, patient or client is the one you turn away, as they might be the next lawsuit waiting to happen. Even good relationships with partners can suddenly change, and so it's important to be proactive to be protected from your partners if, and when, things go sour.
Under the umbrella of an International Trust, we frequently use limited liability companies (LLCs) to hold title to different types of assets, with the client as the manager of the LLC. The assets can be cash, stocks, bonds, collectibles, business or professional practices, homes, investment properties, farms and ranches, service companies, and just about any other asset, other than deferred income assets (transferring deferred income assets into a trust can have negative tax consequences).
It is through the different LLCs that title to the individual assets are held, and then managed by the client as manager of the LLC.
LLCs are found today in over 40 countries, and are becoming increasingly common around the world. In some venues, LLCs have the benefit of the corporate veil of protection for the owners, with the added benefit of pass through tax consequences of a partnership. What’s more, if the LLC is structured correctly and created in the correct jurisdiction, Charging Order protection can be accomplished to avoid forced asset distributions to satisfy creditor’s claims against the owners.
But LLC laws and jurisdictions are not created equal, so great care is necessary in determining where and how to create your LLC, particularly when seeking the benefits of Charging Order protection.
Insurance coverage can still be a useful first step taken to protect assets, but should never be relied upon to fully protect assets against claims. Insurance companies can and do go bankrupt or out of business, a claim might not be covered, or liability can be in excess of coverage. I have repeatedly seen each of these events occur after claims were filed.
When is the last time you looked at your insurance coverage? Do you know what it says? Most people wait until they're sued before actually reading and understanding their coverage, and then learn that exceptions to coverage apply or that coverage is limited, if the claim is covered at all. And even though a claim might be covered, you still need to fight the battle for the money, and the financial and emotional costs can be huge.
Once an integrated planning structure is in place, many of our clients have found not only peace of mind against future litigation threats, but opportunities to reduce the amount of insurance coverage and savings on premiums. Best of all, the savings (and the peace of mind) is not a one-time benefit, but continues year after year.
As part of an asset protection planning strategy, personal planning needs and objectives are always important. Family needs, asset values, asset types, marital relationships, and more, can and do change, and should be reflected in a dynamic and flexible planning structure going forward.
What is the best structure to protect assets?
Customize to Your Needs & Objectives
Surprisingly, there isn’t one “best” structure. Each individual’s needs vary, and customized planning is essential.
The worst possible planning is the one size fits all planning, which is often offered by offshore providers, or an estate planner that has notched up their menu of services to include asset protection. The problem with the former is that it usually fits no one. The problem with the later is that if a challenge arises against the assets or structure in the future it is usually played out in the courtroom; most estate planners have no litigation experience, an essential component of asset protection.
From our first client initial review, our firm begins from day one with an eye towards litigation. This continues through the planning process and thereafter. Certainly not all planning structures are challenged during the lifetime of a settlor, but since our crystal ball is cloudy, and we just don’t know who or when a challenge against assets might arise.
So all planning structures are designed with an eye towards litigation, just in case. This is where a planner with solid litigation experience really comes into play early in the planning stage.
And too, there are different levels of planning, depending on the needs and client comfort levels. In any event, timing is always important. Just like purchasing insurance, if you wait until the fire trucks are in the driveway, it's a bad time to call your insurance agent for homeowner’s insurance.
Certainly International Trust planning structures are not inexpensive. But what’s more expensive is not doing anything at all to protect assets. And worse yet is waiting to try and implement a plan after a threat arises. Costs to implement a planning strategy can vary widely depending on asset values, asset types, asset risk classes, client needs and objectives, and a host of other factors.
Clients with assets above $500,000 are clearly candidates for asset protection planning. As assets levels go up, the types and levels of planning strategies adjust to fit asset types, values, risk classes, and other factors. Naturally, costs vary by the level of planning implemented.
I personally started implementing International Trusts over twenty five years ago, in the early 1990s, and most of the trusts we have implemented over the years are still in place today. There is a one-time cost to set up the structure, and then a nominal ongoing cost thereafter for annual maintenance.
We believe part of our job is to educate all clients with their options, at least to the extent they care to understand. But at the end of the day, it’s their choice to decide what steps to take. An important part of the process is to work through the options so you can make a choice as to how much planning satisfies your objectives.
Below are a few more features and provisions of an International Trust to minimize and reduce exposure to risks and claims. These are just a few of the many reasons that International Trusts work so well.
Trust Features and Provisions
First, integrating spendthrift provisions into an International Trust is crucial.
When properly set up and maintained, a creditor cannot generally attack the trust assets successfully as your personal assets. Self settled spendthrift trust provisions are long settled under international trust laws to prevent litigation attacks, but unfortunately, laws in the US don't generally allow self settled spendthrift trust provisions to protect settlor assets. This means that selecting a venue allowing the trust settlor to protect assets in a trust from creditors is critical.
