Offshore Asset Protection Trusts - Chapter 5 -  International Asset Protection Trusts (IAPTs)

Protector Trust

I.     General Points

A.     Overview of IAPTs

§5:01        The Need for IAPTs

§5:02        Definitions and Basic Functions of IAPTs

§5:03        International Institutions Are Safe

§5:04        Planning the IAPT

B.     Advantages of an IAPT

1.     General Advantages

§5:10        Settlor Is in Indirect Control

§5:11        IAPT Can Be Self-Settled

§5:12        Privacy

§5:13        Avoidance of “Dollar” Risk

2.     Protection from Creditors

§5:20        U.S. Courts Have No Jurisdiction

§5:21        Trustee Can Refuse Duress Request

§5:22        Trial De Novo Required in Jurisdictions That Do Not Extend Comity

§5:23        Foreign Laws Are More Favorable

C.     Criticisms of IAPTs

§5:30        Potential Criminal Liability

§5:31        Protection Does Not Always Work

§5:32        IAPTs Place Assets Beyond U.S. Courts

§5:33        IAPTs Risk Tax Penalties

§5:34        Asset Protection for Trust Settlors Is Not Proper

§5:35        Fees Are Too Large

§5:36        IRS Can Compel Disclosure of IAPT

§5:37        IAPTs Do Not Protect Fraudulent Transfers

D.     Risks and Abuses to Avoid

§5:40        Improperly Drafted IAPTs May Allow U.S. Jurisdiction

§5:41        Delay Allows a “Lookback”

§5:42        The Foreign Grantor Trust (“FGT”)

§5:43        The International Business Corporation (“IBC”)

§5:44        Credit and Debit Cards

§5:45        The British Accent

II.    Legal Issues

A.     Contempt of Court and Impossibility as a Defense

§5:50        General Points

§5:51        Anderson – Contempt for Settlors With Power to Repatriate

§5:52        Lawrence – Settlor’s Claim of Inability to Repatriate Not Credible

§5:53        Bilzerian – Inability to Comply Was Self-Created

B.     Protection of Assets vs. Control of Assets

§5:60        General Points

§5:61        The Estate of Helen Wall and Anderson

IV.   Pre-Formation Considerations

A.     Selecting the Type of International Trust

2.     International Asset Protection Trust (IAPT)

§5:130     International Asset Protection Trust Structure

§5:131     Benefits

§5:132     The “Foreign Investor”

C.     Selecting the Jurisdiction

1.     General Points

§5:220     Two Jurisdictions to Consider

2.     The Jurisdiction’s Characteristics

§5:230     Friendliness Towards Settlors

§5:231     Transferability of Assets

§5:232     Anonymity of Ownership

§5:233     Codified Choice of Law

§5:234     Established Law and Infrequent Changes

§5:235     Alternative Governing Law

§5:236     Repeal of Statute of Elizabeth

§5:237     Tax Cooperation Agreements

3.     The Foreign Law

§5:240     General Objectives

§5:241     Fraudulent Conveyance Laws

§5:242     Enforcement of U.S. Judgments

§5:243     Whose Law Is Applicable?

§5:244     Protection Against Disclosure

V.    Important Clauses in IAPTs

A. General Points

§5:248 Custom Drafting Is Required

B.     The Protector

§5:250     Purpose of the Protector

§5:251     Usage Becoming More Widespread

§5:252     Selecting the Protector

§5:253     Powers Granted to a Trust Protector

§5:254     Examples of Statutory References to Protectors

§5:255     Avoid Granting a General Power of Appointment

D.     Other Clauses

§5:300     The Flight Clause

§5:301     The Duress Clause

§5:302     Settlor’s Limited Power of Appointment

§5:303     Power to Postpone Sale

§5:304     Power to Create Additional Trusts

§5:305     Power of Exclusion

§5:306     Investment of Trust Funds

§5:307     Investment Advisor

§5:308     Payment of Existing Creditors Provision

§5:309     Estate Planning Provisions

§5:310     Pourback or Dispositive Trusts

§5:311     Separate or Community Property

I.      General Points-Americans Neglect a World of Opportunity

Most Americans prefer to make and save money at home. We tend to be comfortable with the familiar and seemingly less threatening domestic economy even if the government is near to bankruptcy. In 2009 only 74 million, about 26% of Americans, even had passports, yet this was an historic high. Americans are happy at home. That happiness or perhaps complacency might be the biggest stumbling block when it comes to considering all the possibilities.

There are excellent reasons why aware Americans should go offshore in financially in 2011, financial survival perhaps being first among them. For those of you responsible for the diversification (among countries, currencies and cultures) of your and your families wealth, no matter how modest, consider the times. Strategically plan for  preserving your , your children, grandchildren…with dynastic estate and asset protection planning. At a time when the United States is deeply in debt, with pending plans for higher income, capital gains and estate taxes looming and with banks teetering on (or having gone over) the brink, prudence dictates strategic offshore planning And activity. The printer cartridge bombs, discovered (in late March, 2010) after the flights, although downplayed as a major threat will still dissuade many to fly less, perhaps bringing about what is economically feared most,  a second economic downtrend, as strong as the first. The facts: They did it! They have the ability to get bombs  on board undetected. They didn’t explode, though the media assures us that the pound of explosives they were packed with, would have brought down a plane. Are you comfortable? Are you comfortable placing your wife and children on a flight? They have proven they can get the bomb past all measures that our government has taken to date. Perhaps, as Americans we will travel in our own country and meet our diverse countrymen? Patriotism does not require us to commit financial suicide when there are reasonable escape exits.

As people open their eyes to the rest of the world, they find greater asset protection, stronger financial privacy, higher returns in carefully selected markets, more diversification of investments and currencies and increased safety and security. Unfortunately relatively few Americans are taking advantage of the fruits of global diversification. I think you owe it to yourself and to your family to  hold a portion of your assets offshore, just in case. None of us can afford to be xenophobic in this 21st century.

Discover how you can safely (and legally) protect yourself against the nightmarish financial scenarios issued by the Congressional Budget Office, why hyperinflation is inevitable – resulting in your dollars being worth only pennies, and why a complete “lock-down” on your money could be right around the corner. But most importantly, find out what you can do about it today, beat the “hidden tax” of inflation, and protect your assets. There are two scenarios for the budget deficit and the national debt. Financial disaster will strike no matter which of the two scenarios occurs and the detrimental effects will last for decades to come! It is a poorly paraphrased Woody Allen said…we stand at a crossroads, one way is the path of helplessness and hopelessness. The other leads to total extinction. Give us the wisdom to choose wisely

Huge Debt. Now is the first time since World War II that foreign investors are reducing their purchases of U.S. securities because of our sky-rocketing debt. This affects the dollar, sending interest rates climbing, and the cost of goods soaring.

Inability To Provide Value To The Global Market. The U.S. Debt/Gross Domestic Product (GDP) ratio is 1.8 to 1. For every $1 we bring in for products and services we provide to the global market, we incur $1.8 in debt.

Many people have learned that history tends to repeat itself when it comes to printing money to pay excessive debt. Financial advisors have a mantra: Diversify, Diversify, Diversify. Many of my clients tell me they have. They own investments in the stock market and in real estate. Is this diversification? All their investments are in one economy and in one currency. 2011, is a good time to look at international asset protection.

A.      Overview of International Asset Protection Trusts (IAPTs)

§5:01         The Need for IAPTs

The purposes of an International Asset Protection Trust (IAPT) are:

•        Greater investing and profit opportunities. To access international investments which, because of the cost of SEC registration, are not available to U.S. persons.

•        A safeguard against the weakening U.S. dollar (inflation or hyperinflation). To invest in currencies other than the dollar.

•        To purchase non-dollar denominated securities.

An IAPT (sometimes called a foreign or offshore asset protection trust) can provide unparalleled asset protection through financial and jurisdictional diversification. Wealthy individuals have used international planning for years, and more recently these techniques have become available to those of more modest means.

IAPTs exist because of the demand to shelter wealth from perceived threats. In the U.S., these threats arise from a contingency legal system that targets the wealthy, an over-leveraged financial system and a weak dollar. For the first time in my lifetime, our government is so dysfunctional that a serious third contender has arisen to our traditional two party political system. There is concern that as America has printed billions of dollars to shore up its financial system, inflation will follow and the dollar will further devalue. In other countries, political and economic climates that pose kidnapping, confiscation, exchange controls, and other risks drive the use of IAPTs.

Although sometimes IAPTs are viewed negatively, they are legitimate and important. America used to the world's largest creditor nation and producer of goods. Our country has been hurt by many factors, and in truth, there are very legitimate financial reasons for an American citizen to “go offshore.” Aside from the reasons mentioned above:

The above has forced Americans to lower their standard of living, work longer hours and take on more debt. It has forced our manufacturers to move to business-friendly, low tax, little regulated environments. Our jobs are moving overseas, outsourced.

Americans who want to shelter their wealth from these threats and who have followed the prudent course of placing part of their wealth outside the US now find themselves lumped together with drug lords, tax cheats and money launderers . What is legal and legitimate has been made to look sinister.

§5:02         Definitions and Basic Functions of IAPTs

IAPTs transfer the legal title of property to a trustee. In medieval times, monks, having taken vows of poverty, were embarrassed by their huge land holdings so they transferred legal ownership to a trustee.

The person (or entity) setting up the trust is called the grantor or settlor.

The trust is created by a deed of trust or trust deed or trust agreement.

The settlor appoints a trustee, whose business is operated outside the U.S. The trustee is a fiduciary, and must act in the best interests of the beneficiaries and can be fired (with or without cause if the IAPT is so drafted) by a protector (see below). Assets may be held by banks or brokerage houses, which could be required to sign off on any asset transfer. All persons with access to trust assets can be bonded, although this is rare.

The settlor appoints a protector (or trustee overseer). This is a person with whom the trustee may consult when administering the trust. The protector has the power to negate actions the trustee may want to pursue. The protector can be a foreign or U.S. person, including the settlor’s best friend, and can be authorized to remove and appoint trustees. Some attorneys allow the settlor to be the Protector. This is not my preference, but perhaps okay as long as he resigns as soon as there is a hint of lawsuit. For the client who wishes this additional control, I explain the dangers which include not timely resigning. Once the client is fully apprised of the potential for forgetting to timely resign as well as my preference that we select a good friend, or better yet a non-American resident, I will allow him to so act. However, if the protector is subject to the U.S. courts (as he would be if the client is the protector), I would make sure he in no manner can appoint a successor trustee who is subject to the U.S. court system. The protector cannot be ordered to do that which he has no power to do. In addition, I want to carefully word the trust’s duress clause (see below).

The trustee administers trust property in accordance with the trust deed. Beneficiaries can be named specifically or generally as members of a class (e.g., my family and descendents). In some cases, the client’s Living Trust is named as one of the IAPT beneficiaries. In some cases a non-self-settled trust for the settlors’ children is named as a discretionary beneficiary. Doing so brings in all of the Living Trust’s and Children’s’ Trust’s beneficiaries. The protector has the authority to remove trustees. This power usually “persuades” the trustee to act in accordance with the settlor’s current Letter of Wishes.

