I ran into a friend tonight who subscribes to this list (hi, Jimmy) and he expressed surprise that I was in the USA. Yep. And it makes me itchy if I’m not flying somewhere frequently.

I am at home nonstop through May 17 — because of family stuff, mostly my wife’s business is in hyperbusy mode (women’s clothing).

Well, not counting a trip to Washington DC from April 16 to April 18. And a couple of day trips to San Francisco. And then I’m free for aa quick trip to Toronto on May 20-21. And a trip May 27-29 to New York.

(I’m telling you this because — It’s a Clue! — we could meet for coffee when I am on the road; I like company.)

Fight Club – Suggested Topics

My email in February about asset protection trusts Fight Club triggered many comments. One came from a CPA friend, Doug, who asked some questions. I take these as suggested topics:

  • Does money from a foreign person into a foreign trust make sense for someone coming to the US in a permanent status?
  • What income tax issues do we create by setting up a foreign trust?
  • Do we save any US Estate Taxes by doing a foreign trust?
  • And how much money does it cost to set up properly?
  • And how much money should be protecting?

Finally, Doug asks:

  • Are you going to have a session on the Fight Club sometime after April 15th?

Yes, Doug. I would like to do more Fight Club stuff. If there is interest.

A Request

Would you do me a favor? Shoot me an email if you would be interested in knowing more about asset protection trusts.

Just hit reply and hit me with an email.

How Many Asset Protection Trusts?

By “asset protection trust” I mean a trust established by a U.S. residents with the primary purpose of asset protection, rather than estate planning.

How big a business is this?

Let’s say that hypothetically there are about 300 asset protection trusts set up every year in the Cook Islands.

This is a number that comes from a person who would know the true number with some accuracy, so let’s use 300.

Lawyers set up asset protection trusts elsewhere, too. Nevis. Isle of Man. Other places. I have no access to insider information on how many asset protection trusts are created in other jurisdictions worldwide.

The Cook Islands are highly regarded as an asset protection jurisdiction–perhaps the premier jurisdiction. I must assume the trust companies in Rarotonga will take the lion’s share of the business.

Total in all foreign jurisdictions? It has to be under 1,000 per year. Maybe well under 1,000, because Cook Islands is sort of the poster child for asset protection trusts.

There are places in the United States that offer asset protection trust business. I have no idea how active they are.

Because I am a skeptic, I have stayed away from this business. But I suspect the same is true for the domestic asset protection business that we see for foreign asset protection: there is not a lot of it going on.

I’m Skeptical

True confessions: I am a tax guy. I am someone who likes to read the boilerplate in trusts, because that’s where the magic happens.

I intensely dislike the salesmanship that goes along with asset protection trusts. Marketing through fear.

Despite my skepticism, I do know that the asset protection function does, in fact, work. At least for the Cook Islands.

But let’s leave my prejudices aside. Let’s answer one of Doug’s questions.

Give Away The Assets, Keep the Income Tax Bill

Let’s talk about the income tax treatment of foreign asset protection trusts created by U.S. persons.

Foreign Trusts = Grantor Trusts

It is almost a dead certainty that if you create a foreign asset protection trust, you will be taxed on the income earned by the trust on its investments. You will give away the assets (essential for asset protection purposes–your creditors can’t grab what you don’t own). But you will still pay the income tax bill.

The reason? Internal Revenue Code Section 679(a)(1):

A United States person who directly or indirectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)) shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust.

If you are treated as the owner of the assets (disregarding the trust’s existence for income tax purposes), then you will be taxed on the income those assets generate every year.

And you will be treated as the owner of the assets that you transferred to the foreign asset protection trust (for U.S. income tax purposes only) if there are U.S. beneficiaries.

United States Beneficiaries

Of course there will be a United States beneficiary. That person is you.

Every foreign trust is presumed to have a “United States beneficiary” unless distributions to a U.S. person are explicitly banned. Treasury Regulations Section 1.679-2(a)(1) says:

(1) In general. The determination of whether a foreign trust has a U.S. beneficiary is made on an annual basis. A foreign trust is treated as having a U.S. beneficiary unless during the taxable year of the U.S. transferor—

(i) No part of the income or corpus of the trust may be paid or accumulated to or for the benefit of, directly or indirectly, a U.S. person; and

(ii) If the trust is terminated at any time during the taxable year, no part of the income or corpus of the trust could be paid to or for the benefit of, directly or indirectly, a U.S. person.

You will probably not have a bulletproof ban on distributions from the foreign asset protection trusts to U.S. persons. In the situations where people have asked me about these trusts, they want to get their money back later — after the risks blow over. And if the money does not come back to them, they certainly want their heirs (U.S. citizens, usually) to inherit everything.

Asset protection trusts are not (usually) about giving stuff away. 🙂

Trustee Discretion Won’t Solve The Problem

Every asset protection trust (and indeed every non-U.S. trust I have seen or drafted) gives the trustee extremely broad powers:

  • to add or remove beneficiaries; and
  • to decide the amount that is distributed to any particular beneficiariy (including a decision to distribute nothing).

This is essential to the asset protection functionality of the trust. Distributions simply do not come to you if a creditor risk exists. The trustee makes the decision, and the trustee is outside the reach of U.S. courts.

Even if you are not mentioned in the trust document, you will be a “U.S. beneficiary” causing the trust to be a grantor trust. As long as the trustee could exercise its discretion to add you as a beneficiary, the trust will be treated as a grantor trust. See Treasury Regulations Section 1.679-2(a)(2)(ii).

Is That Good or Bad?

I am not saying that grantor trust status for a foreign asset protection trust is good or bad. It might be good. It might be bad. But just recognize that this is the state of affairs you must live with.


Don’t take this as legal advice because it isn’t. It is an educational musing. Or something like that.

Again–A Request for Fight Club Feedback

Finally, please let me know. More Fight Club?

Until next Friday (when I will be in Washington DC). . . .