A handful of states in the US have only recently started to allow certain self settled spendthrift provisions, but a trust created under these US state laws do not have the same protection as International Trusts created outside the US. Our past article Offshore vs. Onshore Asset Protection covered the different arguments for and against creating a trust within the US vs. outside the US, and you can read the article in full by following the link. There are approximately 10 states within the US that now allow for some self settled spendthrift trust provisions, so protecting settlor’s assets from creditors is no longer “foreign” under US trust law. However, as discussed in the article, there are serious limitations to stateside asset protection, and creating a trust that can avail itself to superior asset protection trust law not found in the US is certainly the better choice.
The bottom line is that there are huge benefits to International Trust planning.
And too, all 50 US states under the US federal bankruptcy code recognize the concept of spendthrift provisions in a trust, even though the US state laws might not. This means there is extra added weight to the self settled International Trust created with spendthrift provisions if challenged in the bankruptcy arena.
Contrary to some myths, creating an international trust does not mean you necessarily need to transfer all your assets offshore for effective protection.
Assets can - and often do – remain right at home. However, there are certainly many offshore banking venues offering superior cash protection than at home. The key is that the titling and holding of the assets is under the umbrella of the trust structure and allows for the immediate transfer of assets offshore if a threat arises and becomes desirable for trust assets to be relocated elsewhere.
If and when an attack arises, is when the litigation experience of your planner becomes crucial going forward. Defending a lawsuit is more an art, not a science.
Keeping a planning structure user friendly is also very important. It’s of little use to you if your legal counsel or trustee needs to be involved in trivial decisions. It’s certainly important that you are comfortable with managing and controlling assets on a daily basis within the trust structure. Protection and control. These are important factors in implementing International Trusts, and there is often a trade off or balance of these factors, depending on the client’s objectives.
Essential Trust Provisions
As noted above, self settled spendthrift provisions for the settlor, spouse and family members to protect against subsequent creditor claims is critical. Too often we have found this important provision lacking when created by other planners claiming to create asset protection provisions in a trust. Failure to include this provision is a critical mistake.
Another important provision is a duress clause. This key term states that if a trust settlor is being forced to make direction to the trustee to unwind a planning structure or repatriate assets (for example, by court order), that the trustees can legally disregard the instructions. This is another component of asset protection and avoids a local judge from forcing an unwanted result.
A governing law clause is another important trust provision, which directs the application of the choice of law to apply in a dispute. Even though a local opposing attorney or judge may wish to apply local law, the governing law provision would overrule the application of local law and apply the choice of law you prefer where trust law provides for more favorable protection of trust assets.
Consistent with the above, a change of governing law clause allows you to change jurisdictions at a later date. Perhaps you start with Nevada, or Nevis, or Cook Islands as the governing law; this trust provision would allow the trust to “morph” into another jurisdiction, either automatically, or by election. The trustee or the trust protector could have the power to change the law that governs the administration of the trust if the assets were under threat in the original venue.
And with the above being said, a trust company or a local jurisdiction can always be changed in the future, if there is good reason to redomicile a trust. Therefore a proper provision in the trust permitting changes in trustees and venues is very important.
Another provision is the ability for the trustees to create sub-trusts or new companies under the main trust. This allows not only for the administration of the trust for asset protection purposes during the settlor’s life, but also subsequently for surviving spouses, minors or persons suffering from a disability.
Design Variables in the Planning Structure
Design variables of the trust structure include whether - and in what venue - to implement a family limited partnership or limited liability company to hold assets under the trust.....one of many considerations.
As noted above, not all LLC laws are created equal, and availing your LLCs (or other entities) to a more desirable jurisdiction has many benefits.
Inclusions of pre-nuptial or post-nuptial agreements are a further consideration. Whether there is a need to include an offshore limited liability company for offshore investment diversification, or safe keeping of offshore assets, is also a design variable.
Another design variable is the trust protector – the watchdog over the trust terms and the trustees – which is typically the original settlors, with the surviving spouse or adult children heirs frequently designed to step in after the settlor’s death. And too, in the event of a challenge against the trust assets, provisions to allow for substituted trust protectors by individuals or a team of individuals offshore is also an important consideration to avoid local jurisdiction over the trust protector.
An important design variable is using a US domestic co-trustee as part of the International Trust to establish the trust as a US domestic trust, and not a foreign trust, for tax purposes. This simplifies the tax reporting and compliance requirements and keeps the trust and client under the radar screen, which true foreign trusts for tax purposes do not always enjoy.
Control over trust assets is always an important part of the planning structure.
When there are no threats to the trust assets, there are clearly opportunities to maintain daily control over assets by managing the assets directly through the entities holding title to assets (often the LLCs), and indirectly as protector of the trust as “watch dog” over the trust and trustees. But, as noted above, there is a need for a balance, depending on how much or how little protection you desire over the assets, and whether the assets are under threat. Resolving the balance is an important part of the planning process.
