Offshore Asset Protection Trusts vs. Onshore Asset Protection Trusts Same trust concepts govern both Both support estate planning and wealth transfer Same benefits re: probate and avoidance of estate delays I. Accomplish testamentary objectives II. U.S. Estate/Gift tax neutral a) GST Tax Exemption Credit Trusts b) Credit Shelter Trusts c) Marital Trusts d) Estate Freeze --Techniques available such as Limited Partnership Planning to take advantage of valuation discounts
Advantages of Offshore Asset Protection Trusts over Domestic Asset Protection Trusts However: Law of other jurisdictions more favorable than USA Non recognition of foreign judgments Favorable Statute of Limitations No contingency fee litigation permitted Confidentiality Other Practical advantages Plus: Access to international investment opportunities Ability to use defined tax planning opportunities Equals: Greater security Greater certainty Greater flexibility Better investment returns & lower provider costs Better tax/estate position
Asset Protection Trusts Trust Legal Definitions: Grantor or Settlor Trustee Beneficiaries Protector
Popular Foreign Jurisdictions with Asset Protection Trust Statutes Belize Nevis The Cook Islands Bahamas
Case Study Stella, age 60 Successful corporate exec, has accumulated significant personal wealth Has invested after tax dollars in variety of investments Investments have grown, but Stella is concerned about investment costs, consistency of returns and tax leakage Planning retirement in 10 years Two Goals: #1. Protect her assets from the threat of litigation #2. Build the largest nest egg possible
Solution #1: Basic Asset Protection Trust with Protector $ Stella is a U.S. person Beneficiaries PROS Enhanced protection of assets from future creditors Access to funds if needed Protection & Certainty Privacy UNITED STATES THE COOK ISLANDS/BELIZE Transfer of $ to foreign trust Trustee Protector Irrevocable Discretionary Trust Investment Assets ($) U.S. Investment Managers CONS Investment income taxable in Stella s hands Missing diversification opportunities
Solution #2: Asset Protection Trust with Investment Benefits $ Stella is a U.S. person Beneficiaries PROS Enhanced protection of assets from future creditors Access to funds if needed Protection & Certainty Privacy + Greater diversification via international investment managers + Institutional rates vs. retail investment cost UNITED STATES THE COOK ISLANDS/BELIZE Transfer of $ to foreign trust Stella Trust XYZ Trust Co. As Trustee CONS Investment income taxable in Stella s hands PFIC tax issues from non-u.s. Investment managers U.S. Investment Managers Investment Assets ($) International Investment Managers
Solution #3: Asset Protection Trust with Investment & Tax Benefits $ UNITED STATES Stella is a U.S. person Beneficiaries PROS Enhanced protection of assets from future creditors Access to funds if needed Protection & Certainty Privacy Greater diversification via international investment managers Institutional rates vs. retail investment cost + Tax free shifting amongst investment types + Tax free access to policy values + Tax free death benefits for portfolio assets & true insurance benefit THE COOK ISLANDS/BELIZE Transfer of $ to foreign trust Stella Trust XYZ Trust Co. As Trustee Pr. Placement LI CONS Investment income taxable in Stella s hands PFIC tax issues from non-u.s. Investment managers U.S. Investment Managers Investment Assets ($) International Investment Managers
but, once I set this trust structure up, how do I get my $$ back? Ask Trustee for distribution Borrow against assets in trust For Private Placement structure, withdraw from policy and/or take a policy loan
Other Practical Considerations An asset protection trust is not for all assets Independent legal advice is important Selection of Trustee/Custodian/ Jurisdiction is important Don t keep control if you can reach it so can your creditors Reporting requirements Establishment process/timeline Protector, if needed
Fraudulent Conveyance or Transfer Statutes A. General Explanation 1. Definition: A. Transfer B. Protected Creditors 2. Intent (Badges Of Fraud) 3. Effect of Court Finding for Fraudulent Transfer 4. Effect of Court Finding for Transferee Liability 5. Bankruptcy Issues B. Potential Criminal Issues: 1. Concealment Of Assets 2. Bankruptcy Crimes 3. Tax Crimes 4. Money Laundering Rules C. APTs Generally Do Not Work for Pre-Divorce Planning
Benefit Summary: Use of an Offshore Asset Protection Trust Safety of assets when with carefully chosen trustee Enhanced protection of assets from attack Tax planning opportunities Access to best in class investment managers / greater diversification Supports overall estate and generational planning, and wealth preservation goals Is not the never-never plan Flexible, not inflexible tool
U.S. Treasury Reporting Requirements of Offshore APTs Various Treasury Reporting Forms: U.S. citizens and U.S. Resident Aliens are Required to Report their World-Wide Income Annually to the IRS Form 3520 Form 3520 A FBAR Form Schedule B of Form 1040 Check the Box
Domestic Asset Protection Trusts Many states have adopted Asset Protection self-settled Trust legislation Alaska Rhode Island Nevada Missouri South Dakota
Domestic Asset Protection Trusts Delaware is the leading jurisdiction Delaware s Qualified Disposition in Trust Act (1997) (12 Del. Code section 3570 et seq.) Domestic Asset Protection Trusts (DAPTs) offer an alternative to offshore asset protection trusts
Delaware Asset Protection Trusts Fraudulent Conveyance Act Principles: If trust is established with a claim pending, creditor has longer of four years or one year after knew or should have known of trust to file suit. As long as trust is not established with fraudulent intent, should be completely effective against creditor claims. All DAPT claims are heard in Delaware s Court of Chancery specialized court that hears all DE corporate matters.
Delaware Asset Protection Trusts Irrevocable Trust But Flexible Grantor can receive income and/or principal either in trustee s discretion or as a matter of right. Discretionary distributions can either be with or without standards. Grantor may designate advisors for various functions. Trustees protected from all decisions of advisors unless trustee is acting with willful misconduct
Delaware Asset Protection Trusts Permitted Grantor Retained Rights: Consent to or direct investment changes personally Veto discretionary distributions from trust Replace trustee and other named advisors Receive income and/or principal Retain a limited testamentary power of appointment
Delaware Asset Protection Trusts Who may defeat a DAPT? Pre-Transfer Claims must show client had specific fraudulent intent as that particular creditor and bring suit within 4 years of funding or 1 year after knows or should have known of trust s existence, whichever is later. Post-Transfer Claims within 4 years of funding and must show fraudulent intent against that particular creditor. Claimant must prove case by clear and convincing evidence a very high legal standard. Trust is NOT seized by bankruptcy court unless it was fraudulent.
Delaware Delaware Asset Asset Protection Protection Trusts Trusts Consequences if DAPT is defeated: Consequences if DAPT is defeated: Only sufficient funds are removed to satisfy judgment. Only sufficient funds are removed to satisfy judgment. If multiple creditors make claims, each one must bring If multiple creditors make claims, each one must bring separate action to make case. separate action to make case. Any distributions made prior to a creditor s successful suit Any distributions made prior to a creditor s successful suit to defeat DAPT will remain with beneficiary unless to defeat DAPT will remain with beneficiary unless beneficiary acting in bad faith. beneficiary acting in bad faith.
Conclusion What is it: Structuring wealth and business affairs to: Preserve accumulated wealth Meet overall estate planning and investment goals Minimize exposure to potential lawsuit Full transparency and reporting What is it not: Structuring wealth and business affairs to: Hide accumulated wealth Not report income, distributions or transactions as required by the authorities Establish an offshore trust to protect assets, but then direct the Trustee on what to do with those assets OR reserving substantive powers