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Our newsletter today is short, and to the point. But it covers a topic ‘near and dear’ to many readers that are hesitant to create a planning structure. Because it is critical to many, we consolidate this topic from earlier discussions.
The recurring question we hear is "how to maintain control of assets placed into an International Trust"? The common misconception is that a trust creator gives up control to his or her assets to a foreign trustee in a foreign land. Worse yet, trying to wrestle back control of the assets can be a nightmare, if they haven’t been wasted away.
Unfortunately, the above ill founded fears are based upon a misunderstanding of how top, quality asset protection and estate planning is integrated into a combined domestic and international planning structure. What follows below is just one of many examples of how it works; keeping in mind that personal circumstances can vary widely.
How Can I Maintain Control Over Assets in an International Trust?
Maintaining day to day control over trust assets – integrated with asset protection planning, estate planning, or other planning objectives - into one structure can be accomplished, if correctly and timely implemented. But setting up an international trust alone does not mean you, or your assets, need to be at the mercy of someone else.
Control is an important issue for all of our clients. Everyone desires to keep control over hard-earned assets in a protective planning structure. Some are justifiably concerned that giving up control to a foreign trustee – or shifting assets far away – is the only effective means of using offshore trusts for asset protection. A myth is promulgated by those that simply don’t understand or accept the long term and diversified benefits of using an International Trust.
For starters, there is no ‘bright line’ test or rule that specifically marks acceptable control versus unacceptable control over trust assets. And too, the concept of control can voluntarily change from time to time, depending on your needs, or threats against the assets. What is important, however, is that you are comfortable and confident with the control of your assets going forward.
To understand how and why control can be maintained over assets transferred into a trust, let’s look at one example of how a typical International Trust (the type we create for our clients) could be structured. The typical planning structure we create might be designed as follows, but this is also an oversimplification. Nonetheless, it is still a good overview of how ‘control’ works. There are certainly many other ways to customize a structure, and rarely are two planning structures the same.
Segregating Assets by Risk Class & Equity Values
First, assets are segregated by asset risk classes. Some assets are inherently low risk – like cash – and other assets are higher risk – like real estate or business assets.
Then, similar risk classes are segregated by equity amounts: for example two rental properties with similar risks might have different equity amounts, one at $50,000 and another $550,000. Removing the risk of liability from the lower equity asset away from the higher equity asset is another important part of segregating assets. Risk classes and equity amounts, are starting points.
Assets (or a group of assets) are then typically placed into separate entities to isolate them from one another.
For example, limited liability companies (LLCs) are available today in approximately forty five different countries, and have become widely accepted and used globally. An international business company (IBC) is also occasionally still used today, but often the LLC is more flexible and offers greater benefits. Family limited partnerships (FLPs) were once widely used, but have been mostly replaced by the modern LLC. These are a few of the different types of entities available to hold and control title to assets.
Obtaining A Veil of Protection at the LLC Level
One objective of placing assets into an entity is obtaining a ‘veil of protection’ within a planning structure separate from the entity owner. To obtain a solid veil of protection, the LLC must be properly created, established in a favorable venue with favorable LLC statutory provisions, set up with a strong Operating Agreement and ancillary documentation, and then be maintained correctly during the entity life cycle.
An LLC is often an excellent candidate to obtain a veil of protection when created and implemented correctly.
But all LLC statutory legislation is not created equal. For example, in the US and other jurisdictions only a small number of statutory provisions offer favorable charging order protection, which restricts or prohibits court ordered or forced distributions of LLC assets to owners to satisfy judgment creditors.
And even though some statewide or offshore jurisdictions offer charging order protection, the value of each can vary widely. And the result is that the overall effectiveness of an LLC can vary greatly.
Who Owns the LLCs?
The ownership of the LLCs is then often placed into your newly created, self-settled trust. The trust can be established with discretionary, spendthrift, and favorable asset protective provisions, and the trust is registered in a venue offering aggressive statutory asset protection….that means, asset protection is a matter of law.
Generally, a self-settled trust with asset protective provisions was not available at home, and this was one of the early reasons for growth in the offshore industry where finely tuned laws catered to these needs.
The benefits of segregating assets by risk classes, segregating risk classes by equity amounts, entities with their own veil of protection - and ultimately an aggressive International Trust behind the structure – presents huge planning opportunities. And these benefits can be maintained on a day to day basis while you exercise use and control over the assets.
Control Over Assets Within the Planning Structure
In the first instance, you would typically be the manager of the LLC. As manager, you control the assets, and the rights to use the assets placed into the LLCs. If and when you personally desire distributions, you, in your capacity as manager, can exercise that discretion consistent with the Operating Agreement, the terms of the trust, and always acting with entity formalities in mind. To do otherwise could result in the structure being determined as your alter ego.
Maintaining control over the assets as manager of the LLC is the first level of control over the assets themselves, but always acting on behalf of the LLC and trust mandates as you first created.
Making investments and other day to day decisions regarding the assets, for all practical purposes, is the same as before the structure was created, but now by you acting in the capacity as the LLC manager, and not personally…if that is the design of your plan.
