Regulatory compliance for foreign based structures and assets held abroad has increased over the past years. Just some of the various forms that need to be routinely filed include:
- The Report for holding a foreign bank account with more than $10,000 commonly referred to as the FBAR. This is an annual form required to be filed with the US Treasury.
- Annual Return For US ownership of a foreign corporation (sometimes called a "Controlled Foreign Corporation" or CFC) filed on Form 5471.
- Forms for establishing a Foreign Trust. Form 3520, as well as the "Annual Return for the Trust" on Form 3520A.
- Excise Return for buying foreign life insurance and foreign annuities. Form 702.
- Catch All form for ownership of foreign financial assets over $50,000. Form 8938.
For someone considering international asset protection planning, estate planning, doing business or even just living and spending time abroad, the question becomes "are you willing and able to handle the level of necessary disclosure in operating outside the US". One of my legal colleagues simply asks his clients "Are you ready for this cheese"?
The cheese he is talking about isn't American, cheddar or provolone. It is multiple layers with exotic characteristics, maybe a really complex French cheese. Some folks think it is the best stuff in the world, great for gourmet cooking, a wholly unique element that cannot be duplicated. Others think it just smells funny and they'd never want to ever eat it. So again, think about it honestly, educate yourself about what you'd like to do and then ask yourself "am I ready for this cheese"?
If you are, expect marginally increased and on-going annual compliance work and/or fees to accounting professionals. Again, you'll need to have much of the same type of work done for domestic structures, but you'll need to involve competent professionals at both home and abroad conversant with the necessary regulatory forms and US tax laws.
If you are not ready for this type of international structure, look for the best forms of substitute domestic trust structures and investment elements that will give you the best protection possible without going abroad. The balance of this article is designed to provide an overview of foreign trust considerations and asset protection strategies and explain the nuances that make them superior to their domestic counterparts. Since my law firm focuses exclusively on international jurisdiction shopping to achieve global asset protection for our clients, I clearly believe it is superior to domestic planning. At the same time I recognize that not everyone is "ready for this cheese", so to the extent I can integrate concepts to make domestic trust structures more useful, I'll include those as well.
Trusts are integrated frequently in international asset protection and estate planning for a variety of reasons. The main reason is that once you have transferred an asset to a trust, it is simply no longer yours. If something is no longer yours, then future creditors, plaintiffs, even government agencies can no longer take them from you. The concept of a “Trust” has been around for over one thousand years. It involves someone with legal title to an asset, generally referred to as the “grantor” or “settler”, legally transferring the property to a separate entity (i.e., the trust) and thereby no longer retaining ownership of the property. The property is then managed by a “Trustee” who acts as a fiduciary on behalf of the grantor to make sure that the property is properly administered on behalf of the trust’s beneficiaries. The beneficiaries (which in most cases can include the initial grantor) are considered the “object” of the trust, meaning it is their welfare for whom the trust has been put into effect. It is these three parties: the Grantor, the Trustee and the Beneficiary which form what is sometimes referred to as the “Trilogy” of a Trust. It is this “Trilogy” which magically allows a trust under common law to take on its own “persona.” In other words, the sum of the parts creates more than that with which we started, and a separate juridical person is “born”.
An extra benefit to a foreign trust is that the trust actually creates a foreign "juridical" person. That foreign person is not a US person. That means that foreign banks, for example, which are closing bank accounts of their US clients, will frequently spare the accounts of foreign trusts, even where there is a US person involved as a grantor or beneficiary. Additionally, despite the enactment of the “Foreign Account Tax Compliance Act” (FATCA), which compels disclosure of certain financial information to the US Treasury and the IRS, the information available to other types of plaintiffs, ex-spouses, or even judgment creditors is much more restricted than in the case of domestic structures and financial accounts.
Other types of global investment including offshore hedge funds, insurance products, private placements, and even real estate acquisition can be made possible through the creation of a foreign trust. US regulatory agencies such as the SEC that keep over 70% of the world’s foreign investment closed to US persons, simply have no legal authority to regulate foreign trusts. For people interested in establishing global bank and brokerage accounts and in acquiring real foreign investment, the foreign trust can open a world of opportunity which is quickly being closed to US persons.
The second benefit of a foreign trust has to do with the actual legal protection and the timing when it goes into effect that extends to both the grantor and the beneficiary. While this concept is governed largely in the US by the 50 individual state laws, certain characteristics of English Common law, such as the prohibition on what are referred to as "fraudulent conveyances," applies in all cases. Additionally, the judgments in ANY of the US states can be “enforced in ANY of the other 50 states because of the “Full Faith & Credit” clause of the US Constitution. Foreign jurisdictions have no such enforcement mechanism, but instead require that a judgment be obtained directly in that jurisdiction (which is largely impossible) in order for a judgment to be enforceable.
While nobody would agree that someone should be able to evade creditors by running out and forming an offshore trust in which he or she places his or her assets after incurring claims against those assets, the opposite is also true in that nobody can get inside someone's brain to try and figure out what he or she was thinking when they created a trust. The various US states have solved this dilemma by introducing "waiting" periods after a trust is created before the benefits of the trust can be extended to the assets inside the trust. This time period referred to as a “look back” window ranges from one year to three years. California, for example, has a waiting period of three years.
