The Tools of Domestic and
International Asset Protection
Greenville Estate Planning Council
January 19, 2016
Greenville, SC
Elizabeth L. Morgan
(formerly Elizabeth Morgan Schurig)
© Elizabeth L. Morgan
10415 Morado Circle | Building I, Suite 310 | Austin, Texas 78759 | Office 512.370.2750 | Fax 512.370.2751
Is It Appropriate for Estate Planning Attorneys
to Render Asset Protection Advice?
 Some commentators suggest that estate planning attorneys
have a duty to render asset protection advice
 Most estate planning advice has an asset protection or
wealth preservation component
– premarital or post marital agreements – protection against
spousal creditors
– entity structures – protection against business and other third
party creditors
– wills & trusts – protection against governmental and other
third party creditors
– disability documents – protection against unwanted personal
results
How Do You Know Whether A Client
Needs an Asset Protection Vehicle?
 Everyone needs asset protection to some degree
 The greater the net worth the more difficult it is
to achieve asset protection without a protective
trust or entity structure
2
Isn’t Asset Protection
Against Public Policy?
“[T]he doctrine that the owner of property, in the free exercise of his will in
disposing of it, cannot dispose of it, but that the object of his bounty . . .
must hold it subject to the debts due his creditors . . . is one which we are
not prepared to announce as the doctrine of this court. . . . [E]very State
in this Union has passed statutes by which a part of the property of
the debtor is exempt from seizure [for] the payment of his debts. . .
To property so exempted the creditor has no right to look . . . as a
means of payment when his debt is created [and] this court has steadily
held that [such exemptions are] invalid as to debts then in existence [but]
as to contracts made thereafter, the exemptions [are] valid.
This
distinction is well founded in the sound and unanswerable reason, that the
creditor is neither defrauded nor injured by the application of the law to his
case, as he knows, when he parts with the consideration of his debt, that
the property so exempt can never be made liable to its payment.”1
1
Nichols v. Eaton, 91 U.S. 716, 725-726 (1875) (Justice Samuel Freeman Miller).
3
United States Legal System
The U.S. legal system is different from other
Western legal systems in many important ways.
 Contingency fees allowed
 Pleadings are protected speech
 Punitive damages are allowed in civil cases
against individuals (rather than only in cases
involving corporate products liability)
 There is no bond requirement, except for
appeals
 There is no loser–pay system
4
The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005
 Expands list of nondischargeable consumer debt
 Amends means test so that, in general, debtors
with income greater than state median household
income can not get discharge and will be required
to reorganize
5
Methods to Achieve Asset Protection
Homestead
Life Insurance
&
Annuities
Spendthrift Trusts
for and Gifts to
Descendants
CLIENT
Spendthrift
Trusts for
and Gifts to
Spouse
Limited
Partnerships
Limited
Liability
Companies
Protective
Trusts
I.
Retirement
Plans
II.
III.
6
Creditor Protection:
Fraudulent Transfer Law
 General rule
– A gratuitous transfer of property with the actual or
constructive INTENT to avoid creditors is fraudulent
and may be set aside by creditors
– Any transfer of assets from nonexempt status to
exempt status should be tested to assure that it is
not a fraudulent transfer
 Three classes of creditors
– Present creditor – solvency analysis
– Potential subsequent creditor – badges of fraud
– Unknown future creditor
7
Creditor Protection: Fraudulent
Transfer Law (cont.)
 Statute of limitations
– Statute of limitations on fraudulent transfer claims
in most states is four years from the transfer, or,
for existing creditors, within one year of when the
transfer could reasonably have been discovered, if
later
– A bankruptcy trustee can have a fraudulent
transfer set aside if the transfer is made within
two years of bankruptcy – certain transfers to a
self–settled trust or similar device subject to a ten
year statute of limitations
8
Solvency Test
Total value of assets
Less:
Liabilities (including contingent)
Less:
Creditor protected assets (e.g., homestead)
Equals:
Amount that can be transferred
9
Retirement Plans
 In most states, unlimited exemption as long as the
plan “qualifies” under the Internal Revenue Code
 ERISA contains anti-alienation provisions
 Fully protected in bankruptcy if they are exempt
from taxation under IRC §§401, 403, 414, 457, or
501(a)
 Protection for IRAs (under IRC §§408 and 408A) in
bankruptcy capped at $1,000,000 adjusted for
inflation every three years ($1,245,475 through
March 31, 2016 and will be adjusted on April 1,
2016)
 Rollover amounts
bankruptcy cap
to
IRAs
10
are
excluded
from
Homestead
 State homestead exemptions based upon either
acreage (for example, Florida, Texas, and
Kansas) or value (for example, California and
Missouri)
 2005 Bankruptcy Act Amendment possibly limits
equity obtained in homestead during 40 months
prior to bankruptcy to $125,000 adjusted for
inflation every three years ($155,675 through
March 31, 2016 and will be adjusted on April 1,
2016)
11
Life Insurance and Annuities
 Many states exempt cash value and policy
proceeds of life insurance and annuities, even if
the insured retains the power to change the
