OFFSHORE TRUST COMPANY TRUST FORMS
2023 – Published Since 1992
Volume XXVIII • Number 1 • January 2023
INTRODUCTION
We have recently been retained by several clients to review their offshore trust company supplied trust documents. Those reviews revealed some very serious problems.
WHAT OUR REVIEWS REVEALED.
Highlights only: During our recent reviews of trust company supplied trust forms we found this very same provision in each trust: “… the Settlor or the survivor of them shall have the exclusive power to appoint or remove any person (including the Settlor or either of them) as Protector of this Trust.” Thus, in the referred to offshore trust form (utilized in one trust we reviewed by a large Florida law firm), the Settlor could appoint himself as the trust Protector (with the power to appoint and remove any trustee). Is this malpractice? You bet it is! Why is this a significant problem? Here’s why:
A LITTLE HISTORY FIRST.
In the late 1990’s a case was brought in the Cook Islands which is commonly referred to as the Anderson Case (See, APN, Volume VII, Number 2 – October 1998). The Andersons were being sued by the Federal Trade Commission and they had established a Cook Islands trust in which they were designated as co-trustees AND as protectors. That very poor design resulted in their incarceration for civil contempt. The reason: Even though the Andersons were automatically removed as co-trustees upon the FTC filing suit in the Cook Islands, they were still deemed to have complete control over the trust as trust protectors, despite a “duress clause”. Thus, when they were ordered by the U.S. Court to repatriate the trust funds, their assertion that they could not do it because of the duress clause infuriated the judge and he threw them in jail until they complied. This case should have been a lesson for all asset protection planners.
Why were they deemed to have complete control over the trust? In the law of trusts, the trustee administers (controls) the trust. The trust protector will typically have the power to remove and replace the trustee, usually with or without cause. This power is deemed to be the equivalent of having the powers of the trustee. Thus, a power to remove and replace the trustee is equivalent to complete control over the trust, such that a person in that position cannot really say they “can’t do it”. The bottom line: The asset protection goal will fail to be realized, and there is a risk of civil contempt incarceration.
WHAT ELSE? What else did we find in our reviews? A complete lack of any U.S. oriented estate tax provisions: there was no provision in the several form trusts taking advantage of the federal estate tax exemption ($12.92 million for 2023), and, perhaps more importantly, no federal estate tax marital deduction provision (both very important for a married settlor). The bottom line: A potentially huge (and completely unnecessary) federal estate tax liability. In all fairness to the Cook Islands trust company form draftsperson, the Cook Islands trust companies do not hold themselves out as qualified in U.S. tax law. For this very reason (among others), it is crucial that a qualified U.S. lawyer draft the offshore trust and not take the path of least resistance by using the trust company supplied document.
HOW WILL YOU KNOW? How will you know if your attorney has utilized a trust company supplied form? It may or may not be apparent, but here’s what to look for: The trust document may have the trust company’s logo on its cover page, the font type may be different than the font used in other documents prepared by the lawyer for you, and the language may seem different than you might find in a U.S. document (sorry I can’t be more specific on this last one). If you are unsure, contact us (no charge) and we will be able to determine if your trust document was supplied by an offshore trust company.
CONCLUSION.
All trusts are NOT created equal. Our trust documents are the product of more than four decades of our experience, development and “fine tuning”, so nothing, absolutely nothing, is left to chance. The most important factors to consider in hiring a law firm to implement an effective asset protection structure for you are the experience and the qualifications of the lawyers.
This newsletter is not intended to provide legal or investment advice on the matters discussed herein, such advice should only be obtained from a qualified attorney. Copies of previous issues are available upon request.