A Letter of Wishes is an informal and confidential letter from the settlor to the trustee. In cases where privacy is paramount, an “Aide Memoir” between the client and his attorney maintains privacy as well as the attorney-client privilege. An Aide Memoir remains between the attorney and client and therefore is confidential. If an Aide Memoir is given to the trustee or protector, it becomes what is known as a Letter of Wishes and the privilege is lost. [For more on a Letter of Wishes, see §§5:170 et seq.]

The letter provides guidance as to how the trustee might exercise his discretion. Neither an Aide Memoir nor a Letter of Wishes is part of the trust, and is therefore they are revocable and can be freely amended.

§5:03         International Institutions Are Safe

The question most often asked by clients is: “Is my money safe?” The following are three examples of depositor insurance:

•        Switzerland: Government owned Cantonal banks offer 100% deposit insurance to their clients. Swiss domiciled banks have a private agreement regulated by the Swiss Federal Banking Commission under which they commit to insure individual deposits. In November, 2008, the government announced that the amount protected would be CHF80,000.

•        Bahamas: Bank deposit insurance was established by the Protection of Depositors Act, 1999. The Act established a Deposit Insurance Corporation to manage the Fund. The insurance applies per depositor and per institution up to a limit of Bahamian Dollars 50,000 (which currently is the same value as a U.S. dollar).

Americans are not particularly well traveled and do not have the worldly outlook of Europeans. For example, because tourist ships in Nassau (Bahamas) dock behind the straw market; many Americans have a view of Bahamians as people running around in straw hats. And as Senor Frogs abuts the straw market, add shall we say rowdy to the mixture. However, the concern over foreign institutions is misplaced. Perhaps the fear comes from stories of those who have not used licensed companies but have used Internet merchants with impressive web sites or storefront practitioners. None of my clients has ever lost money to financial misdoings of foreign banks or trust companies (although some have been upset at fees for certain services performed by the bank or trust company).

Clients have their choice of banks. They can use:

•        The bank of the trust jurisdiction.

•        Banks located in the major, non-U.S. financial centers.

•        Banks in the Cayman Islands (the 5th largest banking center in the world.)

•        European banks.

•        Banks in the Far East: Hong Kong or Singapore.

•        In India: Mauritius.

•        In the Middle East: Dubai

•        For stricter secrecy: Panama.

The major banks in the world mostly reside outside the U.S. Because of the heavy restrictions America is placing on banks, many banks no longer accept American accounts. For those who plan to open bank accounts for clients, be aware of the time frame involved and the amount of forms and other administrative processes you will be put through. No longer can you open an account with a telephone call or by filling out a few pages of information. The U.S. government (first to prevent money laundering, then to stop the flow of funds from drugs, and finally to stop the flow of money to terrorists) has enacted strict Know Your Customer (KYC) rules on banks worldwide. Furthermore, all governments are actively seeking untaxed gains from capital hiding in tax havens. As the U.S. government is at the forefront of requiring banking transparency, foreign banks are reluctant to deal with Americans. When they do, they appear to give Americans a very thorough vetting. [For more on selecting a bank, see §5:123.]

Different countries have different customs, heritages and a way of doing business. In “UBS: The Final Word,” Bob Bauman wrote:

UBS tarnished not only its own reputation, but also that of a major nation and its people. But worst of all, what UBS did allow the tax bullies at the IRS to:

•        smear thousands of honest Americans who bank offshore;

•        attempt to scare away thousands more who could benefit by doing so;

•        pretend to extend U.S. tax law jurisdiction to the entire world;

•        use blatant economic blackmail against not only an errant bank, but against a friendly country that has long been a faithful ally and against its 7.6 million people.

The agreement lifts the threat of U.S. criminal prosecution against UBS, the world’s number two wealth manager by assets. The IRS was not only willing to risk endangering the bank’s existence, but it could have dealt a major blow to the Swiss and U.S. economies. (UBS has 20,000 American employees).

[The Sovereign Society Offshore A-Letter, August 21, 2009.]

Opening and maintaining a bank account outside the United States is legal provided: (1) you declare bank income, and (2) if your account exceeds $10,000 at any time during the year, you file TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). U.S. citizens and Green Card holders must report all taxable income from anywhere in the world. Americans are taxed on their citizenship, not their residency. Income earned outside of the U.S. must be reported even if not repatriated. Once you are in compliance with these things, your foreign bank account is IRS legal.

Similarly, trust companies are also required to Know Their Clients and, therefore, require considerable due diligence, although usually not as much as a bank. [For selecting a trustee, see §5:120.]

§5:04         Planning the IAPT

Great care must be taken to ensure that the IAPT is properly set up and funded in a timely fashion. IAPTs are an effective asset protection tool, even when the facts are not favorable to the settlor. However, if you have maintained too much control or have set up the IAPT too close in time to your court date, you may run afoul of a judge and spend time in jail for contempt.

In the following cases, the IAPT enabled the settlors to retain some or all of the protected funds despite their flagrant behavior. Obviously, offshore asset protection trusts will provide better results when done before any source of liability has arisen.

•        FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999) (aka the Anderson case). Settlors kept too strong a control over their International Trust and were deemed able to have their offshore assets returned; the judge held them in contempt of court) (many see this case as “bad facts make bad law.” [See §5:51.]

•        In re Lawrence, 227 B.R. 907 (Bankr. S.D. Fla. 1998). Lawrence set up and funded an IAPT weeks after an arbitration award against him for over $20m. He then filed bankruptcy. The court discredited his testimony and found that he still had control over the trust, including the power to repatriate its assets. Lawrence was held in contempt and jailed. Lawrence remained in jail for about six years, after which time he was released by the court, based on a ruling that there was no realistic possibility that Lawrence would comply with the order for repatriation. [See §5:52.]

•        United States of America v. Raymond and Arline Grant, Case No. 00-08986-Civ-Jordan (S.D. FL 2005). The Grants had IAPTs. In litigation with the IRS, the court ruled that the trust language permitted repatriation of the assets, and a judgment was entered against the Grants for over $36 million in back taxes. Mr. Grant died, and Mrs. Grant was ordered to show cause why she should not be held in contempt for failure to follow the repatriation order. Based on her demonstrated, but unsuccessful, efforts to achieve repatriation, the court found that she had sufficiently established her inability to repatriate the assets.

•        Morris v. Morris, Case No. 502005CA006191XXXMB (Circuit Court, 15th Judicial District, Palm Beach County, Florida, 2006). The Morris’ entered into a post-nuptial agreement which set forth child support obligations. They divorced. Mr. Morris obtained a judgment. Mrs. Morris then established and funded a Cook Islands trust. Mrs. Morris was repeatedly held in contempt for failing to appear and failing to follow court orders. After about five months in jail, Mrs. Morris was released when parties reached a settlement in which Mrs. Morris agreed to pay $1 million of the $2.5 million she owed to Mr. Morris to a trust for the children’s benefit.

[See “Recent Developments in Contempt Law Involving Offshore Trusts, Insights & Strategies,” April 2009, by Barry S. Engel, Esq. and Eric R. Kaplan, Esq.]

The client’s planning should take into account:

•        Asset Protection: Protect assets from the unjustified and unwarranted claims of creditors.

•        Comfort Level: The client should be able to understand the structure.

•        Control: Retain as much control as possible for the client (keeping in mind the lessons of Anderson, Lawrence, and their progeny).

•        Investment: Enable clients to invest overseas and thereby reduce their exposure to movements in the U.S. currency and investment markets.

[§§5:05-5:09 Reserved]

B.      Advantages of an IAPT

1.       General Advantages

§5:10         Settlor Is in Indirect Control

With an IAPT, the settlor, through his relationship to the Protector (who can be his best friend, or although not advisable, himself), is in indirect control. The IAPT gives the trustee discretion to make decisions, and the Letter of Wishes from the settlor suggests how the trustee should exercise that discretion. The Protector has the power to enforce the Letter of Wishes. When the settlor dies, the IAPT, lacking its settlor becomes a non-grantor trust pursuant to Code §679 and escapes the U.S. tax net. However, if assets are to be distributed to American beneficiaries they are subject to the throwback rules (Distributable Net Income [DNI] and Undistributed Net Income [UNI]). If they do not distribute their earnings annually, when distributions are eventually made, the tax liability is large.

§5:11         IAPT Even Though Self-Settled, Are Asset Protective

IAPTs can be self-settled. That is, the IAPT will protect the settlor’s assets even though the settlor set the trust up for his own benefit. This permits the settlor to retain a control over trust assets that would not be permitted in most states.

Some states protect self-settled trusts (called Domestic asset Protection Trusts or DAPTs). There is as yet no judicial authority as to the degree of protection they afford and, in federal matters such as bankruptcy, federal law would pre-empt state law. The 2005 changes to the Bankruptcy Code created a 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. All transfers to DAPTs will be suspect for the 10 years prior to the date bankruptcy is filed.

IAPTs are different from most domestic irrevocable trusts and DAPTs. They permit the settlor to retain effective control of assets that have been transferred by them to offshore trustees, and they afford the settlor asset protection. Domestically, generally, self-settled trusts afford no protection although some states have legislation allowing for varying degrees of self-settled trusts). [See Chapter 4, Domestic Trusts.]

It is important to understand the reason self-settled trusts are not, and non-self settled trusts are, asset protected.

Example: Let us take the example of a father and his 45-year-old son: If dad is worth $2m and child is sued and loses a $2m lawsuit to Mr. X, dad has no obligation toward Mr. X. If dad, by his will, leaves $2m to charity, Mr. X can take no legal action against dad. Mr. X is not really hurt if dad figures out a way to get the money to child in a way Mr. X could not get it. Dad is under no obligation to pay his son’s creditors.

But, if dad lost a $2m lawsuit to Mr. X, he now does owe Mr. X $2m. The trust he set up for his own benefit will not protect him. Dad does not have to pay his son’s debt to Mr. X. He does have to pay his own debt to Mr. X.

Until quite recently our country’s philosophy was: We each are responsible for our debts. Recently, that philosophy has changed. In domestic asset protection states you can put your assets in a trust you set up for yourself of which you are the Beneficiary and yet your creditor cannot get at its assets.

§5:12         Privacy

Generally, creditors are not able to go to the international jurisdiction and find out details about an IAPT by looking through public records. In some (but not all) foreign jurisdictions, an IAPT is registered in a public register. Otherwise, there is no public record of its creation. Even if a public register is required, it usually only records the name of the trust, its date, and perhaps the name of the local trustee. It usually does not record the name of the settlor. Clients usually do not use their own name as the name of the trust.

Furthermore, the activities of the trust are not matters of public record. The trust’s cash deposits, stocks, shares and other assets are not available for public scrutiny. Where such trust asset accounts are maintained is not a public record.

§5:13         Avoidance of “Dollar” Risk

The dollar has lost value against many major currencies. Washington is not truly addressing the trade deficit. The costs involved to wage the “war on terrorism” as well as the need to improve our domestic infrastructure to protect our country will likely go on for a very long time. The billions of dollars (trillions by now) recently printed to bail out financial and industrial concerns are backed by what? A dollar of less worth is the result.

The declining value of a client’s dollar can be offset by moving some of your assets into other major currencies and foreign currency denominated investments. Of considerable current interest is the purchase of non U.S. dollar denominated international insurance. [See Chapter 6, International Life Insurance and Annuities.]

By using an international trust, it is possible to invest in non-dollar denominated stocks, mutual funds, and other investments that otherwise prohibit U.S. citizens or residents from investing in them because they do not wish to undertake the high costs and issues associated with our SEC registration.