beneficiary or the insured or the insured’s estate
is a contingent beneficiary
 In some states this exemption extends to policy
proceeds in the hands of the beneficiary and
protects those proceeds from the beneficiary’s
creditors as well
12
Life Insurance and Annuities:
Protective Planning Opportunities
 Advise the client to move exposed cash into a life
insurance or annuity product that is protected
under the state statute
 If the costs of the product are low enough (both
the product and tax costs) then the purchase will
be both a good investment and a prudent
protective device
 If the product chosen is life insurance rather than
an annuity then the investment return inside the
product will also avoid income tax
13
Life Insurance and Annuities:
Protective Planning Opportunities (cont.)
 If there is no available cash then consider moving
equity out of other assets and into the life
insurance or annuity contract
14
Section 529 Plans
 Some states exempt the assets held in §529
plans if the debtor resides in that state and the
plan assets are held by that state’s authorized
plan
 Other states, like Texas, exempt the plan assets
regardless of where the assets are held as long
as they are held in a state qualified tuition
program that meets the requirements of IRC
§529
15
Section 529 Plans (cont.)
 Bankruptcy Code exempts funds in §529 plans but
generally limits the exemption to the contribution
limits contained in §529 and specifically limits the
exemption by completely disallowing contributions
made 1 year before bankruptcy and only exempting
contributions that do not exceed $5,000 per
beneficiary that were made between 2 years and 1
year before bankruptcy
 In states that allow debtors to choose state rather
than federal bankruptcy exemptions §529 plans may
be fully exempt in bankruptcy
16
Section 529 Plans:
Protective Planning Opportunities
 Because Section 529 Plan assets can be used to
benefit any beneficiary, including the Grantor,
the plan assets can be a valuable protected class
of assets
 Move available cash into Section 529 Plans
 If there is no available cash then consider moving
equity out of other assets and into Section 529
Plans
17
What is a Spendthrift Trust?
A spendthrift trust is one in which the beneficiary is
precluded or restrained from voluntary or
involuntary transfers of trust assets.
In some
states, this includes a prohibition on the ability to
pledge as collateral any interest in a trust. The
consequences of these types of provisions in trust
documents is that the beneficiary’s creditors are
precluded from reaching trust assets.
In most
states, settlors cannot utilize a spendthrift trust to
protect assets from the settlor’s creditors.
18
Spendthrift Trusts
 Primarily statutorily created – not a part of
English common law
 Some states have no spendthrift statutes, but
judicial decisions have validated spendthrift
provisions (Hawaii, Maryland, Massachusetts,
Michigan, Minnesota, and Vermont)
 Uniform Trust Code 2000 contains provisions
validating spendthrift provisions in trusts and
addressing rights of settlor’s creditors
19
Trusts for Family Members
With Spendthrift Protection
 Trusts for Descendants
– Crummey Trust
 $14,000 per donee annual exclusion possible
– §2503(c) Trust
 Contributions to trusts for children under age 21 are
not gifts of a future interest
– Life insurance trust
20
Trusts for Family Members With
Spendthrift Protection (cont.)
 Inter vivos QTIP after partition
 All income to spouse required, but document can
disallow distribution of principal on the happening
of some event like divorce
 Consider funding interest in the family business
into an inter vivos QTIP
21
Spendthrift Trusts:
Protective Planning Opportunities
 Draft the trust document to contain a purely
discretionary distribution standard rather than an
ascertainable standard
 Consider forming the trust in a jurisdiction that
has either repealed the common law rule against
perpetuities (for example, Delaware, South
Dakota, or Arizona) or has extended the
perpetuities period (for example, Alaska – 1,000
years, Florida and Tennessee – 360 years,
Nevada – 365 years)
22
Spendthrift Trusts:
Protective Planning Opportunities (cont.)
 Include a provision stating that it is the Settlor’s
intention that all property of the trust will be the
separate property of the beneficiaries and that no
property of the trust will be the communal or
marital property of any beneficiary
 Include provisions allowing the trustee to change
the situs or governing law of the trust
 Include provisions allowing for amendment of the
trust document by either the trustee or protector
23
Spendthrift Trusts:
Protective Planning Opportunities (cont.)
 Consider establishing the trust in an asset
protection jurisdiction like Nevada or Alaska and
allowing the settlor to be a permissible
beneficiary (see PLR (200944002))
24
Advise Clients to Enter Into Premarital
and Post Marital Agreements
 Properly drafted marital agreements create
clearly defined property parameters, thereby
lessening exposure to each other on divorce
 In the case of second or successive marriages or
other relationships, property agreements will
protect children and other interested parties on
the death of one of partners to the marriage or
other relationship
 Properly
drafted
marital
agreements
can
segregate property of the underexposed spouse
so that creditors cannot reach them
25
Marital Property Agreements:
Protective Planning Opportunities