So let's imagine an obstetrician in California who helps deliver "premature" babies. Any baby that is anything less than perfect automatically means that he or she (or I should say their insurance carrier) will face a lawsuit. Under the traditional standards of fraudulent conveyances, it would be virtually impossible for that physician to ever try to protect any of his or her assets from lawsuits, whether real claims or nuisance. Because of the Fraudulent Conveyance Doctrine, it is essentially against California public policy for the doctor to EVER protect their own assets within the California legal framework.
Jurisdictions outside the US, however, have narrowly interpreted or legislatively eliminated the English Common law concept of fraudulent conveyances. Belize and the Cook Islands for example, have made a legislative "bright line" test for fraudulent conveyances which simply asks the question "what came first, the lawsuit or the creation of the trust?" If the lawsuit came first, then the trust could be legally attacked, but, only in Belize or the Cooks. If the trust creation came first, then the claim against the trust is barred under local law.
Many people may not need this level of asset protection, but then again the obstetrician is not alone in having lawsuits as a normal occupational hazard. For those with above average occupation risks, the foreign protection offered by this type of statutory bar against lawsuits may be the difference between keeping or losing one's wealth.
Next, there is the issue of confidentially. In most international asset protection (offshore) jurisdictions, neither the grantor’s identities nor those of the beneficiaries need be listed in any sort of public registry. Furthermore, this confidentiality also applies to the trust beneficiaries themselves. They have no right to know “whether”, “if”, or “how much”, they may be entitled to as a trust beneficiary. At the appropriate time, the beneficiary will only be able to learn the specific information that the original trust grantor wants them to know. What a sibling, niece, grandchild or charity is to receive is none of their business unless the specific trust language requires otherwise. There are “little to no” other disclosure requirements required by the laws of the offshore jurisdiction.
Fourth, not only does an international trust open doors closed to most Americans, it can also help minimize the financial risks associated with putting all of your proverbial “eggs into one basket” International APT’s investing globally into foreign currencies, international stocks and bonds, foreign real estate, as well as gold and silver create a natural investment and wealth management hedge against a traditional US centric investment portfolio made up of stocks, bonds and mutual funds. An overseas portfolio held in an APT can protect against capital currency and exchange controls, as well as changes to the lifetime exemption from gift and estate tax, which is currently $11,500,000 but can be reduced or eliminated.
The last main area of difference between US and foreign trusts has to do with their length. Again, English common law tradition dating back over one thousand years mandates how long assets can be held in trust. Essentially, they may be held for what is called a "life in being", meaning by the time the grantor dies, the generation identified as the trusts' last beneficiaries (normally children, grandchildren or great grandchildren) must be in existence. If you leave assets beyond that point in time, you are said to have violated the "rule against perpetuity". The concept is actually pretty technical and complex and many young lawyers have failed the bar exam for not being able to properly navigate through the “Rule Against Perpetuity”.
But rather than parse the “Rule Against Perpetuities” into complex nuances, some jurisdictions have simply eliminated this Common Law rule replacing it with specific time periods or in some cases eliminating all time limits as to how long an asset can be held in a trust. After all, you earned your money, so why should any government tell you what you can or can't do with it (provided the activity is legal). If you want to create something called a “Dynasty Trust” and hold assets in perpetuity for the next thousand years to allow your heirs to have a college education, or to start a small business or to buy a home, why shouldn't you be able to do that with your own money?
Many offshore jurisdictions agree with that logic and have eliminated any limitations on trusts. To be fair, there are also some states in the US including Alaska and Nevada that now also allow for very long periods of trust for up to 350 years and certainly more States will follow as business is lost to foreign jurisdictions and these States.
So in the case of trusts, if you are looking to create a foreign platform for investment; if you are in need of above average asset protection with a short or no waiting period before the protection comes about; if you are looking for a very long holding period to hold assets beyond the normal limitations offered by your home State; or if you would like both privacy, global diversification or simply do not wish to hold all of your assets in the US economy, then you should consider offshore jurisdictions for your planning needs. If you don't need or want these levels of complexity and prefer something that your local community bank can administer, then you don't want an international trust.
In conclusion, global asset protection and estate planning is right for the "right" type of person. I'm not saying it is something for only the most affluent, but rather for those wanting the specific benefits and who are willing to commit the time and energy to be compliant and make the structure worthwhile to serve their financial and estate planning needs. Is this "cheese" right for you? Weigh the benefits and rewards versus the cost and energy of compliance. If you have a clear reason to utilize international planning, then embrace it. Don’t let the compliance or regulatory hurdles thwart your decisions. If you have concerns about political risks, expropriation, currency devaluation, or any other type of financial risk associated with the US dollar, then consider an international asset protection trust for long-term wealth protection as well as generational wealth stewardship there simply is no stronger or better way to protect, preserve and pass on your wealth.
Joel M. Nagel is an international lawyer and entrepreneur focusing his practice in the area of asset protection, cross-border transactions, second citizenship programs and global investment. He speaks all over the world on the topics of asset protection, global banking and investment, citizenship and residency and international legal compliance. He has served on several bank boards as well as dozens of corporate boards. He has also served as a bilateral and multilateral diplomat for the country of Belize.
Joel has written articles and has been quoted by Forbes, Fortune, The Miami Herald, Live and Invest Overseas, Hemispheres Publishing, Stansberry Research, Oxford Club, Pirate Investor, True Wealth, Islands Magazine, Business Times, Physicians' Money Digest, and the Simon Letter. Joel can be reached at Nagellaw@aol.com or +1-412-749-0500. Follow him on Twitter at @Nagellaw.