Common sense tells us that no settlor of an offshore trust is going to completely give up control of that trust and the property in it. There are two principal mechanisms whereby the settlor maintains “control” over assets in an offshore asset protection trust.
(1) Letter of Wishes.
The Settlor or the Settlor=s attorney will typically give the trustee of the Foreign asset protection trust a non-binding precatory letter of wishes
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which might crudely be paraphrased as follows: ADear Trustee:
While of course the trust which I have established is irrevocable and may not be amended or revoked by me, and recognizing, of course, that you have complete unfettered
discretion to accumulate or distribute income or principal from time to time, and if you distribute it, you may or may not distribute any to me, nevertheless I thought you might find it helpful if I expressed to you in writing some thoughts I had on how you might administer the trust. Of course, my suggestions are precatory only, as you may do as you wish.
a. Under no circumstances should you give a dollar to any alleged creditor of mine;
b. If I do not have creditor problems, please give me whatever I want when I ask;
c. If I have creditor problems, give me nothing, but provide for me and my family and pay our expenses. d. I may send you a new letter of wishes from time
to time.@
An example of an actual Letter of Wishes is attached as Exhibit 6. Alexander A. Bove, Jr. recently authored a useful article, “The Letter of Wishes: Can We Influence Discretion in Discretionary Trusts?” published in the ACTEC Journal Volume 35, No. 1, Summer 2009.
To Americans and American lawyers obsessed with enforceable contract rights, reliance on a precatory letter of wishes seems “loosey-goosey,” but offshore bankers have a strong tradition of scrupulously honoring letters of wishes and their business is built on trust that they will do so.
(2) Trust Protector.
The Settlor will typically appoint in the document a trust protector with absolute authority to change trustees, change jurisdictions, and change governing trust law. Bluntly, if the trustee does not do what the Settlor wants, e.g., if the trustee fails to follow the letter of wishes, the Settlor will whisper in the protector=s ear, and, lo and behold, a new trustee will be appointed. If a creditor claim arises in the U.S., it is
probably best if the Protector is not in the U.S. so the trust should contain a mechanism to replace the U.S. Protector and appoint one offshore in the event a U.S. claim looms on the horizon.
123 Managing Partner.
The Settlor may establish a FLP (or FLLP or FLLC) to hold assets, retaining the 1% managing general partner=s interest and all authority over the partnership and conveying to the foreign asset protection trust the 99% limited partnership interest. The Settlor then may convey to the FLP real estate, tangibles, cash, securities, etc.
If creditor problems loom on the horizon, the Settlor may first of all have normal creditor protection benefits of a partnership under U.S. law, i.e., a creditor=s only remedy is a charging order, creditor gets partnership K-1 for partnership income interests with respect to which he has a
charging order. As a second alternative, the Settlor as general partner will have authority to liquidate the FLP, leaving himself with a 1% interest in partnership assets as tenant in common with the foreign asset protection trust, which holds the other 99% interest in what had formerly been partnership assets as tenant in common. The portable assets
representing 99% of what were formerly partnership assets may then be moved offshore into the direct control of the foreign Trustee. The Settlor may also resign in favor of a third party as managing general partner. (4) Retained Powers Authorized by Statute.
As noted below, Delaware and Alaska law expressly authorize certain powers to be retained by the Settlor without risk of forfeiting the asset protection features of the trust. Similarly, certain foreign jurisdictions expressly sanctioning foreign asset protection trusts authorize the Settlor to retain certain powers. For instance, Cook Islands law provides that a Settlor of an asset protection trust may retain (a) power to revoke, (b) power to appoint, (c) power to amend, (d) power to retain a beneficial interest, (e) power to remove or appoint trustees and trust protectors, (f) power to direct a trustee or protector on any matter.
(5) Domestic Trustee and Foreign Trustee.
One model has a U.S. Trustee, typically a non-beneficiary
individual, family member, friend or attorney, as Co-Trustee with a Foreign Trustee, typically an institution, presumably on the assumption that the U.S. Settlor would appoint someone as U.S. Trustee over whom he felt he or she had more influence. However, the tax issues raised by having a U.S. Co-Trustee and the authority of the U.S. Co-Trustee must be carefully considered.
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Typically in an OAPT the U.S. Settlor appoints a party he completely trusts, not infrequently his attorney, as Trust Protector with power to discharge a trustee, move the trust to another jurisdiction, and hire a new trustee and adjust the law of the new jurisdiction as the
governing law of the trust. If trouble looms in the horizon for the Settlor in the U.S., the Trust Protector should be outside of the U.S.
See Exhibit 4, No U.S. Connections Allowed With An Offshore Trust? Wrong! Use Onshore Contacts, by Frederick J. Tansill. (b) For further control, the settlor may require the trustee to use an investment manager/asset custodial known to and trusted by the settlor. (7) Tension Between Protection and Control.
It is worth recalling the truism of asset protection planning: the more control a Settlor retains, the more vulnerable is the trust to the Settlor=s creditors. This principle resonates through all of the Abad@ cases cited below.