If the creditor concern is third parties rather than spouses, divide assets
so that the exposed spouse’s assets consist of exempt assets and so that
the unexposed spouse’s assets consist of nonexempt assets

Consider unequally severing the assets so that the exposed spouse
receives less than the unexposed spouse, and then the unexposed spouse
can create an intervivos QTIP for the benefit of the exposed spouse

Planning reminder – in community property states, this type of planning
causes a loss in the basis step up in the surviving spouse’s property so it
must be used cautiously and in a considered fashion.
26
Charitable Planning
 Certain charitable gifts protect assets as well
– Gift of home to a qualified charity with a retained
life estate
– Bargain sale to a qualified charity
– Charitable Lead Trust
– Charitable Remainder Trust
27
Limited Partnerships and
Limited Liability Companies
 Aggregate Theory (historical view)
– The partnership is not a distinct legal entity
separate from the partners
– Each partner owns an undivided interest in
partnership property making turnover of assets to
creditors without impact on non-debtor partners
impossible
– Charging Order as a remedy protected both the
creditor and the non-debtor partners
– LLC statutes were modeled on partnership statutes,
and so they adopted the partnership statutes’
Charging Order provisions
28
Limited Partnerships and
Limited Liability Companies (cont.)

Entity Theory (current view)
– The partnership is a distinct legal entity separate from its
partners
– Partners do not own a interest in partnership property;
instead, they own an interest in the entity
– Under the entity theory, there is no real distinction between
partnerships, LLCs, and corporations; thus, it is difficult to
argue that Charging Order laws are needed to protect the
partners
 Under the entity theory, the only thing standing in the way
of a creditor’s ability to divest a partner of his interest in
the entity is the applicable state statute