Keep in mind that if a threat arises after a planning structure is implemented, it’s not you that’s taking steps to protect assets, but the trustees of the trust protecting the trust assets pursuant to the design of the trust agreement. This is an important distinction to avoid appearances of impropriety and fraudulent transfers. Maintaining a distance between you and the assets after litigation arises is important to maintain that the planning structure is not part of your alter ego, but a genuine, independent structure to be treated separate from you, and any claims against you.
Some assets are naturally easier to protect than other assets.
Cash is readily moveable and can be transferred from venue to venue. Real estate, on the other hand, is obviously not movable, but there are still steps to protect the equity in real estate. For example, equity stripping, if properly and timely implemented, can encumber local real estate and safely move the equity outside and away from local claims. Income streams can also be protected within structures if set up correctly.
The unique mix of client assets is always treated differently, and at the end of the day, there are great opportunities to increase the level of protection for most types of assets.
Of course the jurisdiction where the trust is registered makes a huge difference in protecting assets.
What Venue is Best for My Trust?
There are more than 35 countries worldwide that offer trust protective provisions designed for asset protection. And there are many different trust law factors under local trust laws that make trust laws good, better or best.
If we took the top 20 important trust law provisions and lined them up across the top of the page, and then listed the countries down the side of the page, we could then compare country by country, provision by provision, how each country ranked by each legal provision. A comparative grid of selected jurisdictions and important trust law provisions is useful in selecting the best trust venues. Keep in mind that some provisions are more important than others, and therefore some are weighted more heavily than others.
For example, some of the important trust law provisions include statutory certainty regarding non-recognition of foreign judgments, a beyond-a-reasonable doubt standard of proof required in establishing fraudulent intent, statute of limitations if challenging an International Trust, allowing for a settlor as a beneficiary under the trust, and allowing that a settlor can retain a degree of control over assets under the trust.
Other important statutory provisions include that the burden of proving fraudulent intent is always on the creditor, the recognition of different classes of creditors, specific Statute of Elizabeth override provisions, the posting of bond required before litigation can commence, that a trust will remain valid even if a fraudulent transfer is determined to have taken place, retroactive protection to immigrant trusts, high standards for freezing of trust assets, the presumption against fraudulent transfers if the settlor/transferor remains solvent, a binding effect of the choice of law, forced heirship override provisions, and community property provisions, to name a few more.
But there are still other “non-legal” factors that can be more difficult to weigh, and only experience, personal insight and human intuition can help obtain a realistic perspective of working with a local jurisdiction, even if the trust laws are good.
These factors include, but certainly are not limited to, the experience of the staff working in the local trust companies, the reliability of the owners and managers of the trust company, the legal and judicial structure that supports the local trust law, the ethics of the overall community and the country, the history of the jurisdiction, and the prospects for the future of the jurisdiction, to name but a few.
Of course your choice of planner plays a significant part in the overall experience too.
As many of our long time readers know, I spend a considerable amount of my time traveling to personally learn and observe first hand those intangible factors that are essential for our clients. I am in disbelief how so many attorneys claim to be international planners when they rarely leave the comfort of their own backyard. They think the world can be understood by telephone or the Internet alone. Not only are these homebodies fooling themselves, but they are acting recklessly in dishing out international legal advice to clients who place great value (and usually pay large fees) on the laws of the international communities around the globe when they haven’t bothered to understand what makes the local venues (or the world) tick.
Even taking into account the above balancing of trust law provisions - and firsthand knowledge and experience of local jurisdictions - there is still not a one size fits all “best” jurisdiction that suits everybody.
While I believe that the Cook Islands has long been a leader in asset protection trust law, there may be good reasons and better jurisdictions to register a trust for some individuals with needs and objectives that are better aligned elsewhere. That doesn’t mean the Cook Islands isn’t a good place to register an International Trust – it certainly is and offers great advantages to many of our clients – but it means that many different personal factors and objectives must be taken into consideration before deciding on which jurisdiction to register a trust.
Another criticism of some planners is that they have become “married” to one or two jurisdictions or trust companies, for whatever reason. The choices are vast, and the differences are great. Selecting the proper venue to register an International Trust should be driven by the client's best interests, and independent of any personal relationship or conflict of interest between the planner and the trust company (we have never received any remuneration from any trust company we do business with).
How to Learn More
Hopefully the above provides you some fresh insight into some of the trust terms, provisions, and design variables that make an International Trust work. While our clients have many different reasons for creating an International Trust, they all have one common factor: they desire to protect and maintain control over assets acquired during their lifetime.
In previous newsletters we covered a wide range of topics on domestic and international asset protection, and offshore living and investing. Many of these Past Articles can be found at www.DavidTanzer.com, if you wish to learn more about international planning tips.
And the second edition of How to Legally Protect Your Assets is an excellent primer on the above topics, and more, if you are just getting started. Offshore Living & Investing is another good choice. Both are available directly from our site.
Or if you want to contact me to learn about how an confidential initial review could benefit you, contact me here.
Until next time......
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
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.
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