“I’m interested in an international trust, but how do I control the assets?” is a question I’m frequently asked. Today we look at the A, B, Cs, in three easy steps, of how to manage and control assets from a trust through two case studies.
In earlier newsletters we’ve looked at the different benefits of an international trust for risk management, asset protection, offshore investment diversification, relocating offshore and other topics. Many of those newsletter can still be found on our past articles page.
Today’s newsletter takes a practical look to see how to:
Control Assets Through an International Trust
International trusts first became popular over two decades ago as a superior tool to obtain a high level of asset protection and privacy. Today, the trust is frequently used to diversify assets to avoid uncertainties and risks at home. While every situation is different, there are some basics to remember.
Today, if privacy is important to you, an international trust can help more than ever before to keep prying eyes from watching your every move. The trust is never recorded, not a public document, and under normal circumstances there are no reasons to disclose the contents – or that you even have a trust - to anyone.
And estate planning continues to be an important integrated part of the international trust for retirement and inheritance purposes. The above are more valid reasons than ever for using an international trust.
Step One:
When I initially review a new client’s personal situation, the starting point is understanding the big picture. This begins with looking all the assets types, the assets risk classes, their values, and how they are titled. It’s like viewing into the fish bowl from the outside looking in, without getting lost in the details. One of the most important questions I ask is “Why?”
Starting with a good understanding of what makes an individual tick, and why, is critical in designing a quality planning structure, regardless of the motivation. Here's what to look for in a top-knotch planner.
Step Two: Looking at the Up & Comer’s Profile
For our example, let’s say that Dr and Mrs. Jones are middle-aged professionals just beginning to accumulate assets. Their home has $275,000 in equity, and their two property investments have equity of $25,000 equity in one, and $250,000 in equity in the other. Personal property (jewelry, art, etc.) is worth $35,000. The Jones have also $150,000 in tax-deferred investments (IRAs, pensions, 401Ks, etc), and another $225,000 in after-tax stocks, bonds, and cash. Dr Jones also has a new start up practice, with limited current value but high risk.
Even if your assets are more or less than the above, the following analysis is similar.
Many would agree that the Jones have done well with a current net worth of approximately $960,000. And they have strong earning power in the years ahead. We can reasonably 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 of assets in future years are also certain to occur.
Several examples follow below of how they might use an international trust for investing and protecting assets.
But first, currently, the Jones limit their investments domestically, but look to diversity offshore. But offshore bankers have informed them that their government has made it burdensome for them to do business with the Jones, and others have frankly said “no thank you”.
They are increasingly concerned about the free movement of their money and other assets if problems occur at home. Threats of currency exchange restrictions are already limiting their access to international markets. The Jones’ observe how border controls, currency restrictions, and tax and offshore compliance, have discouraged many individuals already from investing and living offshore. They're frustrated, and want to avoid these problems going forward.
Particularly in the U.S., the government is attempting to restrict Americans at home, and monitor all financial transactions globally. It’s already creating problems for those living offshore. As a result, advance planning to make sure that things are structured correctly is critical.
The bottom line is that more and more overseas banks simply don’t want the headache of dealing with American taxpayers, or the compliance issues that follow, and are increasingly turning away good potential U.S. customers. Americans make up only 4% of the global population and many of these banks believe there are far better global opportunities with the remaining 96% world population without dealing with draconian U.S. laws, or Americans.
It begs the questions: With all the at-home rules and regulations, is it really worth going offshore? You bet!
Access to Offshore Opportunities
The Jones’ currently title all investments at home in their name, but seek diversification and higher yields beyond their borders. They’ve heard that an international trust can open the doors to safe, quality equities, bonds, currencies, and real estate across the globe, and with higher yields. And they understand that offshore banking and trading accounts can be created through the trust structure allowing international participation in investment grade opportunities that were previously closed.
Naturally, they also seek enhanced protection against professional risks. But since all assets are held in their names, one lawsuit could wipe them out overnight.
All great reasons for going offshore.
But aren't many risks already protected with insurance cover?
The Insurance Myth
A common misconception is that sufficient insurance will solve liability and lawsuit concerns. 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 then there is no coverage.
Unfortunately, I have witnessed all of the above situations occur to unsuspecting good, honest people, time and time again.
It’s a significant risk to hold title to your assets in your own name. Separating title from control is an important part of protecting assets. You control the assets, but title is held through an international trust you create.
So, should the assets be held directly by the trust? Or indirectly through entities owned by the trust? And what are the pros and cons?
Case Study # 1 - Owning Assets Directly in the Trust
The first example is that the Jones could transfer title of their assets directly into an international trust. This includes the home, real estate investments, personal property, and stocks, bonds and cash. A properly implemented international trust offers significant advantages over holding title to the property directly in their names. And they would still be able to use the assets and maintain control as the trust protectors.
And a common misconception is that using an international trust means that you transfer assets to a far-away place. While locating assets offshore is always an option for the Jones, it’s not initially necessary. They can easily maintain investments at home, and then as their offshore comfort levels increase, investments can then be relocated globally with ease.
A properly structured international trust would permit Dr & Mrs. Jones to continue occupying the home, and provide investment directions concerning the stocks, bonds and cash. And they could readily receive cash distributions or loans from the trust.
The big difference with this first example is that they have access to the assets through the trust, instead of their names personally. The basic trust structure, implemented with advance planning, is designed to achieve their goals.
A benefit with the above example is that if either of the Jones is sued, they have significant opportunities to keep their investments out of the reach of creditors. Seen from this perspective, an international trust is not complicated, and is a commonly used planning structure for holding assets and investment diversification either at home or offshore.
