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PostedHow to close an asset protection trust
Phil Hodgen
Attorney, Principal
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Hi again and welcome to the Friday Edition. I'm Phil and I'm writing this from Seat 20A on AC787 from Toronto to Los Angeles.If you want to stop getting this every-other-Friday email, just click the "unsubscribe" link at the bottom of this email. If, however, you would like to get one (or more) of our other fabulous email newsletters, go check them out at hodgen.com/lists.Mama's the bank is happy, everybody's happy" -- is preceded by a number of other things that you should think about.And I figured that writing about this out loud might be useful. There might be a few other people out there with old asset protection trusts that should be terminated.
Closing a asset protection trust
I received a forwarded email from a friend at the Wall Street Journal this week that raised an interesting practical question: how do you terminate an asset protection trust after the risks have passed?The question (edited by me to hide identifying information) is this:How can I repatriate a "declared" foreign trust (i.e., US taxes paid ever since the trust was created in 1994). The reason I created the foreign trust initially was a medical malpractice lawsuit (from a patient I never touched but whose chart had only my name on it) that cost me $450,000.I see no further need for the foreign trust and prefer to have the assets here in the US. Is there any special procedure or declaration necessary?The foreign bank has no objection to the transfer, it is the US banks that need "reassurance" that this is not laundered money.Thanks for any help or direction you can provide.I do not know anything about this person or the trust. So, dear correspondent, this is not legal advice to you at all. I just want to show you that the the final step -- "When
The nine hurdles
There are nine things this person needs to consider in terminating the foreign trust:- Have the risks disappeared?
- Does the trust document say you are a beneficiary?
- If the trust document says you are not a beneficiary, can you be added as a beneficiary?
- Once you are a beneficiary, will the trustee exercise its powers and distribute money to you?
- What are the trustee's requirements for termination of the trust (and for covering its corporate butt)?
- What are the U.S. income tax considerations?
- What are the U.S. estate tax considerations?
- What are the U.S. tax paperwork considerations?
- What are the requirements of the U.S. bank where the trust distribution will land?
Hurdle 1 - risks
An asset protection trust is no longer necessary if there are no risks. It appears that this person has retired and no longer faces medical malpractice lawsuit risks.If you are looking to unwind an asset protection trust, look over the landscape. Are there still scary monsters out there?Hurdle 2 - are you a beneficiary?
The trust itself has explicit rules for who may receive distributions, and when. Only beneficiaries may receive distributions. You must be a beneficiary of the trust in order to receive anything.Here are the possibilities:- You are named as a beneficiary of the trust. Good news.
- You are identifiably a member of a class of people who are beneficiaries, even though you are not named. Good news.
- You are not a beneficiary of the trust (either by name or by membership in the class of beneficiaries), but you are not banned, either. (Look for provisions that identify "Excluded Persons" and see if you are in that group.) Semi-good news. Extra work needs to be done to make you a beneficiary, but receiving a distribution is still possible. See below.
- You are not a beneficiary of the trust, and you are banned from becoming a beneficiary of the trust. You are SOOL. You will have to find some other way of getting the assets out of the trust.
Hurdle 3 - if you aren't a beneficiary but can be added . . .
Usually a trust document for a foreign trust will give the trustee -- or another person called a "Protector" or "Guardian" -- discretionary power to add or remove beneficiaries.Does such a provision exist? If so, this is tentative good news. Someone can add you as a beneficiary. (This assumes, of course, that you are not an Excluded Person who can never be added as a beneficiary of the trust -- by the very terms of the trust document itself.)- A Protector or Guardian can usually force the result and arbitrarily make you a beneficiary of the trust. This is good. People who serve in this capacity are usually friendly to you and are decisive and unafraid.
- A trustee usually has the discretion to add you as a beneficiary. Trustees may or may not do this -- they are afraid of being sued by the other beneficiaries for dereliction of (fiduciary) duty. This is tentative good news. Now you must assuage the trustee's fear.