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Which is better: a local U.S. state based trust, or an International Trust? And is a Cook Islands registered trust a better alternative?
And why?
Originally, asset protection trusts were implemented to defend against frivolous lawsuits, disgruntled spouses, revengeful employees, contract disputes, embittered business or professional partners, and a long host of other common litigation threats.
Today, added to the list are concerns about social unrest, government confiscation, unsettled political leadership and saber rattling, and an endless list of currency and border controls.
Our newsletter today looks at what is a better way to protect assets: a local U.S. state based trust, or an International trust?
U.S. Trusts Background
Alaska was the first U.S. state to enact laws allowing asset protection for self-settled trusts in 1997. In this order, sixteen other U.S. states followed: Delaware, Rhode Island, Nevada, Utah, Oklahoma, South Dakota, Missouri, Wyoming, Tennessee, New Hampshire, Hawaii, Virginia, Ohio, Mississippi, West Virginia, and Michigan. Trusts registered in the U.S. are typically referred to as a domestic asset protection trust, or simply ‘DAPTs’.
A local lawyer would likely recommend to a client to create a local trust out of convenience, or more commonly, due to his or her lack of knowledge of other options. But convenience and limited knowledge does not make for quality asset protection. In reality, it may mean you pay for nothing more than an illusion of security.
One question to consider with a state based U.S. asset protection trust is the extent of debtor-friendly factors. In some states there are ‘no exception’ creditors, meaning you can keep your money out of the hands of ex-spouses claiming alimony and child support. Even pre-existing tort claims are exempt. In other states, creditors can reach into trust assets without proving fraudulent transfer. And in all U.S. states, creditors can reach the trust assets if they can prove a fraudulent transfer.
Each state attempts to strike a balance between debtor and creditor rights. The more the balance favors the creditor, the more it weighs against you and your assets. Sometimes the state statutory differences appear small, but in practice they can make a huge difference as to whether you keep or are forced to give your money to someone else.
And when you live in one state, and have assets in another state, a claim filed in either state results in uncertainties as to which state, and how, a judge applies different doctrines of law. These variables greatly impact your assets.
The Uniform Voidable Transfers Act
The Uniform Voidable Transfers ACT (UVTA) attempts to apply some consistency regarding the transfer of assets in a very misunderstood body of law. Many legal problems arose nationwide following revisions to the Bankruptcy Act, which provided that many U.S. self-settled trusts were voidable - with no time limits - for common claims that asset transfers were fraudulent.
The Bankruptcy Act provided that a person living in one state without DAPTs could not utilize DAPT laws from another state. Some states have enacted UVTA, and others have not, which presents more legal issues.
Since 2010, cases involving earlier formed DAPTs were beginning to make their way through the U.S. court system. The outcomes of the DAPTs have not been promising. Judges applied the amendments to the bankruptcy laws to seize assets conveyed to a DAPT. And overall, results have been inconsistent between states.
How U.S. Trusts Provide Limited Benefit
Due to the huge differences in the asset protection offered by different states, asset protection for a U.S. based trust is sketchy – and difficult - at best. Other factors also influence the outcome of an attack against your assets using a U.S. based trust.
First, consider conflict of law issues between states. It gets even more complicated when there are multiple venues and multiple parties. An important question becomes: which state law applies?
And the Full Faith and Credit laws also come into play. The Federal laws require judgments in one state to be recognized and enforced in another state. That means you may have protection at home, but if a judgement was entered in a different state that other state judgement may still apply without considering the protection where your U.S. trust was registered.
And of course, results oriented judges are always a concern. If a judge is predisposed towards an outcome, the facts and laws quickly fall into line with their thinking. This is even more of a problem when judges are more consciously concerned with the results and not following the law.
Further, if assets are not timely or properly conveyed, then the transfer may be voidable under fraudulent conveyance statutes. This means an asset transfer could be unwound easily with a U.S. based trust. And various bankruptcy 'claw back' provisions can also leave you empty handed.
And placing assets in one stateside U.S. trust is rarely a good plan.
In my opinion, DAPTs should properly be labelled as DAFTs. An old English slang term - daft - is used to describe something that is mad, crazy, foolish or outright dumb.
Why would you want to try and protect your hard-earned assets in the same venue where the problems persist? That’s being hopeful, and hope is not a plan.
For the above reasons and more, an International Trust registered outside the U.S. applies the asset protective laws from a jurisdiction outside of the U.S. not generally restricted by the above issues.
What Difference in using the International Trust?
An International Trust offers opportunities to transfer liquid assets offshore away from prying eyes, or to encumber hard assets like equity strips with an offshore bank. These transfers can be free of U.S. fraudulent conveyance laws if timely implemented.
Not recognizing U.S. judgments in the venue where your trust is registered is also an important benefit.
Asset protection trusts registered offshore can be more effective if the trustee, trust protectors and assets are beyond the reach of U.S. courts. So long as these conditions are present, harsh U.S. laws may be of little practical benefit to a creditor or plaintiff.