It is interesting to note that Nevada has passed a Charging Order
statute applicable to corporations (NRS §78.746)
29
Charging Order
A charging order is an order issued by a court
pursuant to statute which charges the debtor’s
interest in the entity with the amount due to the
judgment creditor. Under a charging order, the
creditor only gets distributions from the entity to
the extent of the debt.
Once the debt is
extinguished, the charging order is fulfilled. The
debtor’s interest in the underlying partnership or
company assets is preserved.
30
Foreclosure
If a creditor’s lien on a debtor’s interest in a partnership is
foreclosed upon, the debtor loses the partnership interest and
all of the future benefit in that interest forever (even if that
benefit greatly exceeds the debt) including a right to that
partner’s pro rata share of the new assets at liquidation (The
Uniform Limited Partnership Act (2001) §702(b)). In addition,
upon foreclosure, the debtor-partner may also lose the
managerial rights afforded him by §702(b) if the other
partners consent to expel him in accordance with §601(b)(4).
Depending on the relationship with the other partners, this
could be incentive for the partner to settle with the creditor
instead of forcing a settlement the other way around.
31
Foreclosure (cont.)
 Uniform Limited Partnership Act (1976) §703 is silent as to
foreclosure
 Uniform Limited Partnership Act (2001) §703 states that a
charging order constitutes a lien that can be foreclosed
upon by order of the court
 Uniform Limited Liability Company Act (1996) §504(b)
states that a charging order constitutes a lien that can be
foreclosed upon by order of the court
 Uniform Limited Liability Company Act (2006) §503(c)
states that a court may order foreclosure upon a showing
that distributions under a charging order will not pay the
judgment debt within a reasonable time
32
Evolution of Limited Partnerships
 Man has utilized partnerships to conduct his affairs with
others from the beginning of time—evidence of use in
Babylon, classical Greece, and Rome.1
 General partnerships are simply contracts among
individuals who have joined together for a common, usually
commercial, purpose.
 Forerunner of the limited partnership was the commenda
by which nobles and clergy, who had the capital but could
not directly engage in commercial enterprise, could obtain
the benefits of such enterprise without personal liability.
The result being that capital that would have otherwise
been unavailable to the merchant and trading classes
provided the foundation for the elevation of these classes to
influential status.2
1
2
Bromberg & Ribstein, “Partnership” Vol. I, §1.02(a)
Bromberg & Ribstein, “Partnership” Vol. III, §11.02(a)
33
Evolution of Limited Partnerships
(cont.)
 England codified its common law and mercantile law
concerning partnerships in the Partnership Act of 1890 and
its Limited Partnership Act in 19073
 The U.S. codified its partnership common law in 1914 in the
Uniform Partnership Act
 Early limited partnership law in the U.S. was codified only
at the state level and was based on the French Commercial
Code of 1807, Sections 23-28, because of its unique
provisions avoiding the doctrine of partnership liability to
third persons
3
Bromberg & Ribstein, “Partnership” Vol. I, §1.02(b)
34
Evolution of Limited Partnerships
(cont.)
 The first Uniform Limited Partnership Act was codified in
1916 and it reduced the liability exposure of limited
partners from that contained in existent state statutes
 The Revised Uniform Limited Partnership Act (1976) was
drafted to address the needs of the large, multi-partner
partnerships that were in existence at that time and moved
closer to the corporate or entity model than the earlier
aggregate model
 2001 revision of the Uniform Limited Partnership Act has
produced the Uniform Limited Partnership Act (2001)
35
Limited Partnerships

General partner manages the entity and is liable for partnership
liabilities

Limited partners liable for partnership liabilities only to extent of
contribution to partnership

Helpful planning tools but it is important to undestand their
limitations
Individuals
and/or trusts
Individual
99% LP
LLC or Corporation
1% GP
Limited Partnership
Assets /
Operations
36
Evolution of Limited Liability
Companies

Historically a South American concept

Wyoming was first state to adopt an LLC Act effective June 20,
1977, which created an entity that provided owners with limited
liability from business debts like a corporation but is taxed as a
partnership

Hamilton Brothers Oil Company formed a Wyoming LLC in 1977
and immediately applied to the IRS for an administrative ruling
that it qualified as a partnership for federal income tax purposes

IRS granted the ruling on a private basis in 1988 (Rev Rul 88-76)

By 1996 every state had enacted an LLC Act

Most modeled on partnership statutes because of desire to be
taxed as partnership

