Asset protection and dynasty trusts

Real Property, Probate and Trust Journal, Summer 2002 by Fox, Charles D IV, Huft, Michael J

2. Other Advantages

In addition to the creditor protection benefits of an offshore protection trust, such a trust may offer an individual other advantages:

(1) economic diversification;

(2) a "low profile" or anonymity with respect to wealth;

(3) premarital and marital planning;

(4) preparation for the contingency of changing one's citizenship;

(5) participation in investments not otherwise available to U.S. investors;

(6) planning in anticipation of currency controls or fluctuations; and

(7) liability protection, tax planning, or strategic advantage with respect to an active trade or business."

3. Popularity

4. Provisions of Offshore Protection Trusts

The basic provisions of an offshore protection trust generally include the following:

(1) Governing Law. The trust is created and governed under the laws of one of several foreign jurisdictions that have laws favorable to offshore protection trusts. These include, among others, the Cook Islands; the Cayman Islands; Gibraltar; the Isle of Man; the Bahamas; Belize; the Turk and Caicos Islands; and Cyprus.

(2) Irrevocability. The trust is irrevocable; however, as described below, a third party usually possesses a substantial power of amendment.

(3) Term. The trust may have a term for a set number of years or last for the life of the settlor or one or more beneficiaries.

(4) Beneficiaries. The beneficiaries normally include the settlor and one or more family members.

(5) Trustees. A trustee located in the jurisdiction almost always is required. Typically, this trustee is a foreign corporation with trust powers. One or more U.S. cotrustees possibly may serve, but this increases the risk of attachment by creditors because a U.S. trustee potentially is within the jurisdiction of U.S. courts.

(6) Distributions. A foreign trustee usually has unfettered and absolute discretion over the distribution of income and principal.

Typically, the degree of control that a settlor retains bears an inverse relationship to the amount of creditor protection that the trust provides. In other words, the more control that a settlor is willing to relinquish, the greater asset protection the settlor generally will achieve. Conversely, if a settlor retains too much control, the settlor runs the risk of having the entire arrangement overturned by a court as a "sham transaction."22

Additional provisions are frequently included in offshore protection trusts to increase their effectiveness against potential creditors. These provisions include the following:

(1) Ability of Foreign Trustee or Other Fiduciary to Change Situs of Trust Assets. The trustee or trust protector can be given the power to change the situs of the trust assets to another jurisdiction, which can be employed if an action is threatened against the trust in its original jurisdiction. This power increases the costs to the creditor of making its claim and, consequently, acts as a deterrent to any such claim.

(2) Letter of Wishes. The settlor of the trust can provide nonbinding written guidelines to the trustee. These guidelines cover the settlor's intent with respect to the investment of the assets and the making of distributions to family members. The guidelines can be changed as circumstances or the desires of the settlor change.