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 way just 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, (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; that is the client cannot have effective day-to-day control of the Trust despite what the paperwork says. 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.
If you have any questions, please feel free to contact me.