[§§5:14-5:19 Reserved]

2.       Protection from Creditors

§5:20         U.S. Courts Have No Jurisdiction. Using an IAPT to Protect Liquid and Non-Liquid Assets

Liquid assets (cash, stocks and bonds) are transferred to the IAPT. This:

To the extent that assets are not liquid and cannot be removed from the U.S. (e.g. real estate), it is best protected by placing them into an LLC and having the LLC owned by the Low Profiler IAPT (see §5:160, below).  The DAPT [See Chapter 4; see also §5:22.] may also be used to own an LLC which holds the real estate.

Another way to protect hard assets is to utilize Equity Stripping. [See §5:200. Also see Chapter 9, Family Limited Partnerships, and Chapter 10, Limited Liability Companies.]

§5:21         Trustee Can Refuse Duress Request

U.S. courts cannot exercise authority over a foreign person who has no presence or assets in the U.S. Even if a U.S. court required the settlor to have the trustee repatriate trust assets, and the settlor complied, the trustee could properly not heed a client “request” issued under duress.

Duress is the initiation or threatened initiation of legal action against the settlor, the IAPT, trust assets, and/or the trustee or protector. Trustees have a fiduciary duty to protect trust assets, and U.S. courts do not have jurisdiction over foreign trustees.

A U.S. judge can order a client to return assets and back these orders with the power of contempt if the client fails to comply. The issue is ability to return transferred property pursuant to court order. IAPT agreements require the trustee to disregard communications issued under duress. As a result, the settlor has no ability to reacquire trust assets. Unless the settlor retains certain powers or the trust is poorly drafted, a court (absent a nexus in time between the transfer and the contempt pronouncement) cannot compel an action that an individual has no power to perform. A foreign trustee will not respond to orders from a court outside of its jurisdiction.

Drafting Example: Anytime the settlor requests the trustee to do something. The request need be made with the following type of affidavit:

I, John settlor hereby certify under penalty of perjury that the following request is not being made because I am being requested to do so by [go into depth here].

A court cannot compel someone to perjure themselves.

Furthermore, an attempt to bring an action against the IAPT in the international jurisdiction might cause the trust’s flight clause to be activated and the trust to be moved to another jurisdiction. A flight clause is much discussed in offshore planning. However, as we shall see, flee caused are really creep slowly clauses and Maereva orders may cut them down. Giving a protector the ability to move trust assets in one jurisdiction to a new trust in a second jurisdiction may be far more effective.

§5:22         Trial De Novo Required in Jurisdictions That Do Not Extend Comity

Many jurisdictions do not extend comity to a creditor’s U.S. judgment. Jurisdictions that do not enforce U.S. judgments include:

•        Belize [Belize Trusts Act §7(6)]

•        The Cook Islands [195 Cook Islands Trust Act, §13D (providing that certain foreign judgments are not enforceable)]

•        Nevis [Nevis International Trusts Act §28]

As these countries do not recognize U.S. courts, our courts are not impressed with theirs. When a piece of real estate sitting outside the court window is owned by a trust from one of these, or other offshore nonrecognition countries, courts have at times shown hostility. For this reason, assets that can be moved out of the country do well in IAPTs. Assets which are not mobile could be protected in a domestic LLC that is owned by an IAPT. There is considerable current discussions concerning whether it is better to place real estate into an LLC and have that LLC owned (i) by an IAPT or (ii) by a DAPT. Add to this international equity stripping and you have total protection for real estate asset. In cases where lawsuit has become fairly certain, a Jones Clause will allow assets to be transferred into the IAPT and most likely prevent a fraudulent transfer issue (see Jones Clause, below).

If the creditor can not enforce the U.S. judgment in the foreign jurisdiction, then he must bring a trial de novo (a new trial) in the foreign jurisdiction.

A trial de novo raises the following issues:

•        Who has the burden of proof? Usually the party bringing the case.

•        What is the standard of proof? Is it the U.S. criminal standard of beyond a reasonable doubt?

•        Has the statute of limitations run? Foreign statutes begin to run when assets are transferred generally not from the “discovery” of the transfer.

[For more on suing in a foreign court, see §§5:240 et seq. For selecting and working with a trustee, see §§5:120 et seq.]

§5:23         Foreign Laws Are More     Favorable

The major advantage of an IAPT over a domestic trust is that it is established under the laws of a country that is more favorable to asset protection and privacy objectives than the United States.

The legal differences may include:

A short statute of limitations on fraudulent conveyances

Most states allow a creditor to attack asset transfers many years after they take place. [E.g., Cal Civ C §3439.09 (a four-year statute).]

In short statute jurisdictions, a creditor attack can only take place during a limited time after the transfer transpired. [E.g., Cook Islands, International Trusts Act §13K (action must commence before two years from the settlement of or disposition to the trust).]

A more strict legal standard

Many foreign jurisdictions utilize the difficult “beyond a reasonable doubt” standard to prove fraudulent conveyance, rather than the lesser “preponderance of the evidence.” [E.g., Cook Islands, International Trusts Act §13B (“beyond reasonable doubt”).]

Loser pays, plus gives security

The “English Rule” for legal fees applies. That is, the loser pays the winner’s legal fees.

A good defense lawyer will also demand that as the IAPT is being attacked by a foreign claimant (a claimfrom a person residing outside the country of the IAPT’s jurisdiction) , the foreign claimant should give security for costs in case the foreign claimant loses the case. [See, Cook Islands, International Trusts Act §13K(4) (requiring plaintiffs to file an affidavit regarding security).]

While this security will not cover all of the anticipated costs, it is usually sufficient to make the claimant ensure that he or she has a good case before proceeding further

Limited discovery

Discovery is very limited. Foreign courts do not allow the usual U.S. style “fishing expeditions.”

No contingency fees

Local lawyers are usually not allowed to take cases on a contingency fee basis. As a result, creditors must pay the local lawyer as the case progresses.

[For selecting and working with a trustee, see §§5:120, 5:121.]

Aside from legal differences there are cultural differences. For instance, in Switzerland, the government is very protective of funds put aside for retirement into annuities and life insurance.

[§§5:24-5:29 Reserved]

C.      Criticisms of IAPTs

§5:30         Potential Criminal Liability

Claim:

The following criminal laws apply to those moving assets internationally.

•        State Penal Laws: Advisors who are part of a fraudulent transfer with intent to defraud or deceive others may be guilty of a crime. [See, e.g., Cal. Penal Code §531.]

•        Federal Criminal Conspiracy: An attorney may be convicted of engaging in a criminal conspiracy by participating in the formation of an IAPT to evade tax. [18 USC §371.]

•        Money Laundering: An IAPT can be used in a money laundering scheme. [See 18 USC §1956 (The Money Laundering Control Act).] Money laundering can encompass international asset protection trusts if tax evasion [IRC §7201], tax fraud, or false statements relating to taxes [IRC §7206] are present.

Rebuttal:

The practice of law is full of dangers. Follow the law, do careful due diligence, do not stray over the line. Investigate and evaluate the client, and manage the client expectations. [See §5:70.]

If you take care, and show by your actions you had no criminal intent in assisting a client place assets internationally and that you have taken all the steps to properly vet the client, there should be no concern. If you have not undertaken prudent due diligence, be concerned.

Recent events have required many practitioners to look more carefully at the above and other laws concerning fraudulent transfers. The big banks get bailed out, but then do not help our clients by renegotiating their home loan. In today’s environment, a lawyer should be well acquainted with the Laws of Fraudulent Transfer. Those who are may help save a client’s financial life. Those without a good grasp of the law may refuse to aid clients just to play it safe. Remember, to have a fraudulent transfer you must have a transfer. No transfer, no fraudulent transfer. See Chapter 2, Fraudulent transfers for some ideas of how non-transfers can protect your clients.

§5:31         Protection Does Not Always Work

Claim:

Opponents say international protection does not protect against determined creditors. It only discourages creditors from proceeding (or settling for less) because of the expense and risk that they will not be able to collect on a judgment. Deterrence is the main advantage of using international trusts.

Rebuttal:

IAPTs do not offer protection when improperly setup and used, when criminal activity is involved, and when fraudulent transfers take place. However, when this is not the case, they offer unparalleled protection. The fact that the creditor suffers high costs to pursue litigation overseas is of course an added protection benefit.

Virtually every case that has been won against international planning has involved one of the following:

•        A poorly planned structure

•        A structure set up or a transfer undertaken in an untimely manner (causing either a fraudulent transfer argument or causing a contempt order to be enforced)

•        Too much control has been retained

•        A structure was undertaken for inappropriate activities

§5:32         IAPTs Place Assets Beyond U.S. Courts

Claim:

In contrast to protection provided by statutes such as the Revised Uniform Limited Partnership Act, which limits liability by U.S. law, offshore protection involves transferring assets beyond the jurisdiction of U.S. courts and laws to countries which provide (by their law and courts) stronger protection.

Rebuttal:

As Americans, we are given freedoms that many can only dream about. If we prefer not to retain American citizenship we can — but really, who would want to expatriate themselves? However, when we view our runaway legal system, many have chosen to expatriate their assets. We may be “escaping” the U.S. legal system, but, as Americans, we have the right to choose the legal system under which our assets reside.

§5:33         IAPTs Risk Tax Penalties

Claim:

IAPTs are tax neutral (they do not produce tax benefits or detriments). However, the tax reporting requirements required by the IRS for IAPTs are complex and the penalties for non-compliance are large.

Rebuttal:

True, International Trusts set up by Americans are tax neutral. True, the penalties of not filing Forms 3520, 3520-A and TDF 90-22.1 are large. The attorney should inform the client of the reporting obligations and insist that the client’s accountant be involved in the process of setting up international structures.

A competent professional can file IRS forms correctly and timely. Those who do not want to undertake the filing time or have concern may use the Low Profiler. [See §§5:160 et seq.]

§5:33 TDF 90-22.1

U.S. citizens are taxed on their citizenship.  Even if a U.S. citizen is living abroad they are required to file and pay taxes.  Citizens are also required to file a Foreign Bank Account Report (FBAR [Form TD F 90-22.1]) if they have an account that at anytime within the year had more than $10,000 in it.  In the past, if you did not owe taxes you were not required to file a tax return.  The requirement to file the FBAR is separate from your tax filing.  The FBAR requirement is part of the bank secrecy act, not the tax code.  The FBAR, being part of the Bank Secrecy Act is not subject to the privacy rules of your tax return and sharing this information with other agencies is allowed. The penalty for failure to file an FBAR is $10,000 per year, per account.  The IRS can also assess a fine of $100,000 or 50% of the account whichever is greater per year.  Beneficiaries of a foreign trust need to file. The rules have become so complex that I specifically state in my Retainer that I do no form filings and the client must be certain that their accountant understands the requirements.

§5:34         Asset Protection for Trust Settlors Is Not Proper

Claim:

To attract business, foreign countries have enacted “asset protection” legislation, severely restricting the rights of creditors to recover.

Rebuttal:

Domestic asset protection states (e.g., Alaska, Delaware, and Nevada among others) are trying to accomplish the same thing. Will these states actually draw international money to the U.S? IAPT jurisdictions are accused of providing favorable law to attract assets that want protection, but DAPT states are doing the same thing. There are laws which allow creditors to take your assets. There are laws which allow you, before a threat arises, to protect your assets. As the saying goes, “an ounce of prevention is worth a pound of cure.”

