“Own nothing, control everything” (John D. Rockefeller) is an old saying within the asset protection community typically used when referring to trusts.
Essentially, trusts allow individuals to forfeit legal ownership of their assets while still benefiting from and enjoying them.
Trusts are funded by “settlors” who put their assets, like money and real estate, in the trust. The “settlor” appoints a “trustee” who is responsible for administering the trust’s assets and making distributions to beneficiaries.
Trusts are either “revocable” or “irrevocable.” A revocable trust allows the settlor to amend the trust or terminate it and regain personal ownership of the trust’s assets. Consequently, revocable trusts do not offer much asset protection since a judge can simply order a settlor to terminate the trust and regain ownership of the assets to satisfy a judgment. Irrevocable trusts, on the other hand, can offer significant asset protection so long as the settlor doesn’t have the power to control the disposition of the trust’s assets or have a right to trust assets or income.
Until recently, it was possible to be aggressive with the structuring of trusts allowing for the settlor to effectively control the trust’s assets – the equivalent of having your cake and eating it too.
Through the years, clever advisors have found ways to help their clients settle trusts and effectively maintain control without compromising the asset protection they provide.
One such example is to use what is known as a “private trust company.” A wealthy individual might form an LLC or IBC, often in an offshore jurisdiction, which they own and manage. Then, they settle a trust of which they are a beneficiary and their LLC or IBC is the trustee. Essentially, the private trust company is the alter-ego of the settlor.
Another mechanism of control is for a settlor to be the trust’s “protector” – the person who generally has the power to hire and fire the trustee. Conceivably, the protector can hire and fire trustees until finding one that administers the trust’s assets in accordance with his wishes. In this instance, the trustee’s power would be superficial. Courts can demand that a protector hire a trustee that will submit to its authority or hold the protector in contempt of court.
Courts despise the types of arrangements described above – the US in particular, because they afford individuals “too much” protection against creditors.
The Game Has Changed
US courts have an arsenal of weapons to attack various asset protection and tax strategies. They’ve managed to rig the game in their favor. Individuals must run a gauntlet of defenses to achieve desirable outcomes – this is especially true when a government agency is trying to get at the trust’s assets.
Over the last five to ten years, courts have used these legal precedents and others to crack down on “control.” The IRS and other tax authorities around the world have implemented a “substance over form” doctrine. Essentially, they’ll disregard a series of transactions and structures if they’re deemed to have been made primarily for tax avoidance.
Similarly, courts will often pierce a trust to give creditors of the settlor access to the trust’s assets to settle his debts by applying an “alter ego” doctrine when settlors have substantial much control over trust assets and adherence to trust’s separateness would sanction fraud or promote injustice – such as in Transit Group, Inc. v Magliarditi.
The aggressive planning of the past has lost virtually all effectiveness.
If you have control over a trust, the courts will often force you to exercise it to comply with its demands. Control over a trust might force you into having to decide between following court orders and giving up your assets or spending time in jail for contempt of court.
The new phrase for the asset protection community should be, “own nothing, control nothing, influence everything.”
The further removed a beneficiary is from the decision making process regarding the use and distribution of property owned by trusts, the better. “Influence” is more nebulous and less certain than “control.” It is significantly more difficult to define and prove.
But how does one “influence” a trust and still achieve their desired outcomes?
Well, that’s no easy task. A delicate touch is required to avoid having control over the assets while still living as desired.
There are some general rules to follow. Settlors should never act as a trust’s protector.
Another useful strategy is to hire a professional trust company to administer the trust rather than using a private trust company. Professional trust companies located in foreign jurisdictions are generally not subject to the court’s jurisdiction of the settlor’s home country. Thus, courts are powerless to force a foreign professional trust company to administer the trust’s assets in a certain manner.
Making the trust discretionary gives the trustee power to change the beneficiaries and/or if and when they receive distributions and how much. This can further distance a settlor/beneficiary from the trust’s assets. It can be dangerous for a beneficiary to have a right to a certain percentage of trust assets or income – courts will generally rule the beneficiary owns that percentage of the trust and make it available to creditors to settle claims.
Another option is to setup a private trust company comprised of trusted people. Though this takes having people you can entrust all of your assets with.
Strategies like these reduce the settlor’s control over the trust – which can be a scary move. It’s critical to select trustworthy professionals or individuals (in the case of a private trust company) as the trustee and protector who understand the ultimate goals of the settlor and who will act accordingly.
Moral of the story, you can’t achieve strong asset protection without giving up both ownership and control. Your trust must be structured by an expert to reap the benefits of its assets. While more difficult than in the past, it’s still possible for a trust to provide both security and an unencumbered lifestyle.