There are many reasons why individuals create trusts. And many different types of trusts.
And as life changes, so should our trusts. But what's often over-looked is that the trustee, too, may need to be changed to reflect current and future purposes. For example, is a trustee for asset protection also a good choice for administering your estate after you die? Often, they're not.
Today's newsletter takes a look at how to make your trust - and trustees - change with your needs.
Trusts and Trustees should fit the purpose.
When young and building a portfolio it generally means taking on more risks. These added risks increase the potential for lawsuits, and the potential loss of assets. As time goes on and more assets are accumulated - a home, investments, business or profession, vehicles, second home, or other asset types - the risk of a lawsuits significantly increases. The more active and the more assets, the more likely that lawsuits will follow.
As the years march by and you begin to wind down, it's reasonable to believe that your risks will go away too. Sometimes, but often it's just the opposite as the mere ownership of assets makes you a more likely target for more lawsuits.
As we age, protecting assets acquired from a lifetime of hard work presents a new challenge of keeping those assets, and not losing them in a courtroom drama to someone else.
The first battle of life is making assets. The second battle is keeping them. Anyone that's honest will tell you the ups and downs are never a one-way street.
During the different stages of life when risks of lawsuits are high, a superior asset protection trust is essential. Registering your trust with an experienced trustee with solid asset protection skills and experience – and located in a jurisdiction with strong asset protection laws - is essential.
Even these needs change. As we age, access to the trust funds money is essential for retirement. And after we die, the assets require thoughtful distribution and skills to make proper distributions to a spouse, or heirs.
All of these changes in life begs the question as to whether the original trust terms and provisions are still a good fit for the many different needs we experience during life. Rarely is a one-size fits all trust – or trustee - a good idea.
Many of our clients revise and amend their trust numerous times during their life. The changes generally reflect their different life cycles, and the needs that follow.
Unfortunately, we seldom stop to think about whether the same trustee of yesterday and today is now best suited for tomorrow, or thereafter.
An individual at 60 or 70 still needs to protect assets, but estate asset administration becomes relatively more important at this age than when 40 years old. Same for a young, semi-retired individual with assets that need to be properly managed to grow and remain safe for many more decades.
If you have a trust, stop now and ask if your trust as originally created, is current to best satisfy your needs now, and for the future. Probably not.
And importantly, ask yourself whether your trustee - if originally taken onboard for asset protection - is best suited to handle your retirement, or your estate assets distribution to heirs when you die. Possibly not.
What’s more, if you no longer believe you need an aggressive offshore or international trust or trustee for asset protection - or the costs - then consider a trust that stands by for those purposes, if needed.
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 called a Standby International Trust ©.
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.
Instead of choosing one or the other, you can have the benefits of both, without the added risks and costs. That’s where the Standby International Trust © comes in.
Here’s why.
First, the offshore, International Trust Variety
Some of the benefits of using an offshore trust registered in some venues include, for example, trust laws that do not recognize US judgments or US judicial proceedings. This means that attempting to enforce a US judgement is not possible. And if a judgement creditor and their lawyer look to enforce a US judgement where the trust is registered, they are forced to start litigation all over again.
Not only must the plaintiff pay all costs of litigation (including flying to the offshore venue to litigate their claim), but plaintiff lawyer contingency fees are generally illegal, as a matter of law. And short statute of limitations means the claim may already be precluded.
These factors alone generally discourage plaintiffs and their lawyers, and provide a renewed opportunity to discourage or settle litigation swiftly. But these are only the beginning of the benefits of using an offshore or International Trust for asset protection.
The trust with terms and provisions (at least the type we implement for our clients), and statutory laws, generally create extremely high barriers before fresh litigation can commence. Litigation challenges abroad look daunting for even deep pocket plaintiffs looking to attack your assets.
And these are only some of the reasons why some asset protection venues offer superior asset protection and wealth preservation for an International Trust.
Assets can be located at home when seas are calm, or elsewhere for investment diversification. Typically, assets are held directly by a US or offshore LLC, which are owned by the trust. However, as LLC manager you can control the assets directly. When properly implemented, LLCs offer an added layer of asset protection through Charging Orders Protection, which means that forced asset distributions are avoided.
Further trust controls occur when you act as the trust Protector. As the trust Protector, you maintain veto powers and controls over the trustees. A domestic trustee is also typically established, which brings added convenience.
And when the offshore trust is created as a US domestic grantor trust (the type we typically implement), the tax requirements are user friendly. This means the trust is tax neutral when implemented.
Since the early 1990s we have implemented the International Trust for our clients with the above features, and much more. Learn more at this link.
For other individuals willing to give up the above added asset protection for at-home peace of mind and convenience, then the domestic trust variety is sometimes preferred.
The Domestic Trust Variety
US trust laws for over the past 200 years have not been good for protecting assets. One reason is that trust settlors have been prohibited by US trust laws from creating a trust that restricts or prohibits creditor’s claims against assets placed into the trust. For this reason, a self-settled trust for asset protection never existed domestically throughout American trust law history. But now, in marginal ways, this has changed.
As a result of increasing government pressures, the US domestic trust became a popular substitute with lawyers and their clients during the past decade. But often lawyers marketing domestic trusts have no background in litigation, have limited training in asset protection strategies, and have no knowledge or experience with International Trusts. Yet, the domestic trust was seen as an easy way for some law firms to ramp up services and revenues for clients looking to protect their assets domestically in a simple, cost effective fashion.
