Free Newsletter Signup:

About our newsletter ...
  Submit

Already a Subscriber?
To manage your current subscription settings, enter your email address.

  Go
Recent Articles

Life Member: The Top
Trial Lawyers in America

Past Articles

U.S. IS NOW OFFSHORE - WHERE’S YOUR TRUST?

There are many reasons why individuals create trusts. And there are several different types of trusts for asset protection. 

 

For example, the Domestic Asset Protection Trust, the International Trust, and the Standby International Trust©. We'll compare the three, and you might be surprised how recent U.S. laws and changes impact the trust option that may suit you best. 


You'll be forgiven for feeling like you're drowning in alphabet soup.


Does living in the U.S. now mean we've all moved offshore?


First, consider the impact of the National Defense Authorization Act (“NDAA”) that came into law on January 1, 2021, the first and only veto override of Trump's presidency. Contained within the NDAA is the new Anti-Money Laundering Act (“AMLA”), which includes the Corporate Transparency Act (“CTA”). The AMLA expands the Bank Secrecy Act (“BSA”) and strengthens at home the United States’ financial crime monitoring systems over you, your business, and your company, even when located only in the U.S. 


Among the significant provisions in the AMLA is the creation of a registry to be administered by the U.S. Financial Crimes Enforcement Network (“FinCEN”) to track the beneficial ownership of your business formed in, or registered in, the U.S. Information filed under the AMLA/CTA will be available to other parties, including state law enforcement authorities and U.S. Federal agencies engaged in national security, intelligence, or law enforcement activity. 


In addition, the new laws authorize FinCEN to provide information to your bank or other financial institution to satisfy their KYC “know your customer” compliance, and for other “due diligence” requirements.

 

As part of the reporting under the AMLA/CTA, a company must disclose and update the names and identifying information of all beneficial owners (newly defined) or be subject to substantial financial and criminal penalties. 

The reporting obligation applies to existing companies and newly formed companies. Once FinCEN adopts regulations under AMLA/CTA, newly formed entities must immediately file the required information. Then, existing companies will have up to two years to file beneficial ownership reports and other information after FinCEN adopts AMLA/CTA regulations.

What does this mean to you?

First, it means there will be little difference between at home or offshore. And, it means nothing is private anymore with respect to owning a company or running a business. It also means that all personal information can - and will - be readily available to others looking to pierce the veil of privacy of the company, and you. 
 

The U.S. Government has now thrust upon individual U.S. business owners and investors the same harsh, draconian measures cast upon independent, sovereign countries beginning two decades ago, when companies are registered to U.S. individuals. The increased burdens of the offshore style reporting to set up or maintain an offshore company stopped many U.S. individuals in their tracks. As a result, legitimate offshore business centres have lost significant business, and incur huge expenses to maintain the companies now registered in their jurisdiction by U.S. individuals. 


And now, the same harsh burdens that scared off individuals from forming legitimate companies offshore for international planning have arrived at home, in the U.S. Going forward, there will be little distinction between burdensome KYC and due diligence requirements for companies registered at home or abroad. 


In other words, there is now little reason to avoid the burdens of forming an offshore company by forming one at home. Offshore company burdens have arrived at home in the U.S.


And in case you didn't notice, the above reporting requirements apply to U.S. banking, too. So, the added burdens of offshore banking have also arrived in the U.S.


What's more, if you didn't already figure it out, the added burdens of domestic trusts also apply when setting up and maintaining a domestic trust at home, in the U.S.


So, as life changes, you need to re-think how and where you register your company, your trusts, and conduct your banking.


Which type of trust is better suited for you?


When implementing a trust, the preferred structure is that the trust owns companies that own the assets, and you manage the companies and assets on a day-to-day basis. The options for structuring vary from individual to individual. But for many reasons beyond the scope of this newsletter, this concept suits most individuals.


If you already have a trust, stop and ask yourself if your trust, as originally implemented, is current and really best satisfies not just your immediate needs, but for the future. Many don't.

 

And importantly, ask yourself whether your trustee - if located at home, or abroad - is best suited to handle your asset protection needs, retirement, or estate distribution to your heirs when you die. Possibly not.

 

In the past, there were basically two types of integrated asset protection and estate planning trusts: a domestic asset protection trust or an offshore trust. International Trusts replaced the typical offshore trust beginning circa 2000, and more recently, the Standby International Trust© is rising as the choice for some.


Let's next summarize the benefits of each of the above three trusts, and see how one might better apply to fit your needs. 


The Domestic Trust Variety

 

For over 200 years, U.S. trust laws have never been an option for protecting assets. One reason is that individuals were prohibited by U.S. trust laws from creating a trust that restricts or prohibits creditor’s claims against assets placed into a trust. For this reason, a self-settled trust for asset protection never existed domestically. But admittedly, things have changed in recent years, in marginal ways.

 

As a result of increasing government pressures, the U.S. domestic trust became a popular substitute with lawyers and their clients during the past decade. This was motivated by U.S. lawyers marketing domestic trusts with little or no background in litigation, limited experience in asset protection strategies, and little or no experience with International Trusts. Yet, the domestic trust was seen as an easy way for some law firms to ramp up legal 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 U.S. to avoid offshore compliance burdens, and minimize costs. In some circumstances, assets are held directly in the trust, and in other cases in U.S., LLCs, to avoid burdensome offshore KYC and due diligence. It's no surprise why the domestic trust became popular. 


