Why You Don’t Have an International Trust… Even Though You Should

Why You Don’t Have an International Trust… Even Though You Should

The safety, protection, and tax advantages of an international trust give you a rich list of benefits:

  • Protection from malicious lawsuits
  • Protection from arbitrary asset seizures
  • Protection from future restrictions on owning gold or foreign currencies
  • Ready access to foreign investment markets and financial institutions
  • Income tax planning advantages you won’t get if you stay at home
  • A better legal environment for estate planning
  • A way for family wealth to eventually disconnect completely from the US tax system
  • The peace of mind that comes from knowing you can always fall back on assets that aren’t vulnerable to the government where you live.

There is simply no way to gain that full suite of advantages except with an international trust.

Here are the top 10 reasons so many investors are missing out on the kind of protection they want for themselves and their families.

Worry Point 1: “I might get cheated by a dishonest Trustee.”

Few Americans have any experience dealing with international trust companies, and that’s true of their lawyers as well. How can they trust the Trustee? There are two ways to approach this worry point. If WP1 is a problem for you, I suggest that you wrestle it down both ways.

The first solution is the airplane. If you’ve identified a trust company as a candidate for your business, buy a ticket and visit it. After a meeting or two, your confidence level will either go way up or way down. Facts quiet the imagination.

The second solution is structural. There is no need for the Trustee to actually get its hands on the assets you want to protect. Instead, the assets could be kept in an account with a foreign bank or broker in which you do have confidence, with you as the account’s investment manager. You would give trading orders directly to the bank or broker and always know where your money is. The Trustee would stay in the background.

For even tighter control, you can keep all the investments in a foreign limited liability company. Your trust would own the LLC, but you would be the LLC’s manager. You would have hands-on control of everything the company owns. You, not the Trustee, would have signature authority on the LLC’s bank and brokerage accounts. That would make it impossible for a less-than-ethical Trustee to do any harm. The Trustee won’t even know where the LLC is holding the assets until you decide it’s time to provide that information. The Trustee won’t even know what the assets are.

Worry Point 2: “I don’t want to get stuck with a trust company that’s inefficient and unresponsive. How can I be sure the Trustee will stay focused on my purposes for the trust? How can I rely on the Trustee to do a proper job?”

This worry point also has a clear solution. With a properly structured international trust, you (or someone else you choose) will be the Trust Protector, whose primary role is to advise the Trustee about the needs and circumstances of the Beneficiaries. As Protector you’ll have a power to replace the Trustee with another independent, licensed trust company. So you’ll always be free to take your business elsewhere. This subjects your Trustee to the same kind of market discipline that keeps most businesses customer friendly and on their toes. To hold on to your business, the Trustee will have to compete every day.

Your powers as Protector mean you have an easy exit if the Trustee ever loses sight of your objectives. The Trustee understands that, so having an easy exit means you’ll probably never need to use it.

Worry Point 3: “I like to make my own investment decisions. A Trustee’s investment decisions might be pedestrian or self-serving.”

If you’re concerned that the Trustee would handle your money ineptly or manage it to generate revenue for its affiliates, you can easily eliminate those possibilities. One approach is to keep the assets in a brokerage account that you manage. Or if you’re using an investment advisor now and are satisfied with its performance, that same advisor could manage your trust fund. Holding the assets inside an LLC that the trust owns and that you manage is another way to keep your finger on investment decisions.

Worry Point 4: “I’m afraid I’ll get into trouble with the IRS if I set up an international trust.”

Will forming an international trust be like painting a target on your back? No. The tax rules governing your international trust are clear and simple. So follow them. Go on green and stop on red, and you won’t get a ticket.

During your lifetime, any and all taxable income the trust earns from its investments needs to be included on your personal tax return. That’s what the rules tell you to do. And let your accountant know what you’re doing, so he can prepare and file the simple reports the IRS requires. Keeping your accountant in the loop keeps you out of trouble. (The tax-advantaged investment vehicles available to your international trust may help to keep taxable income low.)

Ask any tax attorney or accountant who deals with international matters whether an international trust will attract trouble with the IRS. The answer will be “No. But make sure you file the required reports.” When you pay your taxes and follow the reporting rules, there’s nothing for the IRS to argue about. Go on green, stop on red.

Worry Point 5: “I’d feel awfully uncomfortable telling an angry judge I can’t repatriate money from my international trust to pay a judgment. He might lock me up if I don’t follow his orders.”

A properly structured international trust allows you to do everything you possibly can do to obey any court order you might receive… without endangering the trust fund. If you ever find yourself on the losing end of a big lawsuit, you should make every reasonable effort to follow the court’s orders, and you should follow your attorney’s advice in doing so. But your efforts to loot your own international trust, if that’s what the court tells you to do, are unlikely to succeed, since you won’t have a simple power to unilaterally compel the Trustee to distribute money to you.

And if the Trustee knows or suspects that you are under a court order, the Trustee will have a duty not to send you any unusually large sums that might be grabbed by a creditor. Your trust fund will be safe.

