In theory, an irrevocable domestic trust for
the benefit of your spouse or your children will remove the trust
property from exposure to your future creditors, so long as
- you don't retain any control over the use of the trust
property, and
- you don't put property in the trust when you are insolvent.
Under the best of circumstances, you have to make a complete and
irrevocable gift of the property to someone else while you are solvent
in relation to any current or potential creditors.
But theory doesn't always prevail in U.S. courts.
And ... such gifts will either (1) use up your available
annual gift tax exemptions, (2) use up part or all of your lifetime
exemption from the estate and gift tax, or (3) they may trigger an
immediate obligation for gift taxes.
Objections To Domestic Asset Protection Trusts
Those who are urged to establish an irrevocable domestic trust for
asset protection may be reluctant because;
(1) they have no power to revoke or alter the terms of the
trust,
(2) the grantor can't be a beneficiary of a U.S. trust that
provides any creditor protection by means of a spendthrift provision,
and
(3) the grantor can't be a trustee of his own trust and also
enjoy any asset protection benefits.
A common practice in establishing domestic trusts is to
combine all types of assets in the trust. But, according to Jeffrey Verdon,
"Lumping (high) risk and non-risk assets into a ... trust without
considering a possible liability claim (arising from the high risk
asset) is a mistake commonly made by financial advisors and lawyers, who
may glibly suggest buying liability insurance - which is not always an
adequate solution."
Furthermore, if you are concerned about the potential for
the future imposition of currency controls or the future confiscation of
assets by government, having your money in a U.S. trust won't help if
the government takes control of the trust assets. The U.S. can quickly
impose currency controls because such an action only requires an
executive order by the President.
Advantages of The Foreign Asset Protection Trust
A foreign trust can overcome most of the problems connected with using
a domestic trust for asset protection. The following is a list of these
benefits, which I'll explore in more detail.
To hold assets in a more friendly legal system
Foreign trusts are not favorable to creditors
A trust protector can retain veto powers over the trustee
Foreign trusts can be used to avoid probate
Foreign trusts can function as credit shelter trusts
Contingent legal fees are not allowed
The grantor can be a beneficiary
The trust can be revocable or irrevocable
The trust location can be moved
The foreign trust can pay taxes & expenses of a
beneficiary
The grantor can retain some
control over the assets in the U.S. with a family limited partnership or
limited liability company and can get the money back as loans,
partnership distributions or as compensation to the general partner.
These comments represent an extremely simplified overview of the
benefits of an offshore trust and there are many restrictions and
limitations on the use of these benefits. There is also some controversy
among international tax lawyers as to whether the foreign trust is an
appropriate method for asset protection.
Extensive further details about protecting your assets from
future lawsuits with an offshore trust are available in our subscriber's web site.