§5:35         Fees Are Too Large

Claim:

Fees in this area are blown out of proportion to the time required to set these trusts up.

Rebuttal:

This is a specialized area of law. If heart surgery takes 60 minutes and costs in excess of $100,000, why do some complain when an attorney skilled in the laws of several countries is paid well, but far less than the surgeon is paid for a procedure that takes the surgeon far less time? It is not time; it is know-how the client is paying for. When a dentist’s client complained that the bill for the “two second” extraction was high, the dentist assured him that the next extraction would be considerably  longer.

§5:36         IRS Can Compel Disclosure of IAPT

Claim:

The IRS can make you discuss your IAPT, and can force you to waive any secrecy laws that could apply in the foreign jurisdiction. A foreign jurisdiction’s secrecy laws are generally of little protection against the IRS. The taxpayers can either comply with a U.S. court’s order to waive secrecy or suffer contempt.

Rebuttal:

Yes, courts can make you waive secrecy. However, there is a big difference between knowing you have assets in an IAPT and getting at those assets.

It is true that there are considerably more difficulties in preserving assets when attacked by a U.S. government instrumentality than when attacked by private creditors. Government agencies have a far larger legal budget then you do. But foreign jurisdictions are sovereign and the U.S., by international law, should (and generally has) respected sovereignty.

§5:37         IAPTs Do Not Protect Fraudulent Transfers

Claim:

If the settlor has already committed an act that could give rise to a legal claim against him, it is usually too late to transfer assets to a foreign trust.

Rebuttal:

There is no rebuttal. There is no protection for fraudulent transfers.

Note:

If the debtor commits a fraudulent transfer in the U.S. he is personally subject to an outcome dictated by what he did. However, is it a fraudulent transfer according to the law of the IAPT (the trust’s) jurisdiction? Many IAPT jurisdictions have short statutes and less stringent rules concerning fraudulent transfers than does the U.S. and it is thus more difficult to prove fraudulent transfer in those jurisdictions. [See Cook Island International Trusts Act §§13B & 13K.]

[§§5:38-5:39 Reserved]

D.      Risks and Abuses to Avoid

§5:40         Improperly Drafted IAPTs May Allow U.S. Jurisdiction

Clients often ask if IAPTs are totally creditor proof. Generally, they are, provided they are properly structured and assets are transferred to them years before difficulties arise. In some cases with a well structured Jones Clause (see below), an IAPT can properly be set up after a creditor has arisen. However, a U.S. court may obtain jurisdiction:

•        If a settlor retains control over the appointment of the trustee.

•        If the settlor is a trustee.

•        If domestic trust protectors have the power to remove and replace the trustee and the trust does not specifically prohibit the protector from appointing a U.S. trustee.

•        If a duress clause is not utilized.

If a U.S. court obtains jurisdiction, then it may require the trustee to repatriate assets, or require the U.S. protector to fire him and appoint a U.S. trustee. If the U.S. trustee and/or protector have the power and refuse, they can be held in contempt. Once the trustees are under the court’s jurisdiction, the court can require them to repatriate assets.

§5:41         Delay Allows a “Lookback”

The client must take action before it is too late to do so. The most dangerous attack that a creditor can make against the planning strategy is to claim that the client transferred assets after a claim arose, and that the transfer was made to “hinder or delay” the collection action. Such a transfer is fraudulent.

The IAPT is not designed to allow individuals to defraud others or engage in tax evasion or criminal conduct. If an IAPT is used to defraud creditors or evade taxation, or protect the proceeds of criminal or fraudulent activities, then a judge may ignore provisions of the trust and apply the leverage of a contempt order.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became effective on October 17, 2005. That Act contains a “look back provision” for transfers made to self-settled trusts:

(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if—

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

[Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 §1402(e)(1).]

§5:42         The Foreign Grantor Trust (“FGT”)

A Foreign Grantor Trust (FGT) (as contrasted with the regularly used trust settled by a U.S. person or entity) is a trust formed by a non-U.S. citizen or resident, and there are U.S. beneficiaries. The non-U.S. settlor (as well as earnings of the FGT) are not taxed by the IRS (as they are taxed to the foreign grantor). U.S. recipients need to report money received from an FGT. [Notice 97-34, IRB 1997-25 (6/2/97) Section V. U.S. Beneficiaries of Foreign Trusts.]

Generally, a U.S. person who receives a distribution from a foreign trust after August 20, 1996, must report the name of the trust, the aggregate amount of distributions received from the trust during the taxable year, and such other information as the Secretary may prescribe. [IRC §6048(c).] A U.S. beneficiary who fails to report a distribution is subject to a 35 percent penalty on the gross amount of the distribution. [IRC §6677(a).]

This type of trust is valid only if both:

•        A real foreigner sets it up.

•        The money that funds it is really the foreigner’s.

This type of trust is not valid when an American arriving in Belize (for example), turns to his poorly paid taxi driver and says: “Señor, how would you like to earn $500?”

“$500! My lord, what must I do?”

“You are a foreigner; set up an FGT for me!”

This is tax fraud. Be very careful when a client requests your assistance to set up an FGT for his “foreign friend.” Be certain who the client really is and who is providing the money.

See the CD:

CD5-1 IRS Notice 97-34, IRB 1997-25

CD5-2 IRS Form 101 (Suspicious Activity Report)

CD5-3 IRS Form 101-I (Instructions)

CD5-4 IRS Form 105 (Report of International Transportation of Currency)

CD5-5 IRS Form 8300 (Report of Cash Payment over $10,000)

§5:43         The International Business Corporation (“IBC”)

An IBC set up in a confidential banking and business jurisdiction is inexpensive and an excellent tool in your toolbox. It is even more effective when it is owned by an IAPT. Unfortunately, because IBCs have been often used to shelter assets from the taxing authorities, they have gotten an undeserved negative image.

Even if the earnings of an IBC are not repatriated, an American who owns an International Business Corporation that earns investment income must file the appropriate tax forms and declare the income. An IBC is a legal entity incorporated in a country which is free from taxes provided the earnings come from sources outside of the IBCs jurisdiction (except small annual fees). Typically, the IBC should not conduct business in its country of incorporation or it will be taxed by that country. IBCs are used to conduct international business and trade, investment activities, and for asset protection. IBCs can buy and sell goods and services and operate businesses whereas a trust so doing may be deemed a corporation and taxed accordingly.

An IBC can hold assets in a secure and confidential financial center. At the same time, its shareholders retain 100% control of those assets. In many foreign jurisdictions, it is a crime for a banker to reveal your association with a bank account. IBC ownership records are usually not available in any public record.

Foreigners and foreign-owned IBCs investing into the U.S., under the right circumstances:

•        Are exempt from paying capital gains tax. IRC §871(a)(2), an NRA is not taxable on U.S. capital gain if he is not physically present in the U.S. for more than 183 days during the year; and is not engaged in a U.S. trade or business; IRC §864(b, if an NRA trades in stocks for his own account through a U.S. broker, this is not a trade or business within the U.S., unless he has a fixed place of business in the U.S.

•        Can benefit from structuring loans that comply with the Portfolio Interest Rules. Portfolio Interest [871(h)] is not subject to the normal 30% tax that applies to U.S. interest received by non-resident aliens unless it is effectively connected with U.S. trade or business. (See Chapter 6 for more detail).

Many clients are told by promoters that IBCs can be structured to give them the same benefits that foreigners enjoy. They cannot. Unlike most countries, the United States does not tax its citizens on residence (if you work outside your residence country your residence country does not tax you). The United States taxes citizens on their citizenship. If you are an American citizen, you pay U.S. tax on income you earn irrespective of where you earn it. If you earn a dollar on the moon, and never repatriate it, you still best report it.

Many promoters in international jurisdictions tell clients that they, the foreign promoter, will register the IBC in their own name and give the client a “side letter.” They then explain to the client how to set up a U.S. brokerage relationship for the IBC and thereby avoid paying capital gains tax. This is a sham. If your potential client tells you that the IBC need not pay U.S. tax, explain to him that the information he has is not correct. If he persists in his beliefs, be wary before you become involved.

The following are the principal tax rules that apply to foreign corporations with U.S. ownership:

Controlled Foreign Corporation (CFC)

A foreign corporation is a CFC if more than 50% of either;

(i) the total combined voting power of its outstanding stock, or

(ii) the total value of its stock

 is owned, or considered to be owned, by United States shareholders, each of whom owns, or is considered to own, 10% or more of the voting power of the foreign corporation (a “U.S. Shareholder”). A person who owns less than 10% of the shares is not considered for determining CFC status. Consider the attribution rules, IRC §§267 and 318:

Creative Planning. A foreign company would not be a CFC (i) if it is owned 50% by a U.S. person, and 50% by a foreigner, or (ii) is owned 50% by a U.S. person, and six unrelated U.S. persons each owning less than 10% each.

If a company is a CFC “Subpart F” income is deemed distributed to the U.S. shareholder at year’s end, and is taxable even if it were not distributed. Subpart F income is essentially income not from an active business.

Passive Foreign Investment Company (PFIC)

The PFIC rules tax U.S. investors in a company which is PFIC, no matter how small their stock ownership.

A foreign corporation is a PFIC if either: (i) at least 75 percent of its gross income for the year is passive, or (ii) at least 50 percent of its assets (by value) during the year are assets held for the production of passive income.

Foreign Personal Holding Company (FPHC)

As with a CFC, each U.S. person who owns shares of a FPHC, is required to include their ratable portion of the FPHC’s income in their gross income, whether or not such income is distributed.

To be a FPHC, a foreign corporation must meet both (i) a gross income test (60% or more passive income), and (ii) a stock ownership test.

Personal Holding Company (“PHC”)

See IRC §552 (definition of foreign personal holding company).

§5:44         Credit and Debit Cards

Many owners of IBCs have credit and debit cards issued in the name of the IBC and use them to withdraw cash from “their” IBC. If they do so without paying tax, this activity is tax fraud.

The IRS web site which addresses their Offshore Credit Card Program (OCCP) states:

U.S. citizens must pay tax on their worldwide income. Credit cards provide easy access to offshore funds and accounts in tax haven countries that allow income to be hidden. It is not illegal to have an offshore credit card, but the average person doesn’t need one. There is a reasonable basis for believing that some people are using offshore credit cards to help them evade paying U.S. taxes.

The Internal Revenue Service has taken several major steps to combat tax-avoidance schemes involving credit cards issued by offshore banks.

§5:45         The British Accent

Many Americans do not have a passport and have never traveled abroad. And because of our geographic isolation, Americans tend to be less worldly than Europeans. Many Americans believe that a British accent denotes worldliness and integrity. This belief is pandered to by being used to sell high priced goods. However, do not let an accent mislead you. The same principles of business wariness that apply in the U.S. apply outside the country. And the same economics apply. If something being offered appears to be too good, perhaps it is. Be cautious in your dealings. Do your due diligence.

II.     Legal Issues

A.      Contempt of Court and Impossibility as a Defense

§5:50         General Points

Courts may impose sanctions for failing to comply with a court order to repatriate assets. Sanctions may include fines, imprisonment, or both.

The defense to “contempt of court” is factual impossibility to comply.

Defendants must have the present ability to comply with a court order at the time of the contempt proceedings before an order of contempt will stand. [See Bowen v. Bowen, 471 So. 2d 1274, 1277 (Fla. 1985).]