But it begs the question: Why would you would want to keep assets in the same place where a threat arises?

 

 

Depending on how implemented, a domestic trust may create nothing more than an illusion that assets are protected in a fashion similar to offshore asset protection trust. They are not.  

And unfortunately, there are a number of very serious limitations with the domestic asset protection trust option. 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 conveyance laws. And bankruptcy ‘claw back’ provisions are another. Moreover, too frequently ‘results-oriented’ local 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. This is particularly true 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 all assets in the U.S. should be used for serious asset protection planning. Please read the last sentence again.


Yet, for some individuals, a U.S. domestic asset protection may still be beneficial. For those insisting upon keeping everything local, for the least amount of money, and willing to accept the limitations, this option may be useful as compared to no asset protection at all. Something may be better than nothing.


Now let's compare this with the second option, the International Trust, and then the hybrid Standby International Trust©.

 

The International Trust 

 

The International Trust we provide for our clients is integrated with asset protection, retirement planning, and estate planning. This means that the life / living side and the death / dying side are important, integral parts of the overall planning. And the trust is designed, when implemented, to be tax neutral.


One of the benefits of registering a trust outside of the U.S. includes, for example, trust laws that do not recognize U.S. judgments, or U.S. judicial proceedings. This means that attempting to enforce a U.S. judgement against your assets is not possible. And if a judgement creditor and their lawyer look to enforce a U.S. judgement where the trust is registered, they are forced to start litigation all over again.

  

Not only must the plaintiff then 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 very 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 frivolous lawsuits, or settle litigation swiftly for significantly less. But these are only the beginning of the benefits of using an 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 fresh litigation can commence elsewhere. Litigation challenges from abroad will look daunting for even deep pocket plaintiffs looking to attack your assets. 

 

And these are only some of the reasons how certain asset protection venues offer superior asset protection and wealth preservation for an International Trust. 

 

Assets can still be located at home, or elsewhere for diversification. Assets can be held directly in a U.S. or offshore LLC, and the LLC is owned primarily by the trust. However, as the LLC manager, you control the assets directly on day-to-day matters. When properly implemented, LLCs can offer an added layer of asset protection through Charging Order Protection, which means that forced LLC asset distributions can be avoided.

 

Further controls over the trust and trustees occur when you act as the trust Protector. As the trust Protector, you maintain veto powers and controls over the trustees. Using a domestic trustee also brings added convenience.

 

And when the offshore trust is created as a U.S. domestic grantor trust for U.S. tax purposes (the type we typically implement), the tax requirements are user friendly. This means the trust is tax neutral when implemented.


For those individuals looking to implement superior asset protection now, the International Trust is a superior choice. There is an added cost to implement the trust, and the additional, ongoing annual trustee's fees, but for many this is a small price to pay for the extra benefits. And depending on if, and when, there are offshore activities, there may be added accountant compliance or tax reporting - but this will vary from individual to individual circumstances.

 

Since the early 1990s we have implemented the International Trust integrated with asset protection and estate planning for many of our clients with the above, and other, features. Learn more at this link.

  

And next, a trust with the combined features of the simplicity and lower costs found with a domestic trust. This next option provides the added feature of a standby provision to convert it later to an International Trust offering superior asset protection, a very 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 easier to maintain. Yet the trust includes the added asset protection and estate planning features found in an International 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 converted into an International Trust.

 

When converted, the benefits of an International Trust are designed to come into play. In the meantime, you can avoid the added offshore costs and compliance burdens until the standby provision is exercised.

  

In essence, the original domestic trust stands by ready to become an International Trust at your option. 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, the benefits of an International Trust can come to life by adding an offshore trustee in a jurisdiction of your choosing.

 

Typically, assets remain at home when the trust is first implemented. And initially, they could remain at home even after the standby option is exercised. Then you decide in due course whether to keep the assets at home, or move them to safer shores.

 

A decision can also be made whether to create one or more new offshore LLCs. Assets could then be transferred from an existing U.S. LLC to a new offshore LLC. If a new offshore LLC is created, you can also determine whether it is appropriate that you, or others, act as the offshore LLC manager controlling and managing the assets, or whether another option is more desirable.

 

So long as the assets remain within the trust structure, the date the trust was first created can generally act as the original date the assets were first transferred into the trust structure, even after exercising the standby feature. 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.  

 

And after exercising the standby option, you can elect - for U.S. tax purposes - to continue to maintain the trust as a U.S. domestic grantor trust, or convert the trust to 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 is often enough to discourage even the most determined plaintiff and their lawyers. This helps bring about a quick, low-cost outcome to litigation.

 

And when litigation circumstances arise, there still remains a number of 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 the standby option 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.

 

The Standby International Trust© can save you several thousand dollars at the onset to establish, and several thousand dollars annually to maintain. But one caveat is that timing is everything. This means, it is essential that the standby election be timely and properly exercised, when needed. If not, the added offshore asset protection benefits may fail.


Timing also means taking the necessary steps today, which is essential, so that when a threat arises the International Trust, or the Standby International Trust © is ready to protect you, your hard-earned assets, and your family, in the years ahead. 


And be certain the planner that assists you with implementing your planning is experienced and well-versed in all, necessary aspects. Follow this link for what to look for in an asset protection planner. 


Start Now

 

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