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Why has there been a significant increase during the past decade in the use of International Trusts? Today, we look at different purposes of using the trusts, for protecting assets from frivolous lawsuits, estate planning, diversifying investments globally, and more.
What is an International Trust?
First and foremost, an International Trust is about organizing and protecting assets in advance of a risk or threat of litigation materializing. Different asset classes have different risk, and one objective is to organize assets by risk classes and equity values for a superior outcome if you are sued.
A hallmark of asset protection planning is not based upon hiding or secreting assets, although some are erroneously compelled to believe otherwise. The objective is to use as many legal steps as possible to protect what you've acquired through a lifetime of hard work and investing.
An International Trust is about planning for retirement, and beyond, including estate planning. Integrating both asset protection and estate planning covers both the life and death side of living and planning for the future.
While it's true that an International Trust creates a greater level of privacy and confidentiality in handling your personal affairs and assets, it should never be a means to evade taxes. And it should never be used as a tool for fraudulent purposes.
Importantly, asset protection planning generally integrates different planning tools into one planning structure, creating a synergy beyond what you could otherwise accomplish with independent planning techniques. Therefore, an International Trust has many different purposes, one of which is asset protection.
An International Trust, in its simplest form, is a trust registered in a jursidiction with more favorable asset protection laws outside the venue where you reside. For U.S. individuals, it also means a trust - for U.S. tax purposes - that is U.S. tax neutral and typically not implemented as a foreign trust. And it's a myth that you need to give up control of assets, or transfer your money offshore.
For tax purposes, the trust is generally established as tax neutral. This means the settling of your trust neither creates tax benefits, nor results in a negative tax consequence…. this is an important concept frequently overlooked by inexperienced planners. Tax motivated trusts often come under greater scrutiny, while tax neutral trusts generally fly under the radar screen.
And since asset protection planning ultimately stands or falls in a courtroom, the starting point for all asset protection should be with an experienced planner seasoned with years of courtroom and litigation experience.
Trust planning should always start with the end result in mind, and then integrate planning tools and techniques into the structure…. the ultimate objective should drive the means.
Moreover, today asset protection trusts can be created and registered in various U.S. states, but that doesn't mean they are the same as International Trusts. U.S. domestic trusts have been driven by local states seeking to increase their tax revenue base. This domestic variety is then often marketed by local promoters promising the same results as international or offshore trusts results.
Often the local trust promoters know little or nothing about international laws or planning. And those buying into the local trust hype are led to believe that keeping assets in the same U.S. jurisdiction where threats arise is a good plan. But there is little good about planning and keeping assets located where local plaintiff lawyers and judges can exercise control over your hard-earned money.
While there are a handful of U.S. states that have created asset protection provisions through legislation trying to compete with offshore jurisdictions, at the end of the day, there is generally little benefit to availing yourself to these U.S. domestic varieties when far superior international planning techniques are available.
Offshore also offers far greater access to a much wider variety of investment opportunities than located at home. And many of those investments offer greater safety and security than what's at home. Why limit your investments to a narrow range of options? Life is about having choices.
Whether you live in the U.S., or Australia, or Britain, or elsewhere, the following factors apply.
Let’s look at some of the reasons why:
International Trusts are Superior to U.S. Settled Trusts
For a variety of reasons, an International Trust offers far greater asset protection as compared to creating or settling a trust in the U.S., or locally if living elsewhere. Just a few of those reasons are noted below.
First, the trust laws of some foreign jurisdictions permit a greater degree of benefit and control over the assets held within a trust than what is permissible in the U.S. A problem with U.S. trust law is that it severely restricts the benefit and control of assets through a trust.
And as a general rule, U.S. courts bound to U.S. trust law have long refused to protect settlor’s assets from creditors when the trusts are settled in the U.S. To the contrary, many jurisdictions outside of the U.S. permit self-settled trusts to protect your assets from different risks and classes of claims.
U.S. trust law generally provides that if assets are within reach of the settlor, then they are also within reach of the settlor's creditors, whether they are present, subsequent or future potential creditors.
This means that a U.S. settled trust created even when there are no fraudulent conveyance issues may still be attacked, even many years after a trust is settled …. not a good result if you are serious about protecting your assets and maintaining benefits and control over the assets in the years ahead.
To the contrary, with an International Trust the level of benefits and control created for asset protection governed by the trust laws of a foreign jurisdiction are generally significantly superior to the rights and powers retained by settlors of a U.S. settled trust.
And important benefits to settling an International Trust outside of the U.S. include more favorable and flexible spendthrift provisions. Simply stated, a self-settled international spendthrift trust receives superior recognition under the trust laws of many offshore venues.
A U.S. settled trust may be as much of a target for litigation as a settlor going “naked” without a trust, since there are always creative litigation strategies, which local litigation attorneys can implement to try and circumvent a U.S. settled trust.
But to the contrary, an International Trust is less likely than a U.S. settled trust to be such a magnet for local litigation threats.
Due to distance, jurisdictional and other International Trust law protective provisions, local judgments and court orders are generally not recognized by the foreign court. As a result, an International Trust will often act as a deterrent to even aggressive litigants and their legal counsel.
