How to protect your assets for charitable beneficiaries

Individuals with significant net worth and charitable goals should consider an asset protection strategy to ensure that their charitable goals will be met. Our contingency fee legal system makes it relatively easy for a lawsuit – justifiable or not – to be brought against a “high value target”. Therefore prudent planning dictates asset protection to be certain that charitable and other dispositions will be made as desired.

A trust will be the cornerstone of any effective asset protection plan. Why? Trusts have been used since the crusades to protect assets, and even the IRS regulations define a trust as a protective arrangement.

Unfortunately, in the past sever hundred years, cases and statutes have created a public policy which has significantly eroded the original protective nature of trusts. What is the solution? Establish the trust in a jurisdiction which has repudiated those erosive public policy cases and statues and whose laws permit absolute asset protection.

While a number of states have enacted asset protection trusts laws, recent court decisions have proved what we knew all along – when push comes to shove, the domestic (U.S. based) asset protection trusts just do not work. Here’s why: A trustee administers a trust. In order to “get at” trust assets, a court could order the trustee to distribute the assets to satisfy a claim against the settlor (the creator of the trust). Result? No protection – the U.S. based trustee cannot say “no” to a U.S. judge. The trustee could be held in contempt if it said no to the judge. In addition, our Bankruptcy law permits a federal bankruptcy judge to “undo” a trust which was created within ten years of the bankruptcy – any state asset protection law will be ignored. Why is the offshore trust different? Simple: If the trust is properly implemented, no court in the United States (including federal courts) will have the power to order the trustee to do anything, let alone hold the trustee in contempt for failing to comply with an ineffective order. That translates into absolute protection for the assets held in the trust, thereby enabling and ensuring that the charitable wishes of the settlor will be carried out.

What about the U.S. tax consequences? Properly implemented, the offshore trust will be “tax Neutral”. That is, the settlors “tax picture” will not change as a result of establishing the trust. Under our tax law, while the trust will be required to file certain information returns, it will pay no U.S. income tax while the settlor is living. Why? Because the settlor will continue to report and pay U.S. income tax on all income of the trust – hence the term “tax neutral”.

In summary, to be certain that their charitable goals will be met, individuals should strongly consider an offshore asset protection trust.

October 7, 2014