INTERNATIONAL TRUSTS & CONTROL

Earlier newsletters looked at the benefits of an International Trust for asset protection and risk management at home. Our newsletter today looks at three practical examples. The first two examples begin with an International Trust, and the third with a Standby International Trust©.

Controlling Assets Through an International Trust

International trusts became mainstream three decades ago as a planning tool to achieve a high level of asset protection and privacy. It grew in popularity for diversifying and investing assets offshore. Today, the popularity of an International Trust - and the Standby International Trust© - are also sought after to avoid social and political uncertainties.  

If privacy is important, an International Trust keeps prying eyes from knowing your every move. The trust itself is not recorded as a public document, and there is generally no reason that the trust or the contents need to be disclosed to anyone. The trust agreement is a private document. And estate planning has always been an integrated part of the International Trust for retirement and caring for the next generation.  

The above are but a few of the many reasons individuals with assets seek us out for an International Trust. To help sort out new client's interests and planning objectives, we always begin with an initial review of their circumstances.

From my perspective, understanding the big picture is an essential starting point. This means more than just understanding the assets, how they are titled, and the value of those assets. It’s about looking from the outside in, rather than getting lost in the details. Perhaps the most important question 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.

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 $1,235,000. 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 asset values and types in future years are certain to occur.

For now though, we use their current financial snapshot based upon today’s values.

Many agree that the U.S. government’s heavy-handed approach with U.S. citizens and taxpayers is an assault on natural laws and liberties. And many believe things are destined to get worse. These threats are already occurring as democracies and freedoms are under attack.

Even under current circumstances is it still worth looking offshore? You bet!

Improving Access to Offshore Opportunities

A popular myth is that sufficient insurance will solve liability and lawsuit risks. 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, 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. 

An International Trust, or a Standby International Trust©,  can open the doors to quality global investments with opportunities for better yields. New banking and trading accounts can be created through the trust structure allowing participation in investment grade opportunities. Superior asset protection and integrated estate planning can be achieved, and avoiding risks from political and social uncertainties can be reduced.

Below are three examples of owning and controlling assets through a trust.

The first example of how the Smiths might use a trust to protect their assets is 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 the Smiths 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. They would have access to the assets through the trust and trustee. 

If either of the Smiths are sued, they have significant opportunities to keep their investments out of the reach of certain creditors. 

However, a 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 one asset, all other assets could be subject to the claim. While the trust offers superior asset protection from litigation risks, there are always added 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 important for strong asset protection.

Another drawback is that the trustee of the trust is directly involved with daily asset activities, since the trustee directly holds title to the assets. 

The more common use of a trust directly owning assets is when all assets are low risk, liquid assets, such as cash, stocks, and bonds, and the settlors are retired or elderly and looking to avoid managing assets. 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 a better way.

Case Study # 2 - The International Trust Structure - a preferred option

There is a superior way for the Smiths to structure holding title and maintain control over assets through a trust - and obtain superior asset protection - along with other benefits of an International Trust. 

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 the trust directly owning the assets. Each LLC would hold title to the different assets. Mr. & Mrs. Smith, as managers of the LLCs, 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.

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 venues – at home or offshore - charging order protection offers an added level of asset protection to you and the assets. 

Importantly, by placing assets into an LLC - instead of owning them directly - 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. 

To protect 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 jewelry and art) could also be placed within this same LLC. 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, all income and expenses pass through each entity, through the trust, and then are reported on their personal tax returns. Since certain types of assets could have negative tax consequences if placed into the wrong type of entity - or wrong entity tax election - 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 $50,000 in equity will not expose the other asset with $500,000 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 Mrs. Smith's new start up with low revenues - it would be important to isolate a business or professional practice into its own LLC. Why take on unnecessary risks, even if you think it might be small? 

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 when individuals take distributions at retirement age.

And too, since Mr. Smith desires to start accessing international markets, an offshore LLC may be a good option. An offshore LLC has an added benefit as part of an overall exit strategy if looking to offshore as an alternative to growing problems at home. 

Both U.S. LLCs and offshore LLCs provide different degrees of protection. LLCs are not created equal, and caution must be used with the choice of LLC venue. And if an offshore LLC is formed for international investing - for example in Cook Islands or Nevis - the ‘customer’ would be a Cook Islands or Nevis company. In all cases the Smiths as managers of the LLCs directly control the assets. 

It’s actually simpler than it first appears.

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, there is also a hybrid option.

Typically, the domestic trust variety is 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 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 added optional standby offshore asset protection found in an International Trust, without the offshore asset protection being activated until needed. The added feature of a standby provision means that when a threat appears the trust can be altered - or morphed - into an International Trust.

At that time, all of the benefits of an 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 upon your election. 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 part of the planning process. An added benefit is that the trust agreement is a private document, thus achieving greater levels of privacy.

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 future 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 LLCs, 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.

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 Assets, 2nd 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 contact me to discuss how you can proceed with a confidential initial review.

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. (720) 293-2272

Auckland, New Zealand:
Tel. (64) 9 353-1328

Brisbane, Australia:
Tel. (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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