You can be found in contempt of court for refusing to obey a court order or even for failing to do everything reasonable to comply with the order. But you can’t be found in contempt for failing to do the impossible (unless you created the impossibility after the legal process had begun).

Your inability to tap your international trust to pay a big judgment protects you from litigation in a second way: it reduces the chance that anyone will ever begin a lawsuit against you, since a serious attacker would see the trust as a prize he can’t reach even if he might win in court.

Worry Point 6: “The last person I heard about who had an international trust was a money launderer (or embezzler or arms dealer). I don’t want to be in that kind of company.”

Maybe the last time you heard about someone with an international trust was when you were watching a movie. Every one of the jurisdictions that would be suitable for a lawful international trust has “know your customer” rules that are energetically enforced and that every licensed trust company is required to follow. Trust companies are also required to know how each trust client acquired the money or other property he’s transferring to his trust. No trust company in any of these jurisdictions wants to risk losing its license by accepting tainted money or by being sloppy about following the rules.

Part of doing your homework before setting up an international trust includes selecting a jurisdiction and a specific trust company.

Worry Point 7: “For me, ‘international’ isn’t much different from ‘inter-planetary.’ Even if I decided I wanted an international trust, I wouldn’t know where to go.”

You’ve got plenty of company. Most investors wouldn’t know where to go. But there is a way to figure it out. The most important things to look for in a jurisdiction for an international trust are:

  • English common law
  • No income or inheritance taxes on trusts
  • Laws that make it difficult for future creditors to break into your trust
  • A healthy society, because that’s the basis for political stability and honest government
  • Freedom from dependence on the US government

In this article, we see exactly where those criteria lead. You’ll know where to go.

Worry Point 8: “International trusts are too complicated.”

Everything new seems complicated until you get a clear explanation of how it works. I’ll give you the 60-second version right now.

  1. As Grantor of your international trust, you do two things: First, in a written document you tell the Trustee who the Beneficiaries are—probably you, your spouse (if you’re married), and your children and grandchildren (if you have any). You can include your descendants who haven’t yet been born (future grandchildren, great-grandchildren, etc.). You can include anyone, either by name or by describing a category of persons. And you can name charities and other nonprofit organizations. It’s up to you.

    Second, you transfer money, LLC interests, or other property to the Trustee to hold as part of your trust fund. You can add to the trust fund at any time, which means you can start small if that’s how you’d like to proceed. For tax reasons and to protect against potential creditors, your transfers are irrevocable—so you certainly will want to understand points B and C very clearly before you transfer anything to the trust.
  1. The Trustee’s legally enforceable responsibility is to protect the trust fund and to apply it for the welfare of the Beneficiaries in the ways you intended when you established and funded the trust. “Apply” usually means sending you or another Beneficiary a check. But it can also mean investing in a Beneficiary’s business or paying your credit card or medical bills in an emergency.
  1. Someone, probably you, is the Protector of the trust. The Protector advises the Trustee on how to fulfill its responsibilities—how to protect the trust fund and when each Beneficiary should receive a distribution or other benefit. The Protector has a power to replace the Trustee with another independent, licensed trust company if he decides that doing so would help the trust achieve its purposes—what you intended when you established and funded the trust.

    The Protector also has a power to name his own successor. Thus the Protector’s role continues from generation to generation.
  1. The Protector’s powers are so important that the Protector is himself protected by an “anti-duress” provision. The Protector’s powers become suspended during any period when the Protector is having his arm twisted by a government agency or any other source of coercion. This prevents anyone from using the Protector to hijack the trust.

There. You’ve taken the first step toward becoming an expert on international trusts, and it only took one minute.

Worry Point 9: “I’ve already gone to a lot of trouble and expense to set up an estate plan. I don’t want to start over.”

You don’t need to tear up your estate plan to get the safety and protection of an international trust. You just need to relocate the plan to another jurisdiction. Every conventional estate-planning tool (what you hear about when you talk to your lawyer about estate planning) works smoothly inside an international trust. And by going international, you can achieve two advantages that you can’t have with a stay-at-home approach.

First, with an international trust you can move assets out of your taxable estate and still keep them available for your support.

Second, an international trust is a complete and permanent solution. After your lifetime, the trust disconnects from the US tax system. Compare that with what you leave in the US. The US domiciled assets you leave for your family continue to be subject to income tax, year after year, and to estate tax, generation after generation.

Worry Point 10: “An international trust is too expensive to set up and maintain. Protection is good, but not at just any price.”

As with most things, establishing an international trust can be expensive or inexpensive, depending on how you go about it. If you close your eyes and hand the project over to the most expensive professionals you can find (or who find you), the cost can run like a rabbit. At the very high end, you might pay as much as $100,000. But at the other extreme, if you do your homework and become well acquainted with the subject, establishing an international trust can cost less than $5,000.

Ongoing maintenance costs work the same way. If you’re careless, you can pay 2% per year or even more to keep your international trust going. But with a little comparison shopping, you may push the ongoing costs below 0.5% per year—less than half of what you’d pay to invest in a garden-variety mutual fund.

 

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