THE BRIDGE TRUST®
Why the Bridge Trust® is often better than a foreign asset protection trust.
Foreign-level protection should be available when circumstances demand it without imposing foreign compliance, cost, and loss of control from day one.
Read the full article ↓THE CENTRAL IDEA
Offshore protection. Domestic simplicity. Strategic flexibility.
Domestic administrationFlexibility while circumstances are calmForeign protection when warranted
This is a bold statement for those familiar with the benefits of a fully foreign asset protection trust. I can understand that it is better than a domestic APT, since the domestic APT’s have already failed several times and in any case are so clearly subject to the U.S. courts, but how can the Bridge Trust® often be better than a fully foreign asset protection trust?
For the same reason that a single strand of spider silk can be stronger than steel, FLEXIBILITY!
What is The Bridge Trust®
The Bridge Trust® is an asset protection trust which is registered in an offshore asset protection jurisdiction; however, for U.S. tax compliance it is considered a domestic trust. If, and when, it becomes a tactical advantage for you, the trust may ‘cross the bridge’ and become a fully foreign asset protection trust. During its domestic phase, the Bridge Trust is generally treated as a U.S. grantor trust. Ordinary U.S. grantor trust compliance applies, and in many cases a separate trust income tax return is not required because the trust activity is reported on the grantor’s individual return. Your tax advisor should confirm the requirements for your circumstances. Also, because the trust is a simple domestic grantor trust, you remain in direct control of your assets and are permitted to be the initial Trustee. The Bridge Trust® is engineered to give you offshore protection with domestic simplicity. And most importantly, the Bridge Trust® gives you the one thing that is most critical to strength, FLEXIBILITY!When Offshore is Best
There are times when having a fully foreign asset protection trust (foreign APT), settled in one of the premier offshore jurisdictions in the world, such as the Cook Islands, Nevis, or Belize, is exactly what you need and want. There is nothing that I know of that is better to protect your assets in an aggressive frontal attack (while keeping them as yours) than a fully foreign asset protection trust. The foreign asset protection trust is a tactical masterpiece when used properly in an actual assault! Over the past 25 years, I have been involved with thousands of clients and over 100 cases with clients where we have successfully used the tactical advantage of crossing the bridge to come out on top. If I am in a firefight beside my clients against an opponent using live ammunition, I want to be firing back with real bullets, using bigger guns and from higher ground! I want the tactical advantage. When it’s time to fight, let’s make sure we win! But those times are frankly rare, and with good diplomacy and a strong defense, they become less and less likely. Any soldier will tell you that avoiding a battle is far better than winning one. There is always a very real cost to war, even when you win. War is hell and so is litigation!Why not use a Domestic Asset Protection Trust (DAPT)?
DAPT’s came along in the late 1990’s as a response to the growing popularity and effectiveness of the fully foreign APT. The first state was Alaska, and today over 20 U.S. states have some form of DAPT legislation. The sentiment, if not the effort, is very good. What this means to me is that almost half of the U.S. states have acknowledged that there is a very real need for asset protection and that taking steps to protect your assets is both legitimate and valid. The issue comes with the execution of the actual protection. Because all states are part of the United States they all are bound by the U.S. Constitution, as well as the Federal Courts, including the Federal Bankruptcy Court. The bottom line is that the track record for domestic APT’s is poor with several high profile examples of DAPT’s totally failing to provide any protection for their beneficiaries. I recommend a fully domestic DAPT only in specific circumstances, especially when the advantages of The Bridge Trust® are available to me and my clients. So why do I say that The Bridge Trust® is often better than even the best foreign APT?5 Reasons the Bridge Trust is often better than a foreign APT
Reason #1: Flexibility
By far the most significant and important ‘cost’ of beginning a fully foreign asset protection trust is the loss of your flexibility. 17th century Prussian General, Helmuth Karl von Molte famously said:“No battle plan ever survives contact with the enemy.”In litigation, flexibility is the key to winning. No litigator wants to go into the courtroom with only one argument. Prosecutors go for multiple ‘lesser included charges’ just to make sure they leave with a conviction. Defense attorneys prepare as many defenses as possible, even though just one winning argument is enough. Your execution needs to be tactical, but your planning must be strategic. If you move from strategic to tactical too soon, you may not be able to extract yourself. There is no place where this is more accurate then when talking about optics. “Optics” is the word litigators use to describe how a case “looks” to a judge or jury. If a case has good optics, it means it feels right. Arguments go over better and your chances of winning go way up. Bad optics means it doesn’t pass the smell test, and bad optics can be the kiss of death for a judge or jury. Even more importantly, bad optics put you at a severe disadvantage when negotiating. For better or worse, nowadays, ‘offshore’ conjures bad optics. This is truer today than ever before as illegitimate uses of offshore, like hidden accounts with stolen money and tax evasion, continue to make headlines. Let me give you a real-world example where optics made all the difference.