Thus, trust documents must not give the settlor custody or control of trust assets. If the settlor holds or can get trust assets, he can be ordered to produce them or be held in contempt. If the assets are not in his custody, and if he cannot obtain them, then most likely he cannot be held in contempt.

In determining whether the “impossibility of performance” defense is to apply, courts look to factors such as:

•        Whether the party acted in good faith.

•        Whether the party cooperated with the court.

•        Whether the party self-induced the inability to comply in close time proximity to the issuance of the order.

Impossibility will not be recognized as a defense when it was created at or about the time that the court’s order issues. The issue is not whether the accused created the impossibility but when he created it. If a time-nexus is found (if the defendant knew at the time the impossibility was created that a court would issue its order), the impossibility of performance defense will be lost.

With a well drafted and properly implemented plan, creation and funding will take place well in advance of disputes that may give rise to a contempt order.

§5:51         Anderson—Contempt for Settlors With Power to Repatriate

In the Anderson case, the settlors of a trust were jailed for contempt because the court found that, under the design of the IAPT they settled, they had the power to repatriate the trust assets at the time the court ordered them to do so. [Federal Trade Commissioner v. Affordable Media, LLC (Anderson), 179 F3d 1228 (9th Cir. 1999).]

The Anderson’s trust was settled about two years before their involvement in a disastrous telemarketing venture. They had designated themselves as co-trustees of their trust along with a trust company. They also designated themselves as protectors of the trust.

The trial court ordered the Andersons to produce information. They did not. The court also ordered them to repatriate funds held in their IAPT. The appellate court affirmed that compliance with the repatriation order was possible because the Andersons were in control of their trust.

After they were ordered to repatriate the offshore assets, the Andersons faxed the Cook Islands trustee and instructed it to provide an accounting and to repatriate the assets. The trustee (1) notified the Andersons that the court’s order was an event of duress under the trust, (2) removed the Andersons as co-trustees because of the event of duress, and (3) refused to provide an accounting or repatriation of the assets.

The Andersons’ fax was sent after the court’s order issued and caused the impossibility of performance. Thus, the Andersons created the impossibility in close nexus to (right after) the court order. Performance had been possible at the time of the order. The Andersons were co-trustees and protector. Accordingly, the Andersons were not able to satisfy their burden of proof as to impossibility of performance.

Andersons, as protectors, determined that an event of duress had occurred. The Andersons could have ordered the trust assets repatriated simply by certifying (and thereby lying) to the foreign trustee that in their opinion, as protectors, no event of duress had occurred.

Drafting: The trust should have been drafted to state that any direction from the Andersons had to be signed under penalty of penalty that the Andersons were not under duress. No court can make you swear a falsity.

The court noted the difference between negative and affirmative powers. The court stated, “[a] protector can be compelled to exercise control over a trust to repatriate assets if the protector’s powers are not drafted solely as the negative powers to veto trustee decisions or if the protector’s powers are not subject to the anti-duress provisions of the trust.” [Federal Trade Commissioner (Anderson), 179 F3d at 1242.]

The Anderson court was skeptical that “a rational person would send millions of dollars overseas and retain absolutely no control over the assets.” The court noted that the Andersons had previously been able to obtain over $1 million from the trust in order to pay their taxes.

The court found that “the most telling evidence” of the Andersons’ control over the trust was that after the FTC had revealed to the court that the Andersons were protectors of the trust, they immediately attempted to resign. “This attempted resignation indicates that the Andersons knew that, as the protectors of the trust, they remained in control of the trust and could force the foreign trustee to repatriate the assets.” [Federal Trade Commissioner (Anderson), 179 F3d at 1243.]

The court raised an interesting question in dicta:

It is readily apparent that the Andersons’ inability to comply with the district court’s repatriation order is the intended result of their own conduct—their inability to comply and the foreign trustee’s refusal to comply appears to be the precise goal of the Andersons’ trust. . . . Given that these offshore trusts operate by means of frustrating domestic courts’ jurisdiction, we are unsure that we would find that the Andersons’ inability to comply with the district court’s order is a defense to a civil contempt charge. We leave for another day the resolution of this more difficult question.

[Federal Trade Commissioner (Anderson), 179 F.3d at 1239-1241 (emphasis added).]

§5:52         Lawrence — Settlor’s Claim of Inability to Repatriate Not Credible

In the Lawrence case, a bankruptcy debtor was incarcerated for contempt because the court was unable to find him credible when he claimed that he could not repatriate trust assets. [In re Lawrence, 238 B.R. 498 (Bankr. S.D. Fla. 1998).]

The court stated that its finding regarding Lawrence’s inability to comply was based on the trust provisions and common sense:

. . . it defies reason—it tortures reason—to accept and believe that this Debtor transferred over $7,000,000 in 1991, an amount then constituting over ninety percent of his liquid net worth, to a trust in a far away place administered by a stranger—pursuant to an Alleged Trust which purports to allow the trustee of the Alleged Trust total discretion over the administration and distribution of the trust res.

[In re Lawrence, 238 B.R. at 500.]

The court stated that the law does not recognize the defense of impossibility when the impossibility is self-created:

The Debtor has testified that he voluntarily established the Alleged Trust in 1991. Since the provisions of the trust which he now relies upon in order to substantiate his inability to comply with the Order were of his own creation, he may not claim the benefit of the impossibility defense.

[In re Lawrence, 238 B.R. at 501.]

The real issue here was that the trust was set up a few days after the judgment. Thus the impossibility was created in close proximity in time to the order.

§5:53         Bilzerian—Inability to Comply Was Self-Created

In the Bilzerian case, a trust settlor was ordered to turn over $33M and pay $29M in prejudgment interest. The S.E.C. moved to hold Bilzerian in contempt for failure to comply. [United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991).]

Bilzerian stated that he did not comply because the trustee and the protector declined to turn over the documents and that he lacked the legal authority to provide them to the U.S. Court. The U.S. Court held that Bilzerian had not established that he was unable to comply with the order.

The Court held that Bilzerian:

•        Did not demonstrate his financial inability to comply.

•        Did not make all reasonable efforts to comply.

•        Separated himself from his assets and funneled them to shell companies, partnerships, and trust entities, and that any financial inability to comply was self-created.

Bilzerian’s IAPT was established after the judgment was entered, after he filed for bankruptcy protection, and after the U.S. Court judgment was entered.

[§§5:54-5:59 Reserved]

B.      Protection of Assets vs. Control of Assets

§5:60         General Points

Settlors can retain certain degrees of benefit and control over the IAPT, however, the extra control is at the cost of the strength of the protection of assets.

Generally, the more control the settlor maintains, the less asset protection he achieves. Full control is dangerous if asset protection is important. [See Federal Trade Commissioner v. Affordable Media, LLC, (Anderson) 179 F3d 1228 (9th Cir. 1999) (the settlors were co-trustees and co-protectors of their trust).]

In international planning, the settlor is often the protector. The difference between a settlor acting as trustee and a settler acting as protector is that protectors have only negative powers. The protectors also have the right to replace trustees. The veto power and the power to fire and replace is not control. If a U.S. person is to act as protector, be sure he does not have the power to fire a foreign trustee and replace him with a U.S. trustee OR a U.S. court’s will force him as the U.S. protector to do just that. Make sure he cannot require trust assets to be remitted to U.S. court jurisdiction. He should simply hold negative powers, such as the ability to stop a trustee who would repatriate trust assets.

Drafting Technical Control Retention

If a settlor retains a general power of appointment, a court could order the settlor to appoint the property to his creditor. If the power to appoint is limited by an ascertainable standard, then only those portions over which the settlor has a power to appoint for his benefit can be accessed by a creditor.

A special or limited power of appointment is a secure way for a settlor to retain control over trust assets. A settlor can direct distributions during life or following death, to one or all of a group of persons so long as neither the settlor, his estate, his creditors, nor creditors of his estate can be among the recipients.

Collapsing and Withdrawing Bridge

If the settlor uses the collapsing or withdrawing bridge technique, even greater control can be maintained. [For the collapsing or withdrawing bridge technique, see §§5:180 et seq. and 5:190 et seq.] The settlor of an IAPT can retain control over assets without exposing the assets to creditor claims by combining the IAPT with an underlying limited partnership or limited liability company.

§5:61         The Estate of Helen Wall and Anderson

In The Estate of Helen Wall, Wall retained the power to replace the trustee with another independent corporate trustee. The IRS argued that this power consti­tuted a “retained right” under IRC §2036(a)(2) that caused trust assets to be included in the settlor’s estate. [The Estate of Helen Wall, 101 T.C.300 (1993).]

The court held that the mere power to replace an independent trustee with another independent trustee did not give the settlor sufficient influence over the corporate trustee to be tantamount to the settlor holding the powers as trustee herself.

The Anderson court [see §5:51] recognized the difference between a protector who has negative powers, and a protector who has affirmative powers (such as the Andersons’ affirmative power to determine whether or not an event of duress had occurred). The court stated that:

A protector can be compelled to exercise control over a trust to repatriate assets if the protector’s powers are not drafted solely as the negative powers to veto trustee decisions or if the protector’s powers are not subject to the anti-duress provisions of the trust.

[Federal Trade Commissioner v. Affordable Media, LLC, 179 F3d 1228, 1242 (9th Cir. 1999).]

[§§5:62-5:69 Reserved]

IV.    Pre-Formation Considerations

A.      Selecting the Type of International Trust

2.       International Asset Protection Trusts (IAPTs)

§5:130       International Asset Protection Trust Structure

 For this diagram, see “Figure 5-130 IAPT Structure.pdf” in the “Diagrams” folder on your CD.

With an IAPT, the assets remain creditor protected until they are distributed to beneficiaries by the Trustee.

Alternatively, the transfer of the IAPT assets could be to a creditor protected entity (a non-self-settled discretionary domestic trust) rather than directly to the beneficiary. And of course the trust could pay the settlors expenses directly if there is concern that if paid to the settlor a creditor could access the asset.

[For important clauses in IAPTs, see §§5:250 et seq.]

FORM:

5-15 International Asset Protection Trust

§5:131       Benefits

The benefits of an IAPT are that it resides in a country:

•        Outside the jurisdiction of the U.S. Courts.

•        Which does not recognize U.S. judgments.

•        Which has favorable asset protection law.

•        Where the time to bring a case for fraudulent transfer or any other matter is short.

•        Where the standard to prove a fraudulent transfer is the difficult criminal standard of “beyond a reasonable doubt,” not the easier “preponderance of evidence” civil standard.

•        Which protects self-settled trusts.

•        Which permits “anti-duress provisions.” The trustee and protector will not accept requests from the settlor if a court is compelling the settlor to so act.

•        Which allows easy change of situs in case of attack. The clause in the trust which permits this is called the “flee” clause.

§5:132           The “Foreign Investor”

For this diagram, see “Figure 5-132 The Foreign Investor.pdf” in the “Diagrams” folder on your CD.

Foreign investments that are not available to Americans (because of SEC and State Blue Sky Registration requirements) can assist to resolve fraudulent transfer issues of “Intent in Creating the Trust.” The settlor can proffer evidence that demonstrates intent other than creditor avoidance. This is because the investments are not SEC approved for sales in the U.S. and cannot be purchased directly by Americans.