Therefore, another major advantage of an International Trust over a U.S. settled trust is just how far – in both geographical distance and litigation costs – a creditor is willing to go in the course of pursuing your trust assets.
Further, when you consider the psychological deterrent of a litigant and plaintiff’s attorneys dealing with foreign court systems, the cost of pursuing litigation overseas, the added uncertainty of prevailing in a claim against you elsewhere, and many other legal and practical hurdles created through the use of an International Trust, they all add up to be formidable barriers to even the most threatening of litigants.
One more hurdle includes a higher burden of proof to establish fraudulent intent when the International Trust was first created.
And the hurdle is even more difficult by establishing a “beyond a reasonable doubt” standard of proof, instead of the much lower U.S. standard of merely “by a preponderance of the evidence.” This is more than theoretical when played out in the courtroom.
The above are huge obstacles for opposing litigants to overcome when attempting to attack your assets.
If a creditor’s case is marginal, or they are unable to satisfy the higher standard of proof, then creditors are often discouraged from even filing a lawsuit in the first place.
Moreover, in the U.S., some fraudulent transfer laws permit challenging transfers considered fraudulent for an unlimited duration… meaning many years after a U.S. trust is settled it can still be attacked.
To the contrary, many offshore jurisdictions provide a very short period of time after you transfer assets into an International Trust to challenge your asset transfers into the trust.
Considering that your solvency might be challenged after creating an International Trust, a question remains as to how much time must pass before a creditor is barred from challenging your solvency.
As a practical matter, and is frequently the case, an offshore jurisdiction's statute of limitations may have already expired by the time the creditor seeks to enforce a claim against you and the International Trust.
What’s more, there are substantial costs and fees to an opponent considering a challenge to your International Trust asset protection plan. Just exactly how much money is a plaintiff prepared to spend, particularly when lawyer’s contingency fees are generally illegal in more favorable asset protection jurisdictions?
The high costs and fees alone, coupled with the unknown elements involved in a foreign legal system, generally encourages an opponent to reach a conclusion early on that litigating against you is not worth it after all.
If nothing else, think of an International Trust as a good insurance policy for protecting your assets.
Moreover, in asset protection strong foreign jurisdictions, remedies such as punitive and/or treble damages are generally not allowed. This also severely restricts threats of plaintiff tort claims against your assets.
And as you are probably already aware, the litigation discovery process in the U.S. is very broad, burdensome and costly when defending even the most frivolous of cases. Litigants are often entitled to obtain from you an overwhelming amount of documentation - whether relevant or not - during the course of discovery, otherwise know as a fishing expedition.
These discovery abuses are not permitted in most foreign jurisdictions and ultimately create additional obstacles to a litigation opponent.
The asset protective trust laws of many foreign jurisdictions are generally far more protective than U.S. trust law. And one of the well-known leaders in asset protection legislation is the Cook Islands.
Two other big disadvantages of establishing a trust in the U.S. for asset protection purposes are the "full faith and credit" laws and "supremacy clause" issues.
These are laws that force one state to respect the laws of another state, or question the controlling law when more than one law applies. These are common issues when trusts and assets and/or parties are located within different U.S. states.
Foreign jurisdiction courts generally do not recognize full faith and credit issues as in the U.S., and supremacy clause issues will typically not arise because the trust is beyond the jurisdiction of United States law.
About the best thing that can be said about the U.S. states that have created trust legislation for revenue raising purposes which attempt to compete against offshore jurisdictions, is that they have added to the local credibility of the asset protection planning process that began in earnest in the early 1990s. This is when our office first commenced using what is now known as the International Trust.
How to use an International Trust for everyday purposes?
There are a number of informative complimentary Past Articles posted on our site. This is a good starting point to help you in the learning process of how to work with an International Trust.
How you go about creating your personal asset protection structure and integrating assets into the trust is an important part of the planning process. How to Legally Protect Your Assets, 2nd edition, introduces you to the basics of this planning process and provides actual case scenarios demonstrating how you can achieve results.
And when establishing an International Trust, it is also essential that estate planning be incorporated and integrated into your planning goals. This is always part of the planning process.
If you are considering a move to another country, an International Trust for pre-migration planning can be an excellent tool to minimize tax burdens in your newly-adopted homeland.
While global investment diversification was discussed in earlier newsletters, as a reminder, the International Trust is a good tool for reaching this objective too. This and more is covered in greater detail in the book Offshore Living & Investing, 2nd edition.
Planning goals vary from individual to individual. Your objectives may include protecting your assets from any number of threats and risks that can arise to separate you from your money.
Still other goals focus on issues arising during your lifetime or for retirement purposes. And planning goals often focus on issues following death.
Integrating many different types of planning objectives into an International Trust structure is ultimately about protecting and preserving your assets today, tomorrow and into the future. Your planning should be a customized approach to your needs, and not boiler plate planning documents too often found today.
For more practical information on these topics and much more, visit DavidTanzer.com and see the Past Articles posted for your reading.
If you would like more information about how to begin planning for a more secure future, or how we conduct an initial review and make recommendation, contact me here for more information.
Until next time.
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com
Vail, CO USA:
Tel. (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Brisbane, Australia:
Tel. (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)
(C) Copyright 2020 David Tanzer all rights reserved. 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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