Since IRS issuance of the Check the Box Regulations in 1997,
which provide absolute tax certainty with regard to LLCs,
partnership characteristics are no longer necessary and are being
removed from the state statutes
37
Limited Liability Companies
 Management of the entity is by outside manager or by
members
 Members liable for company liabilities only to extent of
contribution to the company
 Corporate formalities must be followed
Member(s) / Manager(s)
100%
LLC/Corporation/ Individual
Manager
Limited Partnership
%
Assets /
Operations
38
Limited Partnerships and Limited Liability
Companies: Protective Planning Opportunities
 Establish entities in protective jurisdictions
 Draft operating, company, and/or partnership
agreements to restrict transferability of interests
 Use supermajority provisions to protect control of
the entity
 Transfer control of the entity away from any
creditor exposed owner
 Segregate entity assets into separate entities
39
Entity Structural Options
40
Master Limited Partnership Structure
Foreign Trust as
Limited Partner
Foreign or Domestic
LLC as
General Partner
(or Individually Owned)
Potential
Future Trusts
for Children as
Limited
Partners
Master
Limited Partnership
Management Agreement
These assets
could instead
be owned by a
foreign trust
Investment
LLC
Real Estate
LLC
Business
LLC
Intellectual
Property
Interest LLC
Liquid Assets
Real Estate
Business
Intellectual
Property
Lease
41
License
Airplane
LLC
Centralized Holding Company Structure
Owner
Owner
Management, LLC
Holding Company
$
LLC
LLC
License
Agreement
Trademarks,
patents, etc.
Operations
42
Decentralized Business Structure
$
Grantor
Trust
Owner/
Settlor
Promissory
note
Owner/
Settlor
Foreign
Trust
Grantor
Trust
Promissory
note
Owner
Owner
$
Owner
$
Consulting
Agreement
Owner
$
Operating
Company
$
LLC
Lease
Consulting
Agreement
$
Equipment
Owner/
Settlor
Foreign
Trust
Employees
Accounts
receivable
43
$
Owner/
Settlor
Protection for Accounts Receivable
 Professional firm assets are primarily accounts
receivable rather than hard assets
 To the extent that contractual liens can be
created over the accounts receivable, the
creditors holding such liens will have priority over
subsequent creditor liens or judgments
44
Accounts Receivable Leveraged
Transaction
Life
insurance,
annuity,
protective
entity, or
trust
Life
insurance,
annuity,
protective
entity, or
trust
$
Owner
Loan or
distribution
$
Owner
Professional
Service
Organization
$
Bank
Loan
Loan or
distribution
Accounts
receivable
45
Collateral
Assignment
What is a Protective Trust?
 Definition
– The Settlor (the person who transferred assets to
the trust) is a beneficiary of the trust; and
– The assets that the Settlor transferred to the trust
are protected from the claims of the Settlor's
creditors
46
Protective Trusts –
Two Very Different Options
 Domestic
– Available in Delaware (1997), Alaska (1998),
Nevada (1999), Rhode Island (1999), Utah (2003),
South Dakota (2005), Tennessee (2007), Wyoming
(2007), New Hampshire (2008), Hawaii (2010),
and to a lesser extent, Colorado (1994),*
Oklahoma (2004), and Missouri (2005), Virginia
(2012), Ohio (2013), and Mississippi (2014).
 Foreign
– Available in many foreign countries
47
Vulnerabilities of Domestic
Protective Trusts
 Access to trust assets through U.S. court system
 U.S. Constitution
 Availability of punitive damages and attorney’s
fees
48
Offshore Protective
Trusts Offer Additional Benefits
 Creditors cannot reach assets through U.S. court
system
 U.S. judgments are not enforceable
 Cost of pursuing assets offshore is high; loser–
pay systems
49
Offshore Protective Trusts
Offer Additional Benefits (cont.)
 Punitive damages and contingent fee contracts
not allowed
 Secrecy and privacy laws prevalent and strictly
enforced
50
When To Settle a Protective Trust
 Before Insolvency
– Cannot make a fraudulent transfer under state law
or bankruptcy law – a 10–year clawback period
may apply in bankruptcy
– A gratuitous transfer of property with the actual or
constructive INTENT to avoid creditors is fraudulent
 Before a claim arises
– Greater distance in time between transfer and
claim against assets results in superior protection
51
Control and Contacts
Less Asset
Protection
More Asset
Protection
Greater Settlor control
Less Settlor control
More U.S. contacts
Few or no U.S. contacts
52
Typical Protective Trust Structure
(Domestic)
 Wholly discretionary
(rather than
ascertainable)
distribution standard
Trustee
Settlor
Trust
Investment
Advisor(s)
Protector
 Trustee can add and
remove beneficiaries
Settlor and family are
lifetime beneficiaries
 Redomiciliation
permitted
Settlor has limited power of
appointment at death
53
Typical Protective Trust Structure
(Foreign)
Foreign
Trustee
Settlor
Foreign
Trust
 Wholly discretionary
(rather than
ascertainable)
distribution standard
Investment
Advisor(s)
Foreign
Custodian
Foreign
Protector
 Trustee can add and
remove beneficiaries
 Redomiciliation
permitted
Settlor and family are
lifetime beneficiaries
 Independent investment
advice the norm
Settlor has limited power of
appointment at death
54
Two Fundamentally Different
Offshore Strategies
EXPORT THE ASSETS
IMPORT THE LAW
Foreign
Trustee
Foreign
Trustee
Settlor
Settlor
Foreign
Trust
Foreign
Trust
Foreign
Protector
Foreign
Protector
Domestic
Limited Partnership
Foreign
Custodian
General
Partner
JURISDICTIONALLY SEVERED
JURISDICTIONALLY CONNECTED
55
Check and Balance System
Trustee
Protector
Custodian
Bank
56
Representative Trust
Structures
57
Nest Egg Trust
EXAMPLE
Foreign
Trustee
Settlor
Foreign
Trust