The only way Americans can invest in non-SEC registered securities is by setting up an IAPT. The trustee of an IAPT can purchase these investments. The trustee of your IAPT is not an American investor.

The economy has come close to imploding and those that have wealth have finally listened to their financial advisors advice: “diversify.” Diversify? “I have my assets in real estate and the stock market. I am diversified.”

If everything you have is in one currency and everything you have is tied to America’s economy, are you really diversified?

IAPTs are being used to diversify a percentage of a person’s wealth into other currencies and other economies.

[§§5:133-5:139 Reserved]

6.       Letter of Wishes

§5:170       General Points

The best way to understand a Letter of Wishes is to remember the babysitter instructions you left before you went to the movies with your spouse when your children were young. You gave the sitter full instructions covering every situation which could occur during your absence. A Letter of Wishes is the instructions you leave with the babysitter (your trustee) when you are leaving your children forever. It has been my consistent observation that these Letters are very difficult for the client to write. It is hard to picture a world with yourself not in it. I suggest that you give the client a form on disk so they can use that to start their own letter.

For the strongest asset protection, use a fully discretionary trust. With a fully discretionary trust the trustees are given discretion as to who amongst a number of defined or named beneficiaries (usually called the “class of beneficiaries”) is to receive what part of the trust assets and when.

To guide the trustee’s discretionary decision making authority, the settlor can sign a Letter of Wishes. This letter can guide (but is not binding on) the trustee. The letter usually states the settlor’s “requests” about the following:

•        How income and corpus distributions should be made.

•        How the trust is to be handled upon their death.

•        That their (the settlors) “requests” are only requests and that all final authority rests with the trustees.

Although the letter is not legally binding on the trustees, we have not had a single case where the trustees have not acted in compliance with the Letter of Wishes. Furthermore, many trustees will not accept an appointment as trustee unless they are given a Letter of Wishes.

§5:171       The Value of Letters of Wishes

Letters of Wishes are helpful to trustees to ascertain the settlor’s state of mind and purposes in establishing the discretionary trust.

Unfortunately, Letters of Wishes are rarely written, and discretionary trusts themselves provide little guidance. They either:

•        Say nothing about what the trustee should consider in exercising discretion, or

•        Contain the typical “ascertainable standard” (“the trustee may make distributions for a beneficiary’s health, education, maintenance, and support”). This tells the trustee little about the settlor’s actual wishes and gives the trustee broad discretion to determine what falls under those categories. When these “standards” are accompanied by words enlarging the trustee’s discretion, such as “sole,” “absolute,” or “uncontrolled” (discretion), they perhaps allow the trustee to act unreasonably (from what the settlors really would have wanted) when exercising discretion.

We encourage settlors to provide non-binding written expression of the manner in which they would like to see the trustees exercise their discretion, so that the administration of their trusts will reflect the man­ner in which the settlors themselves would have administered them.

A carefully drafted non-binding Letter of Wishes given to the trustee, possibly with a copy to the beneficiary, will enlighten all parties as to the manner in which the settlor contemplated the trust would be administered.

C.      Selecting the Jurisdiction

1.       General Points

§5:220       Jurisdictions to Consider

We need law that favors the protection of assets from litigation. Examples: Belize and the Cook Islands.

 [For selecting and working with a trustee, see §§5:120 et seq.]

[§§5:221-5:229 Reserved]

2.       The Jurisdiction’s Characteristics

§5:230       Friendliness Towards Settlors

Different countries treat wealth differently.

For Banking

A Swiss bank in the Cayman Islands had a circular entryway with a beautiful rug. Imprinted on that rug were the words: “Money Welcomed Gladly.” These are the words of a country that understands that earning money requires some effort and that those who make that effort are entitled to respect, as is their money. Those words and the respect they convey and the laws that back up that sentiment form the basis for my selection of the jurisdictions I select for my client’s assets.

For the IAPT

Neither I nor my clients are really interested in “creating a level playing field with our creditors.” My clients have worked hard, they have achieved a certain wealth, and they are not interested in dealing with legal systems whose purpose is to redistribute wealth. My clients are interested in creating a playing field tilted in their direction. And I help them create that well before there is the slightest potential for a lawsuit, before there is the slightest hint of a fraudulent transfer.

§5:231       Transferability of Assets

The jurisdiction should be favorable to trust transfers for the protection of assets from creditors.

Currently, the most widely used locations are the Cook Islands and Belize.

§5:232       Anonymity of Ownership

The jurisdiction should permit anonymous asset ownership to frustrate the creditor’s tracing of the trust’s beneficial owners.

§5:233       Codified Choice of Law

The Trust will state its governing law, and usually such selection is difficult to challenge.

If the choice of law is challenged, the law of the jurisdiction with which the IAPT has the “closest connection” will usually prevail. The law of the settlor’s domicile will be given weight by the courts. If the IAPT is actually administered in the chosen jurisdiction, this will also be given weight. The trustee, therefore, should be based in the jurisdiction of the governing law.

The risk is that another jurisdiction (e.g., U.S.) may hold that: (i) as the chosen governing law is not set out by statutes and (ii) the trust does not have a real connection with the chosen jurisdiction; therefore, the chosen trust law is not the governing law of the trust, and some other law should be applied (e.g., perhaps U.S. law).

§5:234       Established Law and Infrequent Changes

The settlor does not want to have the IAPT subject to laws that change quickly.

Foreign jurisdictions that have well established asset protection laws that are not subject to frequent change include:

•        Nevis

•        Cook Islands

•        Belize

•        Bahamas

•        And many other “English Law” type jurisdictions

§5:235       Alternative Governing Law

The IAPT should provide for an alternative governing law in case a creditor is actually making progress in the courts where the IAPT is domiciled or another emergency arises.

In some jurisdictions, their trust act specifically permits an “Emergency Trustee” [See, e.g., Cook Islands International Trusts Act 1984, 13G Governing law (“(4) Where a trust instrument contains a power to change the governing law of that trust, that law may be changed to or from the law of the Cook Islands in accordance with that power, and that change shall be valid, effective and conclusive according to the terms of such power”).] If the trusts so called “flight clause” is of importance, be sure the trustee you are using is aware of it and that trustees “termination fee” is reasonable.

§5:236       Repeal of Statute of Elizabeth

The main features of such legislation usually include:

•        The repeal of the Fraudulent Conveyances Act (the 1571 Statute of Elizabeth). [See, e.g., Nevis International Exempt Trust Ordinance, 1994, 49 (“The enactment titled 13 Elizabeth I Ch 5 (1571) shall have no application to any international trust that is governed by this Ordinance”).]

•        A short time limit for creditors to take action in the jurisdiction concerned (2 - 3 years). [See, e.g., Nevis International Exempt Trust Ordinance, 1994, 44 (two-year limit).]

•        Certain deeming provisions (e.g., that if the client is not rendered insolvent by the transfer, then the transfer is not fraudulent as to creditors).

Belize is of special interest. According to Belize lawyers, when Belize went independent, it incorporated the Common Law but did not adopt the Statute of Elizabeth. Although the Statute was later adopted, it was specifically not made applicable to international trusts. It would appear that Belize protects IAPTs as soon as they come into existence.

§5:237       Tax Cooperation Agreements

Tax cooperation agreements include:

•        Tax Information Exchange Agreements.

•        Mutual Legal Assistance Agreements in criminal matters.

•        Memorandum of Understanding with the U.S.

Tax Information Exchange and Mutual Legal Assistance Agreements relate to government to government (i.e. not creditor/debtor) disclosure. Their goal is to catch U.S. taxpayers who have not disclosed income or assets in circumstances when they should have done so, or with respect to criminal activities. Such jurisdictions usually require the U.S. to show a prima facie case before any assistance will be given. It is not unknown for fraudulent affidavits to be used for the purpose of obtaining local information not otherwise obtainable. [See, e.g., In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982), cert. den. 462 U.S. 1119 (1983).]

With the inauguration of the “Black List” by the Organization for Economic Cooperation and Development (OECD), and the Financial Action Task Force (FATF), it would appear that “Banking Transparency” may well soon become a reality.

The Black List is a sort of excommunication. If a country’s laws are not “proper,” its banks will not be permitted access to the international money network.

FATF is an inter-governmental body. Its purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. The Task Force is therefore a “policy-making body” whose goal is to generate the political will to bring about reforms in these areas.

FATF monitors members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques, and promotes the implementation of appropriate measures globally. FATF collaborates with international bodies involved in combating money laundering and the financing of terrorism.

Fairly recently, the United Bank of Switzerland (UBS) case has dominated the news. The IRS reached a deal with the Swiss government, gaining access to thousands of UBS accounts that Americans might have used to avoid paying taxes. “Thousands of taxpayers who avoided paying taxes in the past are being brought into compliance,” said IRS Commissioner Douglas Shulman, in an August, 2009 article from CNNMoney.com. “As this agreement demonstrates, the world of international taxes has drastically changed.” 4,450 accounts held by Americans were included in the settlement and the IRS expects to gain access to accounts that have held $18 billion in assets at one time. In the same article, UBS Chairman Kaspar Villiger said, “UBS welcomes the fact that the information-exchange objectives of the settlement can be achieved in a lawful manner under the existing treaty framework between Switzerland and the United States.” Shulman said the deal should deter Americans from evading taxes in the future. According to attorney Asher Rubinstein, with Rubinstein & Rubinstein in New York, the IRS was initially seeking 52,000 accounts and received about 5,000, so it wasn’t a complete victory. But he added that the landscape has changed dramatically for U.S.-based tax evaders. “The bottom line is that the days of tax havens are going,” said Rubinstein. [Aaron Smith, “IRS Gets a Key to Swiss Bank Accounts,” CNNMoney.com (August 19, 2009).]

[§§5:238-5:239 Reserved]

3.       The Foreign Law

§5:240       General Objectives

Choose a jurisdiction in which to establish the IAPT whose laws:

•        Are pro-debtor. The laws should be sufficiently pro-debtor to defeat the spurious claims of a U.S. creditor.

•        Do not enforce foreign judgments. The laws should not enforce a judgment obtained in a U.S. court thereby rendering the U.S. judgment useless in the foreign jurisdiction.

•        Require action de novo. The law should require a holder of a foreign judgment relating to the IAPT to commence an action de novo (anew) in the courts of the IAPT’s jurisdiction.

•        Limit claims. The law should limit causes of action a creditor can bring if the claim relates to a matter governed (or transfers protected by) the law of the foreign jurisdiction.

§5:241       Fraudulent Conveyance Laws

A creditor (or trustee in bankruptcy) will find it difficult and expensive to attack an IAPT created and administered under foreign laws.

Under foreign laws, a creditor:

•        May be required to prove:

•        Fraudulent intent. (The standard may be the higher standard of “beyond a reasonable doubt” rather than the lower civil standard of “preponderance of evidence.”)

•        That the settlor was rendered insolvent as a result of the transfer of assets to the trust.

•        May not be able to recover against the IAPT if the claim arose after the transfer of assets to the IAPT. This may shield IAPT assets from creditors even if a U.S. court has found the transfer to the IAPT to be fraudulent. [See, e.g., Nevis International Exempt Trust Ordinance, 1994, 24 (providing circumstances in which a trust shall not be fraudulent as against a creditor).]

