How and Why an International Privacy Trust can Help You!
I often advise clients to use an “International Privacy Trust” to own the business entities they form in order to provide them with greater asset protection, tax planning, and financial privacy. But I also tell them, “The only thing you want to do with the International Privacy Trust is to have it passively own the shares in those companies; no bank accounts, no contracts, no financial transactions, etc.”
This seems to cause a lot of confusion, “If the International Privacy Trust is so great, why don’t we use that instead of the US LLC, UK LP, or Belize IBC?”
A good question.
Without going into complicated legal issues it is important to understand that the “Trust” was developed through a totally different legal process than was the “Company”. Trust Law is different than Corporate Law. There are different rules that apply, and things are interpreted differently.
For example: If you set up a Trust, and you name yourself to an important position in the Trust, or in some other way in order to maintain effective control over the officers of the trust, there is a real risk that the entire trust will be set aside as a “grantor’s trust” or worse a “sham entity”. However, if you set up a company, you can be the sole shareholder, sole officer, sole employee, chief bottle-washer, etc. and have no such problems.
Again, this is because a Trust is treated differently than a Company. This does not mean the Trust is not useful; it is very useful. It simply means you must be cautious in how you use the Trust.
A Trust is very helpful in providing arms-length ownership of assets that you want removed from your estate. A Trust is very helpful at providing added privacy and confidentiality. With careful design and execution, the Trust can be a very helpful tool.
In order to avoid the charge that the Trust is a grantor’s trust, which will result in negative tax implications and perhaps even loss of asset protection benefits (at least under “common law” jurisdictions) certain precautions need to be taken. The client cannot be the Trustee, Sole Protector, Beneficiary, etc. of a Trust. The client also needs to be at “arms-length” distance from the Trust in all transactions. In other words, the client cannot have effective day-to-day control of the Trust. By limiting what the Trust actually does, this risk is lowered, and hopefully eliminated.
Another risk is the accusation that the Trust is just the “alter-ego” of the client, or a “sham entity” which will result in the entire Trust being set aside. Again, this is when the client for one reason or another is deemed to have effective day-to-day control over the actions of the Trust. Again, limiting the actions of the Trust to only passive actions such as holding shares in business entities removes this as a reasonable risk to be concerned about.
So, I advise my clients to have an International Privacy Trust that DOES NOTHING OTHER THAN own the shares of the business entity they establish. The client gets the benefit of having an effective Trust that removes the assets from his or her estate thereby providing legal and legitimate asset protection and tax benefits, but can still take an active role in the business with the business entity which is owned by the Trust. This is often referred to as a “hybrid” entity approach.
How does the International Privacy Trust work and what is the Protector?
The International Privacy Trust is usually used to own the shares of another entity in a more private and confidential manner. It is also useful in establishing a separate taxable entity and to provide advanced asset protection. This is a real advantage since the Bahamas treats such entities as non-taxable as long as they earn no active income in the Bahamas.
The Trust itself is established by a separate entity that is in no way related to the client and serves as the initial Trustor (forms the Trust), Trustee (manages the Trust), Beneficiary (the ultimate owner of the Trust) and Protector (see description later) of the Trust.
Of the four positions, the Protector is the most important. The Protector has the power to remove and replace the Trustee, and, most importantly change the Beneficiary. After the trust is established, the old Protector resigns and appoints a new Protector(s) . The Client has the option of naming himself or some other trusted individual as Protector, or name more than one Protector. He or she can also change the Beneficiary at that time or at a later date.
The new Protector is effectively in control of the trust without being listed anywhere in the Trust formation documents. The Client can maintain control over the Trust without becoming either a Trustor, a Trustee or a Beneficiary. Also, as of the date of this writing, there is no legal requirement to declare you position as Protector if that is how you choose to set up the Trust, though we would suggest you consider the other option below.
The Protector is the key to the whole system. Under Bahamian law the Protector has the right to supervise what the Trustee does, remove and replace the Trustee, and add and remove other Protectors (depending upon the mechanism put in place inside the Trust). In addition as stated above, the Protector(s) in this Trust also have the right appoint the Beneficiaries.
This is a very powerful position. It essentially controls the Big Picture issues of the Trust without getting into the day-to-day management issues. This is important since most countries will declare a Trust that is essentially controlled by its Grantor/Client a “self-settled trust” or worse a “sham trust”, and will strip it of its asset protection and tax reducing value. The Protector prevents this from happening.
In this Trust you are not the Trustor/Grantor/Settlor, the Trustee, or the Beneficiary, all positions that could result in problems. Instead you or your appointee(s) will be the Protector(s), which is all you need to control this Trust since the Trust will never do anything more than hold passive assets, like the shares of a company.
Now you have 3 options (I Strongly Suggest You Use #3):
1. Name yourself as Protector. If you are a citizen of a “European Code” country this should be fine. Under the Code, the powers given to the Protector are considered an “executory contract” or an “options contract”. They do not come into force until you actually execute the powers. This would not be wise for someone who is a citizen or resident of a “Common Law” country like the UK, USA, Australia, etc. because these countries interpret the powers of the Protector differently. Those from Common Law countries should only consider options 2 and 3.
2. Name yourself and 2 other people as Protectors. I usually suggest you name me or some other US based attorney as one of the Protectors since under US law I am obligated to either obey your instructions or resign as Protector. Going against my client in any way would result in severe legal problems for me, and could result in loss of my law license or worse. I would not want that so I will obey my client’s wishes or resign my position if I believe I cannot follow those instructions.
3. Name me or some other US based attorney as Sole Protector. This is the default setting for these types of trusts and the alternative I strongly suggest you use. With ths option you have all the benefits of having an attorney who is obligated to obey you, but I also provide a conditional resignation letter as added protection. My resignation is subject to you accepting it. All you have to do to make the resignation final is to “accept” the resignation and I am removed and you take my place. This is an ideal situation for people who do not want anyone to know the system is linked to them. Ultimate privacy. And it is completely legal.
As stated, number 3 is the default setting for this trust. I am named as the Protector and issue to you a Declaration of Protector in addition to the Contingent Resignation. This declaration simply states in clear and unambiguous terms that I am accepting the position of Protector as your attorney, and as such I am bound by the Attorney-Client Relationship to serve in your interests.