Next, an International Trust is generally created integrating both the aging/death side of planning, along with the life side of asset protection. This means that planning for inevitable events of aging and death are integrated into the trust. For the life side, planning means protecting your assets against threats using aggressive asset protection provisions as set forth in the trust, along with other important planning objectives for investing and retirement.
Introducing the Trust Protector
As part of the trust implementation, a trust ‘Protector’ is designated to act to make sure the terms and provisions of the trust are satisfied – think of the Protector as the ‘watch dog’.
Generally you, as the trust creator, would also be the initial Protector, with adult beneficiaries often acting as successor protectors after the event of your death. During a threat against the trust structure or trust assets, the Protector can resign and be replaced by a committee of protectors who then act in the same capacity as the original Protector, also acting as watchdog over the trust assets.
While the direct day to day control over the assets in the LLCs is by you, the manager, during normal times, the Protector is the next, higher level of control over the trust provisions you first created. However, this control is not of an affirmative nature, but instead a negative veto power over actions of the trustees. This is an important protective provision under the trust. The Protector can also replace the trustees, or redomicile the trust to another jurisdiction, if necessary.
Generally, the trusts we create have both a foreign trustee in the jurisdiction where the trust is registered, and a domestic trustee in the jurisdiction where the client resides. Worth noting is that at the trust level the foreign trustee generally cannot act without the domestic trustee acting jointly. However, for convenience, the domestic trustee can act unilaterally, meaning without the foreign trustee participating.
Making Day to Day Decisions
As a practical matter, all day to day decisions directly affecting the assets are made by you as the LLC manager, and not by the trustees. Keep in mind the trustees own the LLC membership interests, and are not generally required to participate in day to day decisions, and rarely is that the case while you maintain control as the manager over the LLC assets.
For those events that the trustees become involved with, the most significant variety are always subject to the veto power by you as the Protector. As noted above, you are generally the initial trust Protector with negative veto powers over the trustees; and the Protector does not have active management of the trust, which is typically not necessary.
During normal, day to day activities, you maintain control over the LLC assets as manager, and indirectly by virtue of acting as trust Protector with negative veto powers over the trustees. With that being said, it is still in your best interest that the trustees be kept informed. In the event of your death - or a threat against the assets - the trustees will need to take a more active role pursuant to the trust terms....so don't take their role lightly.
If you wish to share management of the LLCs with a spouse or other business partner, this can be included. If desired, you can also add a successor manager after an event of disability or death, or even following a threat to the assets.
If and When a Threat Arises
When we first implement a planning structure for a client we never really know if, or when, ‘this’ client or ‘these’ assets will someday come under a challenge, or from what direction a challenge may arise. Even though only a limited number of plans actually come under attack, we still treat each plan as a realistic, potential candidate for a challenge one day. Many years of litigation experience – and serving as a judge – have taught me that surprises come in many shapes and forms. After all, as time goes on in our lives, the likelihood of threats and challenges increase over time...the opposite is not the case.
And if a serious threat arises, the assets can then also be removed from the LLCs, distributed to the trustee, who then invests the assets into your previously arranged offshore bank or financial institution located anywhere around the globe. Illiquid assets can be ‘equity stripped’ and protected through various legal means. In such event, the assets are always protected pursuant to the terms and provisions of the trust as you first established - or as you later amended with the trustee - but always under the watchful eye of the trust Protector.
Moreover, in the event of a threat against you or the assets, you as Protector, can also resign in this capacity and supplement this role with a new successor. This successor can be a trusted individual, a trust company acting as a protector, or even a committee of protectors. In all such cases the successor protectors have the same negative veto powers over the trustees, the right to replace the trustees, or even redomicile the trust to another jurisdiction, if desired.
The trust terms and the trustees continue under the watchful eye of the Protector in power.
Summary
No doubt, the above is an over-simplification of how the International Trust works, as the focus has been primarily on maintaining control over assets on a day to day basis. The above issue of maintaining control over assets placed into an International Trust is important to every one of our clients. For that reason this topic is summarized again today.
Several chapters and numerous in depth examples of the issue of maintaining control over assets is covered in How to Legally Protect Your Assets, second edition. You can view the table of contents here.
It always remains essential that you work with a high quality team of professionals to reach your objectives. The one-size-fits-all planners – or estate planners that have notched up their menu of services to include asset protection – offer little in the way of realistic benefits. Ultimately, challenges are tested and resolved in the courtroom, so starting a planning structure with litigation in mind is essential.
The individual that helps implement your structure is a critical member of your team. And too, a well-versed and experienced tax counsel - and a quality financial advisor - are also important components of your team. Never under estimate what can be accomplished through the synergy of a top performing team of professionals.
Follow this link to learn how to achieve quality asset protection.
There are plenty of other good Past Articles on our site to help you learn more.
Start here for more tips about international planning. Or contact me directly if you wish to discuss in confidence your personal planning objectives. Our discussions are covered under the strictest attorney-client confidentiality.
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.
(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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