§5:242       Enforcement of U.S. Judgments

If a creditor secures a judgment against the settlor of an IAPT and seeks to collect, the question is will the IAPT jurisdiction enforce the judgment. [See, e.g., Nevis International Exempt Trust Ordinance, 1994, §28 (“. . . no proceedings for . . . the enforcement . . . of a judgment obtained in a jurisdiction other than St. Christopher and Nevis . . . shall be entertained by any Court in St. Christopher and Nevis if (i) that judgment is based upon the application of any law inconsistent with the provisions of this Ordinance; (ii) that judgment relates to a matter or particular aspect that is governed by the laws of St. Christopher and Nevis”).]

Liquid and movable assets (such as cash and stock) are placed into the possession of the IAPT trustee or an LLC or International LLC owned 100% by the IAPT. [See §§5:330 et seq.]

U.S. based property, such as real estate, or accounts receivable should be either (i) sold, and the resulting liquid assets should be held in the foreign jurisdiction or (ii) placed into an LLC owned by the IAPT, or in some cases by a Domestic Asset Protection Trust (DAPT) [see Chapter 4, Domestic Trusts]. In other cases an international equity strip could be used.  [See §5:200.]

The extent to which a judgment creditor can seize assets situated in the U.S. and held by the IAPT will depend on state law, federal bankruptcy law (when applicable), and an evaluation of the initial transfer into the IAPT (i.e., the fraudulent transfer question). If the transfer was not fraudulent at the outset, the ownership of assets by the IAPT should be respected.

Whether an IAPT’s ownership of assets in the U.S. is respected by a U.S. court partially depends upon whether an order of the U.S. court would be respected by the foreign jurisdiction. This depends upon any Reciprocal Enforcement of Judgments Acts that might exist between the U.S. and the jurisdiction concerned; and whether that country has signed the Hague Convention (the U.S. is a signatory).

Enforcement in a country that requires a trial de novo requires two actions:

•        The creditor must win against the debtor.

•        The creditor must collect. [See §5:300.]

§5:243       Whose Law Is Applicable?

Settlors are often concerned about a possible voiding of transfers, even though the IAPT was established under circumstances seemingly not in violation of fraudulent transfer law.

Under California law, the validity of a transfer is generally governed by the law of the State that has the most significant relations. [Cal Civ Code §946 (stating that if there is no law to the contrary in the place where personal property is situated, it is deemed to follow the person of its owner and is governed by the law of his domicile). See also Restatement (Second) of Conflict of Laws §244 (1971).] This means that if you transfer personal assets to a favorable foreign jurisdiction, you should be able to achieve protection against fraudulent U.S. transfer claims re those personal assets.

Under the Cook Islands law, a creditor claiming a fraudulent conveyance to an IAPT must show all of the following:

•        The property was transferred with the “principal intent to defraud.”

•        The transfer was done so as to “render the settlor insolvent or without property” by which the claims could have been satisfied.

•        The claim of the creditor as regards the allegation of fraudulent transfer is proven “beyond a reasonable doubt”.

[Cook Islands International Trusts Act (“ITA”) §13B (as amended 1991).]

Generally, in the Cook Islands, foreign law is excluded from consideration when an application is made to defeat any rights granted by or allowed under the law of the Cook Islands. [Cook Islands International Trusts Act (“ITA”) §13I.]

In the case of real estate (non-movable), when a judge needs to rule concerning property within his U.S. jurisdiction, the fact that the real estate is owned via the law of a country which affords no reciprocity to the U.S. court will enter into his negative consideration. In the area of real estate, there is considerable debate concerning protection using IAPTs or DAPTs. In any case the real estate should be placed into an LLC and ownership of the LLC placed into the IAPT or DAPT.

§5:244       Protection Against Disclosure

If the trustees are carefully chosen, they will not disclose any of the assets or activities of the IAPT without a local court order. From the settlor’s perspective, this means that any creditor or other busybody will have to obtain a court order in the local jurisdiction (which is unlikely) prior to receiving any information concerning the IAPT.

If such an order was applied for, and if it appeared that it might be granted, the IAPT might change its situs, or better, wait to see how his opponent’s case evolves before moving.

The primary methods of protection against disclosure are:

•        No Public Record. There is almost no indication in any public record of the existence of the IAPT, and certainly not of its settlor, its beneficiaries, or its assets. The activities of the owner of the IAPT’s assets are therefore never known to the public.

•        Penalties for Disclosing. Many jurisdictions impose a requirement against disclosure by local trustees of any information about the IAPT to any third party, and some jurisdictions impose criminal penalties. However, this alone may not be sufficient. You must be sure that the local trustee does not have an office in the U.S. If it does, financial penalties could be applied against it’s U.S. office until the foreign office complied.

•        Trust Drafted Prohibition. The IAPT should have a prohibition on disclosure.

[§§5:245-5:247 Reserved]

V.     Important Clauses in IAPTs

A.      General Points

§5:248       Custom Drafting Is Required

An IAPT requires custom drafting. Drafting is complicated by the multijurisdictional nature of the structure. The challenge is to create a structure that accounts for jurisdictional as well as client-specific requirements.

The often used “one size fits all” document is misplaced in this context. When drafting the trust document it is important to balance the client’s need for control with his need for asset protection.

[§5:249 Reserved]

B.      The Protector

§5:250       Purpose of the Protector

The protector can be your best friend. In some cases, planners will allow the settlor to be the protector. Caveat, be certain that if trouble is seen coming, the settlor/protector resigns well before his resignation places him in contempt of the court.

Protectors are given the power to remove and appoint trustees.

Drafting Point:

If a domestic protector is used, do not give him the power to appoint a domestic trustee. He should only be allowed to fire the foreign trustee after a new foreign (not domestic) trustee is appointed.

When there is more than one trust protector, they are usually called “the Committee.”

The IAPT should state that decisions are made by the trustees, and not by the protector. Protector’s act as a check and balance over the trustees to ensure that there is no breach of the provisions of the IAPT or disregard of the Letter of Wishes. The trustees make decisions. Protectors basically can only negate decisions trustees make.

Since trustees serve at the protector’s or the Committee’s discretion, trustees will usually pay careful respect to their views.

The protector will usually discuss with the settlor any particular course of action that the trustees propose to take to ensure that there is overall consensus. [For more on Protectors, see Chapter 4, Domestic Trusts.]

It is wise to include provisions in the IAPT enabling the trustees to challenge their removal. Valid removal reasons include failure to achieve a reasonable return on investments, unjustified increase in fees, or breakdown in communication between the trustees and the beneficiaries.

§5:251       Usage Becoming More Widespread

The use of trust protectors in the U.S. is becoming more common. It has been expanding from IAPTs to become an important watchdog over all types of domestic trusts.

Irrevocably transferring property to a trustee has caused clients and advisors concern due to the lack of control over the transferred assets. Just the word “irrevocable” raises anxiety due to the fear that future change may negate the purpose, taxability, distributions, or other benefits originally contemplated by a trust agreement. Appointment of a protector can offset those reservations and provide a safety net for administering long-term trusts.

Protectors have the ability to terminate, modify, or otherwise bring a trust into compliance with any future law changes that weren’t contemplated at the time the trust agreement was drafted.

§5:252       Selecting the Protector

The conservative approach to selecting a protector is to not select the settlor, the settlor’s spouse, or family members who are beneficiaries. [For the benefit of appointing an “independent” protector, see IRC §§672 & 674.]

The aggressive approach is to select the settlor because this provides him more control. However, this could weaken asset protection.

Thus, unless there is a particular need, the settlor normally should not be a protector. The settlor should not have direct control of the trust assets. If the settlor has control, a creditor may persuade a court that the settlor can cause the IAPT to pay.

The IAPT must be a true trust and not the alter ego of the settlor. If the settlor retains too much control over the trustees or their actions, there may not be a trust. [See Rahman v. Chase Bank (CI) Ltd. (Royal Court of Jersey, 12 February 1990) (the terms of that trust showed that there was never a true trust).]

The settlor may appoint close friends who are not likely to be intimidated by litigation to be trust protectors. Close friends are appropriate as “Independent” trustees. [IRC §§672 & 674.]

If possible, have at least one (and if possible a majority) of the Committee of Protectors (if a committee is used) as non-U.S. citizens or residents. However, when a Low Profiler is being used, the protector needs to be a U.S. person. [See §§5:160 et seq.]

Do not give any protector under the jurisdiction of a U.S. court the power to fire the foreign trustee and select a U.S. trustee. This would bring the IAPT under a U.S. court’s jurisdiction.

§5:253       Powers Granted to a Trust Protector

A Trust Protector typically has the power to:

•        Veto decisions of the trustee.

•        Veto distributions contemplated by the trustee.

•        Correct scrivener errors.

•        Respond to changes in the law.

•        Eliminate or add beneficiaries.

•        Amend administrative and investment powers.

•        Grant a trust beneficiary a testamentary general power to appoint trust property with an inclusion ratio greater than zero which in the absence of the exercise of such power would pass to a skip person for GSTT purposes.

•        Fire, appoint, and change trustee duties and powers.

FORMS:

4-21 Committee Protectors Provision (in Chapter 4)

5-15 International Asset Protection Trust (Article 28.0, Appointment of Protector)

§5:254       Examples of Statutory References to Protectors

There are only a few states which specifically make note of protectors. A Delaware statute provides as follows:

 . . nothing in this subchapter shall preclude a transferor from appointing one or more advisers, including but not limited to:

1. Advisers who have authority under the terms of the trust instrument to remove and appoint qualified trustees or trust advisers;

2. Advisers who have authority under the terms of the trust instrument to direct, consent to or disapprove distributions from the trust; and

3. Advisers described in Del. C §3313 of this title, whether or not such advisers would meet the requirements imposed by paragraphs a. and b. of this subsection.

For purposes of this subsection, the term “adviser” includes a trust “protector” or any other person who, in addition to a qualified trustee, holds 1 or more trust powers.

[12 Del. C. §3570(c) (emphasis added).]

A Nevis trust law statute provides as follows:

(1) The terms of an international trust may provide for the office of protector of the trust.

(2) The protector shall have the following powers-

(a) (unless the terms of the trust shall otherwise provide) the power to remove a trustee and appoint a new or additional trustee;

(b) such further powers as are conferred on the protector by the terms of the trust or by this Ordinance.

(3) The protector of an international trust may also be a settlor, a trustee or a beneficiary of the trust.

(4) In the exercise of his office, the protector shall not be accounted or regarded as a trustee.

(5) Subject to the terms of the international trust, in the exercise of his office a protector shall owe a fiduciary duty to the beneficiaries of the trust or to the purpose for which the trust is created.

(6) Where there is more than one protector of a trust then, subject to the terms of the trust, any functions conferred on the protectors may be exercised if a majority of the protectors for the time being agree on its exercise.

(7) A protector who dissents from a decision of the majority of protectors may require his dissent to be recorded in writing.

[The Nevis International Exempt Trust Ordinance, 1994, Part 6, Trustees, Protectors and Beneficiaries, 9 Protector of the Trust.]

In the case of Trustee, Plaintiffs-Appellants, v. PATRICK DAVIS, P.C., et al., Defendants-Respondents. SD 28613. No.-- January 26, 2009 for the first time a case seriously discusses the role of a protector. It is my understanding that the case is on appeal and will be heard in March 2011. Alexander Bove of the Bostopn firm of Bove & Langa will be the expert witness.

§5:255       Avoid Granting a General Power of Appointment

When someone is granted powers over property owned by another, the powers could be either personal powers or fiduciary powers.