Settlor has $20M total assets

Settlor has $10M investment assets

Settlor retains $5M of investment
assets personally and funds trust with
$5M

Investment advice to Settlor and to
Trustee may be provided by preselected investment advisor

Contributions to trust are not subject
to gift tax

Settlor is subject to income tax on all
earnings of the trust

Trust assets are includible in settlor’s
estate for estate tax purposes
Investment
Advisor(s)
Custodian
Foreign
Protector
$5M
58
Multiple Trusts
Settlor
$50M
Trustee
Protector
Liechtenstein
Trust
Trustee
Protector
$25M
$25M
Jersey
Trust
Custodian
Custodian
Investment
Advisor(s)
Investment
Advisor(s)
Trustee
Trustee
Protector
Isle of Man
Trust
Custodian
EXAMPLE
Protector
$25M
Investment
Advisor(s)
$25M
Investment
Advisor(s)
Bermuda
Trust
Custodian
59
 Settlor has $250M
total assets
 Settlor has $150M
investment assets
 Settlor retains $50M
of investment assets
personally and funds
four trusts with $25M
each
Domestic or Foreign Dynastic Trust
Trustee
Settlor
Dynastic
Trust

All of the benefits of a basic wealth
protection trust, including Settlor’s
retention of beneficial interest
and

Settlor can make a completed gift
(which might use exemption
equivalent amount) and allocate
GSTT exemption