Martin’s Case:
Martin had been a client for over 7 years. He became involved in a civil issue over a transaction he had been a party to. We had been waiting to trigger his trust until it became apparent that it was going to be necessary. In other words, until it gave us a tactical advantage. One day he called me to tell me that his civil case had been upgraded to include criminal charges, suddenly the optics became critical. We had a conference call with his criminal attorney and the one thing he insisted we cannot do is trigger the trust and move the assets offshore. For him this would create such bad optics that he felt he would not be able to keep Martin from serving time. Because we had the Bridge Trust® in place, and had been strategic about not triggering it too early, we could make that tactical decision in real time to keep the trust, the trustee and the assets in the U.S. Therefore, we didn’t have to disclose any offshore accounts or jurisdictions to the prosecutor, the court, or the attorneys. Martin went on to both plead out the criminal charges with no jail time (because we had good optics) and still use the existence of the asset protection planning to successfully settle the civil issues on very favorable terms to him. Had Martin had a fully foreign asset protection trust in place he would have be stuck. He would have had no choice but to disclose and the optics would have been destroyed because he would have looked like the bad guy they had painted him to be (and which he wasn’t). I could add several more examples where the fact that the Bridge Trust® was not yet triggered became a critical point. This includes several more criminal case examples, as well as at least 3 super-creditor cases involving the SEC and the IRS, where had there been a fully foreign trust the client would have been severely handicapped. The point is obvious; a foreign trust is not always a tactical advantage. What you want is the option to have a fully foreign trust, not the obligation. This huge flexibility advantage alone is enough for me to consider the Bridge Trust® a superior plan than a commitment to a fully foreign asset protection trust from day one.Reason #2: Compliance
In addition to greatly reducing the flexibility and options to control the optics of your case, by fully committing to a foreign APT, you have also obligated yourself to a greatly increased reporting and compliance burden. Most of my clients think twice before voluntarily submitting themselves to additional IRS requirements and scrutiny. What this compliance includes, at the bare minimum, is FORM 3520 and FORM 3520A, filed annually. If you additionally have offshore accounts, which make sense to include if you have a fully foreign APT, then there is even more compliance under FATCA, but let's just focus on the 3520 forms. Form 3520 is a full initial report required by the IRS for any foreign trusts. It is 6 pages long and includes the following:- Full personal information on all the settlors, beneficiaries and the Trustees of the trust including social security numbers and Tax ID numbers.
- A list of all transfers made into the Trust and the value of those transfers.
- You are required to list a U.S. agent for the trust who is required to be able to provide the IRS will all relevant information on the trust, including:
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- A full copy of the executed trust,
- Summary of all written and oral agreement and understandings related to the trust,
- Memorandum or letters of wishes,
- Subsequent variances to the original trust documents,
- Trust financial statements
- Any other documents relevant to the trust.
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- A very detailed list of all distributions made from the trust during the taxable year and their tax classification as a gift, a sale or a loan.
- You must sign the form under penalty of perjury, as if you had testified to all the above in a court of law.
Reason #3: Cost
No matter what your budget, the financial cost should be considered. A fully foreign APT has several required costs to consider:- Annual Trustee Fees: These run from $3,000 per year to well over $10,000 per year, depending on the jurisdiction and the Trust company. They are required and failure to pay them results in the termination of your trust.
- Annual Trust Registration Fees: These are fees required to re-register your trust each year. In most jurisdictions if you fail to register your trust annually, then it expires and cannot be renewed. The reason for this is to provide incentive for you to pay your fees every year. These fees are typically paid by your resident trustee, so everyone must get paid annually for your trust to be valid. The amount is often wrapped in the trustee fee, but when broken out runs between $500 and $1,000 per year.
- Initial set-up fees. These vary greatly. On the one end, I have seen fees as low as $10,000, usually from non-attorney document preparation firms. On the other end, I have seen large NY law firms charge over $100,000 for an offshore plan. In general I am comfortable saying that you can get a well drafted and supported plan from a reputable and experienced law firm from between $25,000, $45,000.