Personal Powers

If personal powers are given to the protector, he could be deemed to hold a general power of appointment.

The concern is not with powers retained by the settlor but with powers he conferred upon another. In order to avoid inadvertent inclusion in the protector’s estate, care must be taken when drafting the powers and perhaps a provision should be included stating that no general power of appointment exists, such as:

Notwithstanding other provisions in this agreement to the contrary, the trust protector shall not participate in an action under this agreement that would cause him to possess a general power of appointment within the meaning of IRC §§2041 and 2514. The protector may not use such powers for personal benefit, nor for the discharge of his financial obligations.

Fiduciary Powers

The granting of fiduciary powers to a protector would normally not cause estate or income tax concerns unless the protector could exercise the powers for the protector’s benefit by naming himself and his family members as beneficiaries of the trust.

To be safe, a restriction preventing this should be drafted into the trust.

[§§5:256-5:259 Reserved]

D.          Other Clauses

§5:300   The Flight and Decanting Clauses

A “flight clause” is used to transfer the trust and its assets to a more favorable situs in the event that the country where the IAPT is located turns “risky” (e.g., war, insurrection, or civil unrest) or the IAPT is being pursued by creditors of the settlor. Should it become necessary to flee, without thoughtful consideration and pre-planning, you may find the process is not simple. What is required by your existing trustee in order to terminate their services? What do you need to do to satisfy the new trustee? The due diligence process in the new jurisdiction could be lengthy. Most importantly, have you made pre-arrangements with the trust company you are fleeing to, to accept the trust? The new trustee understands you are fleeing to him because an attacking creditor was actually making progress in the courts of the jurisdiction you are fleeing from. Is the new trust company willing to take on a trust that most assuredly will be sued in their jurisdiction? If they are willing, what is the cost?                                                                                                                                 .            The basic concept of the flee clause is:  if a creditor is making headway in the jurisdiction where the trust resides, change to another jurisdiction and let the trial begin anew. Sooner or later the creditor will negotiate. But do flee clauses really work? As discussed above the flee clause is time consuming to implement and may take enough time to allow your opponent to obtain a Mareva injunction freezing the trust’s assets and thereby nullifying the flee clause.

There are Different Types of Flight Clauses:

Automatic: If certain events occur, the trust’s jurisdiction is automatically transferred to another named jurisdiction. Because the event would automatically invoke the flee (flight) clause, the “event” must be very carefully thought out and drafted. An automatic flight clause automatically disqualifies the use of the Low Profiler. [See §§5:160 et seq.]

Trustee Decision: The trust should give the trustee the power to change its situs to a non-named jurisdiction, if the trustee believed conditions warranted the change.

Limited Powers: Limited powers may be given to a person residing outside of the trust’s jurisdiction. If the concern is strong that the flight clause may need to be activated, this is an important clause to draft.

If a judge disallows the automatic change of jurisdiction and also prohibits the trustee from selecting an alternative jurisdiction, this limited power can become quite important. The holder is outside the trust jurisdiction. The trust situs judge cannot prevent the power holder from exercising this power. Since trust assets are (hopefully) not in the same jurisdiction as the trust, the judge is powerless to stop the trust’s flight.

Decanting Not Fleeing

Perhaps a decanting clause would be preferable to a flee clause. Instead of physically moving the trust from Jurisdiction A to Jurisdiction B and having to satisfy the fiduciary concerns of the terminated and the new trustee, the assets from A could simply be poured into a new trust in B. We can accomplish this by giving the protector, the power to appoint the trust property to another trust in another jurisdiction but with the same trust clauses as the existing trust. The exercise of a power is quick, and the old and the new trustee need do nothing so they have no fiduciary concern.

FORM:

5-15 International Asset Protection Trust (Article 21.0, Governing Law)

§5:301       The Duress Clause

The Duress Clause protects the IAPTs assets against repatriation under duress. It also affords protection under the “impossibility of performance” doctrine if the trust fund is not repatriated after a court order to do so.

Impossibility is a defense to civil contempt which is not intended as punishment, but as a coercive tool to obtain compliance with a court order. [See Maggio v. Zeitz, 333 U.S. 56 (1948) (stating that to jail one for omitting an act he is powerless to perform would be purely punitive and would add nothing to the bankrupt estate).]

Nevertheless, several courts have held that a self-induced impossibility of performance should not be recognized as a defense. [See, e.g., In Re Lawrence, 227 B.R. 907 (Bankr. S.D. Fla. 1998) (stating that while impossibility is a recognized defense to civil contempt, the law does not recognize the defense of impossibility when the impossibility is self created; the debtor had settled his IAPT 66 days before a $20 million arbitration award was rendered).]

IAPTs should:

•        Include an anti-duress clause.

•        Minimize and distance domestic control from an adverse court order.

In order to minimize the domestic control from an adverse court order:

•        The settlor should never be a trustee, or co-trustee. Trustees have control over the trust.

•        Generally, the settlor should not be a protector since protectors have a measure of control over the trust fund. Many settlors insist on being the protector. They are concerned about giving their assets to a foreign company distant from themselves. Provided they understand that they need to resign at the first hint of litigation, they can be the protector. The protector’s powers should be drafted as completely negative — he can veto but not institute actions.

Activating

How is the Duress Clause activated. I suggest the following. Every time the protector, or in the case of the Low Profiler the Protector and Trustee requests that any action be taken, the request must contain the following:

I John smith, under penalty of perjury, affirm that the action I am requested is being requested is free from duress from….

The court could not request him to perjure himself and therefore a request received without the confirmation would alert the requested party to the fact that the requesting party is under duress.

Drafting

The provision should state that the trustees are not bound to act in accordance with any directions given to them by the settlor or the protector when such directions have been given under duress (e.g., by order of a court, threats of jail, fines, or contempt of court).

This clause ensures that trustees need only act on directions received from the settlor or the protectors which are voluntarily and of their own free will.

The clause should provide that the trustee is not to make a distribution when the grantor/beneficiary is under “duress.” Duress is when a creditor has made a claim, or obtained a judgment against the grantor/beneficiary. This prevents the creditor from enforcing his claim against trust assets without obtaining a new judgment in a trial de novo in the foreign jurisdiction.

When the clause is invoked, it could (if so drafted) also remove the grantor/beneficiary from the positions of trust protector or co-trustee, if he held such positions. This would be a decent fallback position if the client, against your advice, demanded to occupy these positions.

Form:

5-15 International Asset Protection Trust (Article 4.0(d), Definitions, Event of Duress)

§5:302       Settlor’s Limited Power of Appointment

The following clauses provide the settlor with Limited (not general) Powers of Appointment. These powers may not be exercised in favor of the settlor, the settlor’s estate, the settlor’s creditors, or the creditors of the Settlor’s estate.

Inter-Vivos Power of Appointment

During the life of the Settlor, the Trustee shall distribute the Trust Fund or any part thereof to one or more members of the appointed class, either outright or in trust, as the Settlor may appoint by signed document delivered to the Trustee exercising this power of appointment.

Testamentary Power of Appointment

Upon the death of the Settlor, the Trustees shall distribute the Trust Fund or any part thereof to one or more members of the appointed class, either outright or in trust, as the Settlor may appoint by a writing (including without limitation a will or Codicil) signed by the settlor and delivered to the Trustees, exercising this power of appointment.

§5:303       Power to Postpone Sale

In many English law jurisdictions, the trustees have to be given a power to postpone sale. Otherwise, they would have to sell all statutorily defined “non-approved” assets, and purchase approved type assets.

In these jurisdictions, there are various designated types of investments into which the trustees must invest the trust assets unless the trustees are given a wider power of investment. This is the basis of the need to draft wide powers of investment.

The power to postpone the sale of trust assets, retain particular assets, and not be required to diversify assets, enables the trustees to keep the trust assets in the form they were transferred to the IAPT. For example, settlors do not want to transfer shares in their controlled corporation to the trustees and then later find that the trustees are required by law to sell them.

FORM:

5-15 International Asset Protection Trust (First Schedule, Powers of the Trustees, 2.0 General, (a)(ii))

§5:304       Power to Create Additional Trusts

The power of merger and the power to create additional trusts enable trustees to divide trust assets into sub-trusts, and to create additional trusts in other jurisdictions.

This can be advantageous to frustrate pursuing creditors as they may have to utilize the courts of several jurisdiction.

FORM:

5-21 Merger of Trusts

§5:305       Power of Exclusion

The power of exclusion permits the trustees to take advantage of changing tax laws where, for example, a beneficiary may be taxed on a portion of the trust assets because he now resides in the same jurisdiction as the trust.

In these situations, the beneficiary may prefer others to receive his part of trust income. This can be accomplished if the trustees have the power to designate an “excluded person” thus excluding the person as a beneficiary, or to enable such beneficiary to waive his rights under the IAPT.

FORM:

5-22 Excluded Persons Clause

§5:306       Investment of Trust Funds

The IAPT should set forth the investment policy to be used by the trustees. Similarly, changes in investment strategy, or with whose consent such changes are to be permitted (e.g. the trust protector), should also be set forth.

This is important in the case of a cautious settlor who does not want the trustees investing in risky investments. As a matter of practice trustees will not take an investment action until they receive a request or guidance from the settlor and/or the protectors.

If the settlor owns a business, and wishes it to be carried on after his death, he should name someone with whom the trustees can consult, and on whom the trustees can rely to continue the practical day to day management of the business.

Although there are laws in various jurisdictions against unnecessarily turning over the trust assets (“churning”), the protector should be watchful.

Caution:

IAPTs should not carry on a business in its own name or it may be taxed as a corporation for U.S. tax purposes. The trustees should be prohibited from carrying on a business directly, but they may carry on a business through the medium of a third party, e.g. through an IBC, FLP, or LLC controlled by the trust.

§5:307       Investment Advisor

An investment advisor should be given the power to invest and reinvest but not withdraw funds from the account. The settlor can request and the trustee can appoint the advisor.

§5:308       Payment of Existing Creditors Provision

The IAPT may include a statement that the IAPT does not intend to avoid payment of legitimate claims of existing creditors of the settlor.

This statement, accompanied by a request that the trustees consider paying such claims, will help to defeat fraudulent transfer attacks, where the intent of the settlor to defraud creditors may be inferred from the actions of the settlor under one of the “badges of fraud” attacks. [See Chapter 2, Fraudulent Transfers.]

FORM:

4-2 Provision for Existing Obligation of Settlor (in Chapter 4)

§5:309       Estate Planning Provisions

QTIP, A/B, and Generation Skipping provisions may be included in the IAPT.

With the inclusion of those estate planning provisions, the trust is called an Integrated Estate Planning Trust (IEPT) and is a fully asset protected “Living Trust.” [See §§5:140 et seq.]

§5:310       Pourback or Dispositive Trust

The trust’s assets can either:

•        be “poured back” into the settlor’s living trust, or

•        remain or pour into irrevocable trusts after the settlor’s death.

The “pourback” trust is accomplished by naming the client’s living trust as a discretionary beneficiary. The irrevocable trust is more complex, but it could be drafted to cover situations not normally focused on in the children’s trusts contained in the living trust.

§5:311       Separate or Community Property

If the clients live in a community property state, then they should consider whether they want the assets settled into the trust as separate or community property. The rights of both spouses should be protected to avoid creating a fraud on the community or harming one of the spouses.