As a result, domestic trusts today are frequently marketed to American clients with the added benefit of keeping all assets in the US to minimize costs and avoid offshore compliance matters. In some circumstances, the assets are held directly in the trust, and in other cases held in US LLCs. It is no surprise why the domestic trust has become popular.
But the question remains: Why would you would want to keep assets in the same place where a threat arises?
Like anything in life, you get what you pay for. Often, domestic trusts are nothing more than standardized, boilerplate documents provided at reduced prices. The lawyer - or more commonly the clerical staff - fill in the blanks, change names, and magically the client is supposed to be protected.
The reality is very different. Frequently, pure domestic trusts often create nothing more than an illusion to a client that their assets are protected in a fashion similar to offshore trusts. But they are not.
Follow this link for what to look for in an asset protection planner.
And unfortunately, there are a number of very serious limitations with the domestic asset protection trust variety. One problem is that under Article 4, Section 1 of the U.S. Constitution, each state is required to honor the judicial proceedings of every other state, known as the Full Faith and Credit Clause. This means that a claim against you or the assets can be adjudicated in another state where no asset protection exists, and then the state where your trust is registered must honor the judgment. That’s not a good plan.
Another problem is conflict of law issues arising between different state's laws.
And another is fraudulent conveyances laws. And bankruptcy ‘claw back’ provisions are still another. Too frequently ‘results-oriented’ judges create more problems to a successful outcome bringing their personal biases into the courtroom.
Any one of the above problems leave the domestic trust vulnerable to attack by plaintiffs and lawyers going after your assets, particularly when assets are primarily located in the same country where you reside, and the threat arises.
As such, we have never believed that a standalone, pure, domestic asset protection trust strategy with assets in the US should be used for serious asset protection planning. Please read the last sentence again.
However, a trust that has the combined features of the simplicity and lower costs found in a domestic trust, with a standby provision to switch it to an International Trust offering superior asset protection, is a valuable alternative.
The Standby International Trust ©
Think of having the benefits of both trust worlds. 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. This added feature is a ‘standby’ provision in the trust, so that when a threat appears the trust can be altered into an International Trust.
When altered, all of the benefits of an International Trust are designed to come into play. However, no added offshore 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 ©.
How Does the Standby International Trust © Work?
As noted above, the original trust documents contain a standby provision to alter or change the trust. Until such time, you have the benefits of simplicity and lower costs. Then when you, the assets, or the planning structure are under threat, you can utilize the benefits of an International Trust.
Until the standby provision is exercised, the offshore trust asset protective provisions remain dormant. Only when the standby provisions are called do they become active. And only then does an offshore trustee replace a domestic trustee.
The Standby International Trust springs into action not only through the trust provisions, but through the added documentation that makes it occur.
Typically, assets would remain at home when the trust is first implemented. And initially, they could continue at home when the standby option is exercised. Then you decide whether to keep the assets at home, or move them offshore to safer shores at a later date.
A decision can also be made whether to create one or more new offshore LLCs. Assets could then be transferred from an existing trust domestic LLC to a new trust offshore LLC. If a new offshore LLC is created, you can also determine whether it is appropriate that you act as the offshore LLC manager controlling and managing the assets, or whether a different option is more desirable.
So long as the assets remain within the trust structure, the date the trust was first created continues as the controlling date the assets were first transferred into the trust, even when exercising the standby features. This is consistent with statutory trust laws found only in a select few offshore jurisdictions. This mitigates or avoids claims of fraudulent transfers.
In other words, the assets were in the trust and remained in the trust, and only certain trust options were exercised.
As another standby option, you can elect - for US tax purposes - to maintain the trust as a US domestic grantor trust, or to include the added benefits of a true foreign trust (for tax purposes), if desired.
With the overwhelming number of trusts we’ve created over many years, the mere fact of assets being held inside an International Trust – whether on standby or initially - is often enough to discourage even the most determined plaintiff and their lawyers to bring about a quick, low-cost outcome to a claim against you.
And if extraordinary litigation circumstances arise, there always remains a number of other asset protective measures that can be exercised. The circumstances, the asset types and values, and your objectives, will ultimately determine which, if any, of the more aggressive offshore asset protective measures become necessary.
The Standby International Trust © provides numerous standby options to flee to safety.
The bottom line is that when a threat arises against you, your assets, or the trust, a more aggressive trust structure remains on standby. Until such time, you can minimize the costs, and keep life simple.
Instead of a black or white, domestic or offshore trust, think of the Standby International Trust © being on standby.
And the cost to establish the Standby International Trust © can save you several thousand dollars to establish and to maintain.
One caveat – timing is everything. This includes taking the necessary steps now, which is essential so that when a threat arises, your Standby International Trust © is ready to protect you, your hard-earned assets, and your family in the years ahead. And when needed, you are the one that elects and brings about the standby changes needed.
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If you’d like to learn more or discuss your planning objectives in a confidential initial review, contact me here.
The book How to Legally Protect Your Assets, 2nd edition, explains how you can use an International Trust to accomplish your objectives. Offshore Living & Investing, 2nd edition, takes it to another level.
Both books are available at reduced prices right here at our web site in quality soft cover, pdf, or Kindle.
More International Trust tips can be found at DavidTanzer.com.
And visit our site for nearly 100 other complimentary Past Articles.
Until next time…
David