- Accounting and ongoing legal fees. A foreign APT requires annual reporting by the IRS. Your accountant or tax attorney should be filing the FORM 3520 and 3520A at the minimum. As discussed this is a very detailed form and annual costs based on what I see clients pay run between $2,500 and $5,500 a year. Ongoing legal costs are based on the time you need. In my opinion experience this amounts to 1-2 hours per year meeting with your attorney, so factor in another $500-$1,000 there.
Reason #4: Control
For a fully foreign APT to work, you must not be in control of the trust. This of course makes sense, because if you are in control of the trust, then a judge can simply order you to repatriate the assets and give them to the court. As discussed above, once it becomes tactically advantageous to do so, this loss of control by you is an acceptable cost to preserving your asset base against an aggressive attack. But if you are setting up your trust now as a preventative measure, and the waters are calm, then I can bet that you would like to continue to control your assets. Some planners attempt to give control of a foreign APT structure to the clients by allowing them to serve as the manager of an LLC or LP, or even as co-trustee of the trust itself. While this works, it basically doubles down on the optics issues. Each brick you place further removes your options and forces your hand. In my opinion, if you are at the stage that you need a fully foreign APT, then maintaining any control element whatsoever is risky. It’s a bit like jumping halfway out of the airplane with your parachute. Either stay in the plane, or jump, not both!Reason #5: Continuity
The continuity of your planning may be the most important reason of all. What I mean by continuity is keeping your planning in place, updated and ready to be used for an uncertain time and an uncertain reason in the future. If you don’t keep the planning in place, it will not work when you need it. What I see consistently happening is that clients often call when they are feeling a little bit vulnerable. Sometimes there is a direct risk they are a little worried about. Other times they are witnessing a colleague or friend going through a legal battle. In either case, I often see them get talked into a fully foreign APT by someone because “it’s the best”. These planners cite law school textbook reasons why they need to be offshore from day one. They do not discuss strategy. They do not discuss tactics. They do not understand the most important consideration of all, flexibility. They simply promote and sell a one-dimensional plan because they have decided it is “the best”. In my opinion, most often when I see this happen it is uninformed and inappropriate, at best, and, at worst, it is an outright abuse of the professional relationship. Why I feel so strongly about this is because a great many of these people drop the planning altogether after 3 or 4 years for precisely the reasons of burdensome costs and compliance requirements. In the worst of these cases, I have seen planners who sold these plans and failed to even inform the clients of the required compliance. In more than one case I have had calls from people desperate to get out of a 35% penalty of all the trust assets for failing to file the 3520 on time! I was speaking with legal counsel for a well-known trust company at a conference in 2015. I asked him what the average life of his fully foreign trusts was. His answer was just what I had guessed from my own experience. He said 4 years! Why I consider this so devastating is that even after spending tens of thousands of dollars to set up ‘the best’ foreign plan, if tis dropped after 4 years, it’s not going to be there when they need it in the future. My experience has shown that the reasons people create plans are almost never the reasons they use them. For your planning to work it needs to be in place, up to date and ready to go. Creating a fully foreign APT not only limits your flexibility, massively increases your compliance burden and costs more to boot, but very likely you will get tired of being boxed in and priced out, and you will drop it before you ever need it. It is a regular call for me to be contacted by someone 2 to 3 years after they have set up an initial offshore plan with another planner. Their question is inevitably: “Doug I didn’t fully understand all of the considerations and I wish I had known about the Bridge Trust® when I set this up. Can you convert my offshore trust to a Bridge Trust® for me?” The answer is that, while its possible, it more difficult and expensive then setting up an entirely new Bridge Trust®. That is exactly what most opt to do. And the funny thing is that even when they consider that they are going to pay twice for their planning, they still come out ahead in the long run.So what are the considerations?
