International Trusts: Graduating from Training Wheels

You’ve made a good start toward gaining the safety that can come only from internationalizing your financial life if you’ve…

  • Opened a foreign bank account
  • Opened a foreign brokerage account
  • Bought gold, especially if it’s physical gold stored outside the US
  • Bought foreign currency, especially if it’s on deposit with a bank outside the US
  • Bought life insurance or an annuity from a foreign insurance company
  • Purchased real estate in a foreign country
  • Extended any aspect of your business or professional practice so that it operates outside the US.

A foreign bank account protects you from being paralyzed by a lightning seizure by the IRS or by any other government agency armed with a summary power to freeze your assets, since such summary powers can’t reach beyond the US. A foreign brokerage account gives you the same kind of protection. If you ever find yourself in a wrestling match with a government agency, you’ll have resources you can count on.

Gold gives you independence from problems with financial institutions in the US. It certainly isn’t endorsed, guaranteed, or underwritten by any member of the FDIC or SIPC, but its value doesn’t depend on such promises or on the institutions that make them.

Owning foreign currencies, whether through a non-US bank or through a non-US insurance company, reduces your exposure to the dollar’s loss of value. An annuity or life policy denominated in anything other than US dollars does the same, and some foreign policies put up a barrier against lawsuit predators.

Foreign real estate and business operations help to insulate your financial fate from that of the US economy. And foreign real estate would be a difficult puzzle for government planners trying to develop a program of capital controls.

In addition, taking any of those steps accomplishes what so many US investors need most—the psychological experience of acting outside of the conventional and familiar. There is so much to be gained by treating the entire world as your financial pasture; any one small step beyond the US border enables further, larger steps.

Don’t Come Undone

It’s all to the good. All worth doing. But none of it completes anything. Every one of those measures improves your level of safety, but every one of them fails to finish the job, because every one of them leaves you in the position of owner. You still have the direct power to dispose of the assets, so anyone who can twist your arm can compel you to undo what you’ve done. A new law or a judge who doesn’t see things your way could force you to close your foreign accounts and bring the money home, or sell your gold (perhaps at a low, “official price”), or liquidate your foreign business or real estate and hand the money over.

Even though the US government can’t reach your foreign assets directly, it can reach you. And that keeps your foreign assets available to the government and to any litigant who succeeds in turning the government’s power to his own purpose. The heart of the problem is that you still own those assets. The solution—the only thorough solution—is to hire someone else to do the owning for you.

Owner for Others

Put that way, it is an odd-sounding suggestion, but in fact there is a well-tested arrangement for hiring an owner. It’s a trust. A properly structured trust puts just enough legal distance between you and the assets you want to protect so that you can honestly and credibly tell any attacker, “They’re not mine. I don’t have any way to get them for you.”

The essential elements for such a trust are:

  • The trustee is an institution, probably a licensed trust company, that is in the business of owning things for other people.
  • The trustee isn’t in the US, and it doesn’t have any important assets in the US.
  • The trust is irrevocable, so that you cannot be forced to undo what you have done.
  • The trust is discretionary, meaning that the trustee has a responsibility to decide when and how to use the trust fund (whether by sending you a check or otherwise) for you and for the other beneficiaries you’ve included. Since neither you nor any other beneficiary has a fixed share in the trust, no beneficiary can be compelled to assign a share to someone else.

Such a trust would leave you incapable of complying with any government order aimed at the assets you want to protect. But such a trust, unless there were more to the story, would leave you extremely uncomfortable, so uncomfortable that you would never carry out the idea. How could you have any confidence that the trustee would use its discretion intelligently and conscientiously, for your purposes? Oh, and how could you be sure the trustee wouldn’t just walk away with everything?

Let’s start with the larceny problem, because it’s the simplest one to deal with. The most common arrangement is for an international trust to own little more than a limited liability company (organized in a foreign jurisdiction). It’s the LLC that owns the assets the client wants to protect. And the client is the LLC’s manager, so he has management control over the assets (but owns neither the assets nor the LLC itself). It would be impossible for even a thoroughly dishonest trustee to help itself to anything from such a structure.

Protecting the Protector

Getting comfortable with the trustee’s discretionary authority is a more complex matter. The usual device for keeping the trustee informed and focused on the client’s intentions is to include a protector, who has a power to advise the trustee and a power to replace the trustee with another licensed trust company. Fee-earning trustees, of course, don’t want to get replaced, so they’re understandably attentive to the information and advice they receive from such a protector. The rare exception gets fired.

The protector’s role is so important that in most cases the client keeps the job for himself. That’s what makes giving discretionary authority to the trustee acceptable to most clients, but it introduces a puzzle of its own. How do you protect the protector from coercion? How do you keep his powers from being used to disarm the trust through, for example, a court order compelling the protector to replace the trustee with a bank in the US?

The general strategy for protecting the protector is to include “anti-duress” provisions in the trust instrument; anti-duress provisions put the protector’s powers into suspension if and when the protector is under a court order to use his powers. Crafting the protector’s powers and the anti-duress provisions is the most sensitive aspect of designing a robust international trust. It must leave the trustee with a duty to say “No” when it sees that the protector is under duress, and it must create information channels that ensure that the trustee will be alerted if and when the protector is not acting of his own free will.

If you’ve already opened a foreign bank account, are storing gold outside the US, or have a Swiss or other foreign annuity, you’ve done far more to improve your financial safety than 99% of American investors. But those things are only half measures—measures you can be forced to undo. Their greatest value is in serving as training wheels for using a device you can count on even in the worst circumstances. When you’re ready to take the training wheels off, an international trust will actually deliver the safety you probably had in mind the first time you carried your wallet across the US border.

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