And often these measures alone are enough to discourage even the most determined litigant.
While real estate and other hard assets might still have limited protection in the U.S., the protection through an International Trust can be found in encumbering the real estate by various forms of equity stripping.
Registering a trust in a venue designed with superior asset protection as a matter of law is also critical. Proper advance planning for liquid and illiquid assets makes all the difference.
Unfortunately, today, there are inexperienced planners setting up trusts with little or no experience in litigation, international laws, or asset transfer laws. Here is a link to what to look for in a good planner.
One of the many distinguishing trust features between DAPTs and an International Trust is that the trust registered outside the U.S. protects the trust settlors from creditors and litigants wherever located.
International Trusts are nothing new. And the Cook Islands still remain a favorite with me and other experienced international lawyers creating superior asset protection for clients.
Why the Cook Islands?
The Cook Islands is a sovereign nation in the South Pacific. Around 1990 it first established itself in the international financial services industry through innovative asset protection trust laws. In the beginning it was named as a non-co-operative to combat money laundering and financial crimes and blacklisted. But today it is recognized as a world leader in the fight against money laundering and other financial crimes.
The Cook Islands’ journey from outcast to global leader has taken time, in part due to demanding international standards placed on the small jurisdiction with limited resources. Yet the Cook Islands is still required to have the same framework of AML/CFT systems, processes and controls, including with member nations like the US, China, India, Singapore, Hong Kong, Australia, New Zealand and others.
Most notable Cook Island enactments established the Financial Supervisory Commission (FSC), and the Financial Transactions Reporting Act 2004 (FTRA). The FSC became and remains responsible for the licensing and supervision of financial institutions including banks, insurance companies, trustee companies and money transmitters, and the Cook Islands’ overall compliance with international AML/CFT standards. Other laws and enactments followed.
The FTRA targeted the prevention, detection, investigation and prosecution of serious offences, including money laundering and terrorist financing, by establishing a Financial Intelligence Unit (FIU) and imposing customer due diligence requirements on reporting institutions.
In addition, other laws included: criminalizing money laundering; tracing and seizing proceeds of crime; providing international assistance in criminal matters; and eliminating shell banks.
As a result, the Cook Islands gained substantial ratings in key areas, which was collectively better than large financial centers, such as in Australia and the U.S.
What this means for the Cook Islands
This outstanding result for the Cook Islands has been achieved through the commitment and hard work of the Cook Islands government, its crown agencies and the private sector. Today, it provides governments, institutions and businesses globally great comfort when dealing with the Cook Islands and its financial services industry. In other words, today, the Cook Islands offer much more than asset protection.
It also provides the Cook Islands enhanced credibility when dealing with international trade partners, and financial institutions find it harder to justify reasons for not transacting with the Cook Islands.
Notwithstanding significant international regulatory compliance in the Cook Islands today, there is still misinformation in the global community in regards to the Cook Islands and its financial services industry, which in the past gave rise to unjustified criticism.
At the same time, the Cook Islands continues to offer superior asset protection by virtue of the laws originating in the late 1980s / early 1990s, which set the standard for international asset protection today.
A long list of specific Cook Islands asset protection laws and applications are outlined in the book How to Legally Protect Your Assets, 2nd edition.
The International Trust
A trust registered outside of the jurisdiction where you reside, can still use a local, U.S. based domestic trustee. For Americans, this means registering your trust outside the U.S. - with your local trustee at home - and maintaining the trust as a U.S. domestic trust for U.S. tax purposes. This also means it is not a foreign trust for tax purposes. Yet this still results in availing your assets, and the trust, to superior asset protective measures located offshore, as needed.
What’s more, you have the ability to take advantage of more favorable statutory asset protective laws than found anywhere in any of the U.S. states, and a trust located in a venue where U.S. court judgments are not recognized.
Then, when a threat materializes against you or the assets, there are numerous steps you can elect to implement to protect assets at home. Transferring liquid assets offshore and encumbering equity in real estate are just two examples to protecting assets. Numerous other examples are covered in How to Legally Protect Your Assets, 2nd edition.
And until a threat materializes, you can still maintain control over the assets as an LLC manager, and over the trust and trustees as the trust protector.
The above are only a few of the many benefits of an International Trust. Go here to learn more. And yes, going offshore is still perfectly legal.
One of the most important steps to achieving good results is to take steps now, well in advance of future problems. If you wait until it's too late, then there is not much that you can do other than damage control. Take action today, while the seas are calm and before the storm sets in.
To learn more about both stateside and offshore planning visit DavidTanzer.com. There are plenty of good complimentary articles found here.
To start learning how to protect your assets How to Legally Protect Your Assets, 2nd edition, is a good start, found right here.
To learn more about living and investing from an international perspective, read Offshore Living & Investing, 2nd edition.
Both books are located on our site at substantially reduced prices in Kindle, pdf and quality softcover.
Or to learn how you can get started with an initial review for your planning, contact me at this link.
Until next time......
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328
Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (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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