International Asset Protection Planning: Using Foreign Trusts in Estate Planning

Course Description

A revocable living trust gives a client no protection from creditors during life, and a domestic asset protection trust works reliably only for residents of the states that have one. This course shows estate planning attorneys which clients need a foreign asset protection trust and how a Cook Islands trust fits alongside the revocable trust, exemption planning, and entities they use. It explains the offshore trust structure, how it protects against a U.S. judgment, tax reporting, and common objections. We also cover choosing a jurisdiction and trustee, trust provisions, due diligence, and funding.

Principles

• Where a foreign trust fits in an estate plan. A revocable living trust protects nothing from the settlor’s creditors during life. State exemptions and charging order protection can sometimes cover people in a state with strong exemption laws. For others, an offshore trust can provide a much greater level of asset protection.
• The offshore trust structure. The parties are the settlor, a licensed Cook Islands trustee company, and the settlor and family as beneficiaries. A protector is optional. The trust often owns an offshore LLC, managed by the settlor. Cash and securities move in easily. U.S. real estate does not, because a U.S. court controls the land.
• How the trust protects against a U.S. judgment. The trustee sits outside U.S. jurisdiction, so a U.S. court cannot order it to pay. The Cook Islands does not recognize a U.S. judgment, so the creditor must sue again there, prove a fraudulent transfer beyond a reasonable doubt, and pay the other side’s costs on losing.
• Tax treatment and reporting. The trust is a grantor trust, so every dollar of trust income is taxed to the settlor on the settlor’s own return. There is no income tax advantage and no income tax cost. The trust is disclosed to the IRS every year on Forms 3520 and 3520-A, the FBAR, and Form 8938. The settlor’s CPA files them.
• The common objections. Attorneys stay away for four reasons: it looks like tax evasion, fraudulent transfer law will catch the client, a domestic asset protection trust is cheaper, attorney liability, and settlors have gone to jail. The program answers each one.
• Choosing a jurisdiction and trustee. The Cook Islands has the longest litigation record and the deepest trustee market. It requires no creditor bond. Nevis follows the Cook Islands statute, requires a creditor bond, and has a thinner trustee market. About ten trustee companies hold Cook Islands licenses. Each is supervised and must carry minimum capital and insurance. The program covers how to evaluate a trustee company.
• Trust provisions. The provisions that decide whether the trust holds are the duress clause, the Jones clause for a settlor who already faces a claim, the protector’s powers where there is one, and the LLC manager provisions.
• Application, due diligence, funding, and operation. The trustee asks for application and tax forms, identity documents, source of wealth and funds, a solvency statement, and the settlor’s purposes. The attorney prepares the settlor for each request. Cash and securities move into an underlying LLC’s accounts, where an LLC is used, and the trustee assists with gifts and distributions while the settlor manages the underlying LLC day to day.

Syllabus

1. Where a foreign trust fits in an estate plan
2. How a Cook Islands trust protects against a U.S. judgment
3. Tax treatment and annual reporting
4. Answers to the common objections
5. Choosing a jurisdiction and trustee, due diligence, and funding