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 same claim. In other words, the investments may be protected from litigation if the lawsuit is filed against Dr Jones personally, but there are always risks of a lawsuit being filed directly against the trust. And even through the international trust offers the best asset protection available, why expose all assets from the liability of one asset? 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 when you first create the trust, but the trustees are still the direct owner of the trust assets in the above example.
Even with the above drawbacks, proper planning through an international trust can still significantly mitigate your risks. If the trust is set up correctly, in a timely manner, and formed in an asset friendly jurisdiction, Dr & Mrs. Jones could still mitigate their risks, and substantially increase chances of success from different threats.
The more frequent use of an international trust directly owning all 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 to the trustee. And the low risk asset class (e.g. cash) is less likely to be the subject of litigation as compared to higher risk assets (e.g. real estate or professional practices, or businesses).
But there is a better way.
Case Study # 2 - The Preferred International Trust Structure
There is a superior way for the Jones to structure holding title and maintain control over different asset risk classes - and obtain superior asset protection - along with all other benefits of an international trust. The following example is preferred to the above Case Study #1.
Since the Jones has different assets with varying degrees of risk, a superior structure would be for an international trust to hold title to different entities, instead of owning the assets directly. Each entity in turn would then hold title to the different assets. Dr & Mrs. Jones, as managers of the entities, could have direct control over managing the assets and day-to-day decisions. And if the Jones previously created a pre- or post-nuptial agreement, the segregation of assets could be maintained and controlled through separate entities.
Proper planning always requires using the proper company entity type, sometimes motivated by tax considerations. There are many different types of entities, but today, without doubt, even the LLC (limited liability company) is the company of choice. And when correctly implemented under the best venue – at home or offshore - charging order protection also offers an added level of asset protection to the LLC, assets and member owners.
Importantly, by placing assets into an LLC - instead of owning them directly in the trust - the Jones could maintain direct control over the assets as managers of the LLCs. And the title to the assets is another step away from a frivolous litigant. This also offers greater flexibility than when assets are held directly in the trust, if for no other reason than the trustee does not need to be involved with day-to-day decisions.
Diversification of investments and superior asset protection can easily be accomplished at home or offshore. And almost any type of ‘after-tax’ asset can be placed into an entity, meaning ‘tax-deferred’ assets are not a good choice.
For example, to protect the home equity, the Jones could place title in one LLC, and as managers they maintain control and right of occupancy. This could effectively provide an opportunity for safe-guarding the home equity - $275,000 - from threats arising from other investments or from Dr Jones’ professional career.
The stocks, bonds and cash - totaling $225,000 – can be held in a ‘nest egg’ LLC, with the Jones as managers to maintain direct control over the investment decisions. Keeping assets such as stocks, bonds and cash separate from riskier assets - like real estate, businesses and professional activities - is generally safe and conservative planning. The personal property - totaling $35,000 – could also be placed in the same LLC, so long as none of these assets have any high risk factors.
As manager of the ‘nest egg’ LLC, they can easily make trades and other investment decisions within the investment portfolio. If the LLC is set up as tax neutral, all income and expenses pass through the entity, through the trust, and picked up on their personal tax returns. And if set up a separate “corporate” tax election, then income, expenses and taxes can be isolated within the LLC; but care must be taken to avoid negative tax consequences for certain asset types.
Another question to consider is how to treat the two real estate investment properties. Should they both be held in one LLC? Or, two?
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 higher value asset with $250,000 in equity. The only disadvantage is the small added cost and reporting requirements, which are generally minimal.
Alternatively, the Jones could elect to keep both real estate investments in one LLC if the lower equity investment is low risk, but segregate them in the future if risks intensify, or as equity value increases. Otherwise, two separate LLCs is a better risk-adverse choice. As managers of the LLCs, they continue to manage and make decisions with the real estate as before.
Another important question is whether the Jones should continue to personally own the start-up business, or place it into an LLC of its own? Since all businesses and professions carry their own risk - even start ups with low revenues – it’s essential to isolate the business or professional activities into its own LLC (and with charging order protection). Why take unnecessary risks, even if you think they might be small?
And too, since Dr Jones desires to start accessing international markets, an offshore LLC would be an ideal entity of choice. But not all LLCs are created equal, so great caution should be used with the choice of venue. If an offshore LLC is formed for international investing - for example in Nevis - the ‘customer’ would be a Nevis company. As a result, banks and financial institution doors can reopen for offshore investments.
Implementing the above is simpler than it first appears.
Step Three: Integrating the International Trust
If you too look for asset protection, investment diversification, and retirement and estate planning as part of your planning process, there’re great opportunities you are missing if you’re not integrating an international trust as part of the planning process. An added benefit is that the trust 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 properly created and maintained during their life cycles. And a ‘one-size fits all’ plan should be avoided, since it rarely fits anyone.
And importantly, your international trust structure should be flexible to allow you to adjust to your personal, business and professional objectives as they and assets 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.
At the end of the day, we all like to keep things less complicated and under the 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 very long, and solid track record.
Reasons for going offshore include investment diversification, protection from local and government asset threats, integrated international asset protection and estate planning, investing money or living offshore, and much, much more. There are many legitimate domestic and offshore planning opportunities open to you by taking a few easy steps, but do it right.
To get started, there are numerous complimentary newsletters and past articles on our website at DavidTanzer.com, which is a good place to begin learning about asset protection and offshore investing and living.
To learn more about the legitimate use of international trusts for integrated estate planning and asset protection, start with How to Legally Protect Your Assets, 2nd edition. And to learn more about going offshore, read Offshore Living & Investing, 2nd edition.
If you wish to inquire about how to proceed with a confidential consultation to review your personal situation and accomplish your objectives, then contact me here now.
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
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Fax (61) 7 3319 6999
(Licensed to Practice Law in U.S. States & Federal Courts; (Former) 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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