I believe the case for the Bridge Trust® as a better planning vehicle than either a fully domestic or a fully foreign asset protection trust is compelling. Nevertheless, there are uninformed planners and commentators who attempt to criticize the Bridge Trust® and I want to address the three things I hear most often. Objection #1: A court in the US may invalidate the Trust. Firstly, I would point out that this is also true for any other trust including a fully foreign or fully domestic asset protection trust. There is simply no way to ensure that a U.S. court is going to do, or not do, anything as you wish. So, I agree, this could theoretically happen (although it has never occurred to any of my clients). If this did happen the question would be, what is the impact? The answer is that it depends on what tactical moves we have chosen to make. If we have indeed triggered the trust, then a U.S. court invalidating it would make virtually no difference to the effectiveness of the trust. At that point the Bridge Trust® will have converted to a fully foreign trust and any challenge to the trust must be brought in the High Court of the Cook Islands and proven beyond a reasonable doubt. What these commentators either fail to understand, or fail to mention, is that for all the exact same reasons that the fully foreign APT is going to withstand a U.S. court challenge, so will the Bridge Trust® once it has been triggered because it is then a fully foreign APT. Objection #2: Waiting until after the threat has materialized to cross the bridge creates a fraudulent conveyance. This is simply wrong and a mis-statement of the law. The 'conveyance' occurs when the plan is created, and the trust is initially funded, not when the trust or the assets cross the bridge. I would agree that creating any plan after the liability has been incurred risks a fraudulent conveyance claim, and again this would include a fully foreign or fully domestic trust. However, if the Bridge Trust® is created and funded before any issues arise, then a later change in trustee and U.S. tax classification does not create a 'conveyance' for fraudulent conveyance purposes, especially when the changes are pursuant to the terms of the trust itself and not at the behest of a beneficiary. The trust is registered offshore from inception. Again, any challenge to this would have to be heard in the High Court of the Cook Islands. Objection #3: Your assets will get stuck in the U.S. and frozen before you can move them because it will be impossible to open an offshore account after you have a problem, and even if you can or already have one open, you cannot participate in sending the assets offshore. This argument would be true with respect to what I call a “Trampoline Trust”. In other words, a trust in which the offshore components are not already fully set up and a specific action by the U.S. Trustee is required to affirmatively move the trust offshore. As to a Trampoline Trust I would agree you may end up with a catch-22 where moving the trust assets may itself be interpreted as an impermissible action. However, when it come to The Bridge Trust® this comment fails to understand or consider the subtleties of how the planning is designed. First, you (the client) will not be opening an offshore account at all, the trustee of the trust will. In 25 years, I have yet to see our offshore trustee fail in opening an account for a Trust even after very significant issues have arisen. This is because, from their standpoint, the trust has owned the assets long before the problem has arisen and a potential liability against a beneficiary is not a stumbling block for an offshore trustee. In fact, this is the reason the offshore trustee exists and their entire purpose for being and they are very good at it. The second comment about participation of the US persons being prohibited demonstrates a lack of understanding in how the planning works. Since your Bridge Trust® is connected to your Arizona Asset Management Limited Partnership™ we have access to a unique clause in the Arizona statute. A.R.S. 29-333. Withdrawal of limited partnerA limited partner may withdraw from a limited partnership at the time or upon the happening of events specified in writing in the partnership agreement.
What this means is that it is NOT the client or any US person or entity, acting in any capacity whatsoever, determining to transfer the assets offshore. Rather, it is the offshore trust company, acting on behalf of the trust, withdrawing from the LP and demanding a distribution of their % of the LP assets. This demand may be acquiesced to by the U.S. based General Partner, or the Trust may cause a court in Arizona to force the General Partner to distribute the assets per the terms of the LP agreement and ARS 29-333. What I advise clients who are concerned about doing everything right and by the book, is to focus on keeping ‘the book’ simple and your options open. The Bridge Trust® does exactly that.The Takeaway
I do have clients where the asset level is high enough, and the risk is great enough that it makes sense to begin with a fully foreign Cook Islands Trust. In those cases, we strategically consider the circumstances and we carefully and thoughtfully implement a tactical plan that incorporates a fully foreign trust. This often involves funding the trust with a portion of their total estate and sometimes also using the Bridge Trust® in conjunction for other assets. However, for most of my clients, even very wealthy ones, the flexibility of the Bridge Trust® strikes the right balance between the mitigation of the risks, the costs, the control, the compliance and the ultimate effectiveness of the planning. In the end, the most important thing is that you are comfortable with your plan and with your attorney and that you and your family sleep better at night because you have confidence that it will work if needed and doesn't tie your hands in the meantime. Focus on that and you will find the plan that is best for you. Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®. L&L serves clients nationwide and may be reached at support@lodmell.com or 602-230-2014.This article is provided for education and general information. Every plan depends on its facts, timing, governing law, and proper implementation.
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