The trust is the oldest of all of the entities currently used in international financial planning. Some say it dates back to Roman times, but it certainly dates back at least to the time of the Crusades, when it was used to protect the estate of the knight or Lord who went to fight in the holy land at a time when wives were considered legally incompetent to manage such an estate.
In its simplest form a trust is a contract among three parties: the settlor or grantor, the trustee and one or more beneficiaries. Under common law the trust does not have a separate persona from the trustee; however in some jurisdictions, especially the newer international financial centers (IFC) statutory provision has been made creating the trust as a separate persona. In a simple trust the settlor or grantor places assets in the trust fund in the name of or under the control of the trustee who is required to manage those assets on behalf of one or more named beneficiaries.
Modern trusts usually include another fiduciary known as a protector, who at the very least, has the power to remove the trustee and appoint a new one in his stead. In many jurisdictions trusts can also be established on behalf of purposes rather than stated beneficiaries, i. e. for the advancement of religion. Almost all modern trusts include strong asset protection provisions which would effectively prevent the creditors of a beneficiary from gaining access or enjoyment of the assets within the trust held on behalf of the beneficiary.
Another layer of asset protection is provided by a flight clause, which allows or requires the trustee or protector to remove the situs of the trust to another jurisdiction. In many cases this movement can be done secretly, which by itself adds another element of asset protection.
The big problem with the trust, is that for it to be effective, the grantor must genuinely give up control of the assets to the trustee. This causes two problems: first, is the trustee trustworthy and, second will the trust survive the scrutiny of the courts.
Finding a trustee that is trustworthy is not difficult if one keeps in mind a few principles. The trustee should have enough money that he is not interested in stealing yours. As such, a big bank or trust Company is perfect. A second consideration is that the trustee, which is presumably a corporate trustee, has no offices, branches or subsidiaries in the home country of the settlor. This is necessary in order to protect the trustee from undue legal pressure being brought against it. For example, a foreign bank with US offices could be pressured into compromising a trust under its trusteeship by huge daily fines levied against its US subsidiary.
In order to survive the scrutiny of US courts the establishment and independence of the trust in question must be believable! This means that the settlor must still have substantial assets under his control and outside the trust. No judge will find it easy to believe that someone has given away all their assets to a foreign trustee without retaining some control. However, if the trust sets aside a substantial portion of the settlor’s estate in order to preserve it for his or her heirs, such a trust becomes substantially more believable.
Many thought that the famous Anderson case was the death knell of trusts–but the courage and perspicacity of the courts of the Cook Islands ultimately upheld their integrity even in the face of a massive onslaught by the US government.
In my opinion, the biggest downside to foreign asset protection trusts for US persons is that they are highly suspect, and their reporting requirements exacting and extensive. In some cases, the creation of such a trust can even require the payment of gift tax.
Nevertheless, a foreign trust established by a well qualified professional with in-depth understanding of both trust law and US tax law can be a powerful asset protection and estate planning tool. But, under no circumstances is it a tool for tax reduction! If anyone tells you that it is, run from this fast as you can–if they will lie to you they will steal your money too!!!