Q. I've been reading about asset protection strategies, why would anybody use one of those off-shore international trusts?

A. Asset protection has been recognized as one of the basics of retirement and estate planning for years. The international tool just takes a more sophisticated approach to those same well-known concepts. Foreign trusts additionally offer U.S. citizens opportunities to diversify into a number of better performing global investments not generally available "on shore". Since 75 percent of the world's capital is held outside the U.S., it makes sense to have improved access to that market.

Although designed to be tax neutral, many foreign countries offer more flexible trust laws allowing trust creators to shelter assets from frivolous lawsuits, create entities that will last for many generations and more effectively manage and distribute those assets. They are also helpful in corporate business planning and investment diversification. For clients with international holdings or immigration concerns, an asset protection trust offers numerous advantages.

Planning for these trusts requires that they be established long before they are needed. In other words, if you wait until you are exposed to litigation and creditors, then it's too late. An asset protection trust must be in place before the debtor or defendant has been sued, or even threatened with a lawsuit. Wait too long to act and a fraudulent conveyance may occur; then the trust will be set aside, unable to protect anything. Also these trust entities must be established by properly filing the required paperwork with the IRS and they are not to be used for insolvent individuals.

International trusts should provide more than just asset protection. Properly done, they offer excellent estate planning tools for anyone concerned about conserving or losing control of their assets. Combined with family limited partnerships and section 664 charitable remainder trusts, a well-constructed international trust can effectively eliminate estate tax liabilities.

Off-shore trusts may be funded in two ways, those which own assets remaining in the U.S. but hold the title off-shore, and those which hold both title and assets in foreign countries. For many, the psychological discomfort of shipping a significant portion of their estate off-shore is the principal reason to keep positions in domestic financial products. Unfortunately, any assets left in the U.S. may ultimately be exposed to litigation claims, even though owned by an off-shore trust. Therefore, the most safety lies in holding all of the assets and their ownership outside the U.S. Off-shore assets held by international trusts may allow the defendant in a lawsuit to better maintain control during any litigation. As a result, the trustor can effectively steer any potential settlement towards more favorable terms, since off-shore assets are not easily attached. Enforcement of legal actions often requires that the litigation occur in the foreign country where the trust is sited and be subject to its laws. In many cases, attorneys are barred from working on a contingency basis and plaintiffs must post a bond equal to 10-50% of the amount claimed. Shorter statutes of limitations, more restrictive legal requirements and the inconvenience of trying a case outside of the U.S. all create effective barriers to nuisance suits. You don't have to be a high profile brain surgeon to have excessive liability exposure. For example, if one of your heirs or employees uses your vehicle to accidentally run over a bus load of children, the resulting litigation is likely to exceed the typical liability coverage of your auto policy by several million dollars. Even if you are not guilty of any wrongdoing, to whom are the plaintiffs going to turn for compensation in the lawsuit? Even if you win in court, you lost time, money and your reputation in the process. For anyone with "deep pockets" worried about increasing exposure to personal injury claims and confiscation of assets due to final expenses, an international trust may be the most potent tool available today.

The rules under which the trust operates depend upon its location. Since many countries have more favorable laws, it is critical to select the site of the trust with care. Based on your needs, you may have many uses for an international trust. They avoid forced heirships, limit domestic medicaid attachments, create dynasty trusts which bypass laws of perpetuity, allow for negotiated settlements that make full use of liability insurance, all without tapping into privately held assets. Commonly used to limit divorce settlements, international asset protection trusts may be useful as a bargaining tool for individuals who should have given more thought and planning to their prenuptial agreements.

The most popular countries used in off-shore planning include: The Cayman Islands, Switzerland, Liechtenstein, Bermuda, The Bahamas, The Cook Islands, Nevis, Anguilla, Gibraltar, Turks and Caicos. Each country has its own advantages and disadvantages with regard to tax planning, foreign business operations, banking and investment infrastructure, telecommunication capabilities, access to qualified trustees and money managers; so the trust creator's decisions should not be undertaken lightly. Since most people have little experience in establishing a foreign entity trust and no contacts to wade through the bureaucratic paperwork, an experienced team of advisors is a must. International trusts are not for everyone, but for those individuals who feel their asset exposure is too high, these trusts are another valuable tool in their estate planning program.

Vaughn W. Henry, an estate planning member of the Central Illinois Chapter of the International Association for Financial Planning, may be reached at (217) 529-1958 or toll-free 1 (800) 879-2098 in Springfield, Illinois.

Henry & Associates, 1994

e-mail to VWHenry@aol.com

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