There are many reasons to create a trust, and many different types of trusts. As trust needs change, so should your trust. Are you confident that the structure of your current trust is fitting your present and future needs?
Or, what if you don't have a trust?
Today's newsletter looks at several important types of trust, and how your trust can change with your needs.
First, what is the purpose of your trust?
When you were younger you probably took on more risks. Those added risks increase the potential for lawsuits, and the potential for loss of assets. As assets grow, the risk of lawsuits also increase.
Owning a home, personal investments, business or professional assets, vehicles, second homes, and other asset types all carry with them different risks. And the more active you are, the more types of assets, and the greater the value of the assets, always increase the likelihood lawsuits will follow.
Even after you look to retire, the mere ownership of assets makes you a target for lawsuits. And the more others become aware of your assets, the more that makes you a target, too.
The first battle of life is making assets. The second battle is keeping them. It's never easy street.
During the different stages of life when risks of lawsuits are high, a superior asset protection trust is essential. Having quick access to solid asset protection opportunities - even access to jurisdictions with strong asset protection - is essential.
As we age, access to trust assets is essential for retirement. And then after we die, the assets require thoughtful distribution and skills to make proper distributions to a spouse and heirs.
These issues should make you think about whether or not the original trust terms and provisions are still a good fit for the many different needs we experience during a long life. Rarely is a one-size fits all trust a good idea.
Most of our clients revise and amend their trust at different times throughout life to meet their current needs. The changes generally reflect their next life cycle, and the needs that follow.
Unfortunately, we seldom stop to think about whether the trust entered into during past years is still best suited for today, tomorrow, or the future.
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 40-ish individual with assets that need to be properly nurtured to grow and remain safe for many decades ahead.
If you have a trust, stop now and ask if your trust as originally created is current and best suited to fit your needs today, and for the future. Probably not.
Ask yourself whether your current trustee is best suited to handle asset protection, your retirement, or distribute your assets when you die. Possibly not.
And, if you no longer believe you need an aggressive offshore or international trust or trustee for asset protection - or the large costs - consider a trust without those burdens, yet 'stands by' for those purposes, if needed.
Until recently, there were basically two types of trusts that integrated asset protection and estate planning: a domestic trust or an offshore trust. Most trusts fit into one category or the other.
However, there is also a hybrid option called a Standby International Trust ©.
The domestic trust type is generally more user friendly and with lower costs to set up and maintain, but comes with a higher risk of asset protection uncertainty. In contrast, the offshore variety offers superior asset protection and international investment diversification, but comes at a higher cost to set up and maintain.
However, 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. First, a primer on the typical two trust types, and then to follow below, more on the Standby International Trust ©.
Here’s why.
First, the offshore, International Trust Variety
The benefits of an offshore trust registered in some venues include trust laws that do not recognize US judgments or US judicial proceedings. This means that attempting to enforce a US judgement is difficult or not possible if the trust is registered in the proper venue. And if a judgement creditor, or their lawyer, seek to enforce a US judgement where the trust is registered, they are forced to start litigation all over again.
And not only must a plaintiff pay all litigation costs (including, flying to the offshore venue to litigate their claim), but plaintiff lawyer contingency fees are generally illegal, as a matter of law. Better yet, short statute of limitations means the claim may already be precluded.
The above factors alone often discourage plaintiffs, and their lawyers, and provide an opportunity to discourage or quickly settle litigation. But this is only the beginning of the benefits of an offshore, International Trust, for asset protection.
The trust terms and provisions (at least the type we implement for our clients) and statutory laws, generally create extremely high barriers before litigation can commence. Litigation burdens offshore are burdensome even for deep pocket plaintiffs after your assets.
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, or elsewhere, for investment diversification. And assets can be owned and controlled directly by a US domestic LLC, or an offshore LLC. You, as the LLC manager can control the assets directly, even though the LLCs are owned by the trust. When properly implemented, certain LLCs can 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 are 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 created, for tax purposes, the trust is created as a US domestic grantor trust (the type we typically implement), and tax requirements are user friendly. This also means the trust is 'tax neutral' when implemented.
Since the early 1990s we have implemented the International Trust for many of our clients with the above features, and much more. Learn more at this link.
For individuals willing to forgo the above added asset protection for at-home peace of mind and convenience, then the below domestic trust variety is sometimes preferred.
The Domestic Trust Variety
US domestic trust laws over the past 200 years have not been great 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 (a/k/a 'self-settled' trusts). 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 US government 'know your customer' rules and compliance, the US domestic trust became a substitute with some lawyers and their clients during the past decade. But the real reason is that often these lawyers marketing domestic trusts have little or 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 still seen as an easy way for some law firms to ramp up services and revenues for those clients looking to protect their assets domestically in a simple, cost effective manner.
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 became popular.
But the big 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 by 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, the following trust strategy has the combined features of simplicity and lower costs found in a domestic trust, and with a standby provision to switch it to an International Trust, which offers superior asset protection. This is a very valuable alternative.
The Standby International Trust ©
Think of having the benefits of both above 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 upon 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 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 domestic LLC to a new offshore LLC. If a new offshore LLC is created, you can also determine whether it's appropriate to 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 acts 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, 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).
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 an extraordinary litigation circumstance arises, there 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. And the trust remains fully designed with estate planning as first implemented.
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're the one that elects to use the standby provisions.
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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
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)