Assets may not be included in
Settlor’s estate for federal estate
tax purposes

Establish in jurisdiction where
perpetual trusts are allowed

Investment advice to Trustee may
be provided by pre-selected
investment consultant
Investment
Advisor(s)
Custodian
Protector
Settlor and family are
lifetime beneficiaries
Trustor for Settlor’s family
arise at Settlor’s death
60
Combination of Trust Structures
Settlor
Settlor
$1M
$4M
Trustee
Foreign
Protective
Trust
Dynastic
Trust
Protector
20%
Member
Limited
Liability
Company
Investment
Assets
61
80%
Member/
Manager
Foreign
Trustee
Foreign
Protector
Trust Implementation
62
Selection of Jurisdiction
 Traditional Jurisdictions
– Jersey
– Guernsey
– Liechtenstein
– Isle of Man
– Bermuda
63
Selection of Jurisdiction (cont.)
 Established “Asset Protection” Jurisdictions
– Cayman Islands
– Bahamas
– Gibraltar
– Belize
64
Selection of Jurisdiction (cont.)
 New “Asset Protection” Jurisdictions
– Cook Islands
– Nevis
– Turks & Caicos
– Mauritius
– Niue
– St. Lucia
65
Liechtenstein
 Loser–pay (and deposit 10–15% of asserted
damages with court before filing suit)
 No punitive damages
 No contingent fee contracts
 Must engage Liechtenstein counsel
66
Liechtenstein (cont.)
 No enforcement of foreign judgments (except
Swiss and Austrian judgments)
 Legal proceedings conducted in German
 No “specific” asset protection laws
67
Cook Islands
 Highly “specific” asset protection laws
 Fraudulent transfer
– Burden on creditor to prove beyond a reasonable
doubt that:
 transferor specifically intended to defraud creditorclaimant; and
 transferor rendered insolvent by transfer
68
Cook Islands (cont.)
 Statute of limitations
– No transfer made more than two years before
cause of action accrued is fraudulent
– Creditor must sue within one year after transfer to
Cook Islands trust
69
Negotiation of Fees
 Start-up
 On-going
– Legal fees
– Legal fees
– Trustee fees
– Accounting fees
– Foreign taxes/duties
– Trustee fees
– Protector fees
– Custodial fees
– Money management
fees
– Foreign taxes
70
Due Diligence
(Standard for all Jurisdictions)
 Certified copies of settlor’s passport and residential
utility bill
– In some jurisdictions, the same is required of all current
beneficiaries
 Letter of recommendation from attorney or bank
 Professional curriculum vitae for settlor, if applicable
 Statement as to source of wealth
 Financial statement (including current and contingent
liabilities) accompanying an affidavit of solvency
71
Additional Due Diligence
(Varies by Jurisdiction)
 Due diligence forms and additional requirements vary from
jurisdiction to jurisdiction, but typically include:
– Personal details for settlor and settlor’s immediate
family
– Current occupation of settlor and business/career history
(source of wealth)
– Information on proposed trust structure, including name
of trust, beneficiaries, protector, etc
– Information on proposed trust funding, including source
of funds, type and amount of assets to be contributed,
and plans for future investment and handling of trust
assets
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Preparation of Documents
 Trust instrument
 Affidavit regarding financial condition
 Trustee and protector fee agreement letters
 Form SS-4: Application for Employer
Identification Number
 Authorization of agent (IRS)
 Account opening documents (including Forms W9
and W-8IMY - withholding certificates)
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Tax Considerations
and
Reporting Requirements
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Income Taxation –
Typically Tax Neutral
 Income Tax: taxed as Grantor Trust if Settlor and
at least one beneficiary are U.S. persons (IRC
§679)
– All items of income, deduction, and credit flow
through to Grantor
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Capital Gain Taxation: IRC §684
 Incomplete Gift Trust: no tax on transfer of
appreciated assets when trust is a Grantor Trust;
no tax on appreciated assets at Grantor’s death.
 Completed Gift Trust:
no tax on transfer of
appreciated assets when trust is a Grantor Trust;
but tax is imposed on appreciated assets at
Grantor’s death.
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Gift Taxation – Typically Tax Neutral
 Gift Tax: gifts can be either complete (gift tax
due on transfers) or incomplete (no gift tax due
on transfers); incomplete gift requires retention
by grantor of special power of appointment
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Estate Taxation –
Typically Tax Neutral
 Estate Tax: assets not includible in estate for
federal estate tax purposes if there was a
completed gift made at time of transfer, but are
included if there was an incomplete gift made at
time of transfer
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Primary Foreign Trust Filing
Requirements
 Form 3520: Annual Return to Report Transactions with
Foreign Trusts
 Form 3520-A: Annual Information Return of Foreign
Trust with U.S. Owner
 Form 1041: U.S. Income Tax Return for Estates and
Trusts (with Grantor Trust Information Letter attached)
 Form TD F 90-221.1: Report of Foreign Bank Accounts
 Form 8938: Statement of Foreign Financial Assets
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Primary Foreign Trust Filing
Requirements (cont.)
 Form 8858: Information Return of U.S. Persons
with respect to Foreign Disregarded Entities
 TDF 90-22.1: Report
Financial Accounts
of
Foreign
Bank
and
 Form 709: United States Gift (and GenerationSkipping Transfer) Tax Return
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