Trustees of prosperity

personal financial planning

IN THE WORLD OF OFFSHORE TRUSTS, THERE ARE IMPORTANT SAFEGUARDS TO PROTECT THE INTENT OF YOUR CLIENT AND THE INTEREST OF THE BENEFICIARIES

Financial advisers are integrating international planning into their practices as never before. The rewards of doing so can be quite dramatic: clients appreciate the practical solutions, and advisers attract clients with a higher net worth. Initially, however, many clients require a briefing on the nature of offshore trusts. Following are some of the main points to be communicated.

Trusts are quite aptly named because the process requires the "settlor" to relinquish legal ownership of assets to an individual or an institution (the 11 trustee") for the benefit of another (the "beneficiary").

A trust is a trust is a trust, whether it is onshore or offshore. For a trust to be considered offshore - that is, outside of North America and usually in a tax-free jurisdiction - the majority of trustees as well as the protector must reside offshore and have no intention of residing in North America during the lifetime of the trust.

For many, establishing an offshore trust in an unfamiliar jurisdiction, with a trustee they have never met, involves an unsettling leap of faith. The loss of control can cause extreme discomfort. Fortunately, in the world of offshore trusts, three important safeguards exist to protect the intent of the settlor and the interest of the beneficiaries.

The first safeguard is the trust deed itself. It clearly outlines the wishes of the settlor regarding the administration of the trust assets and their subsequent distribution to beneficiaries. This document establishes the rules that govern how the trust is managed. The trust deed lists the rights, powers, duties and obligations of the trustee; the role and powers of the protector; the beneficiaries; and any special instructions relevant to the investment, administration and distribution of trust assets.

The second safeguard is the protector. A protector is chosen to act as an intermediary between the trustee and the beneficiaries. In situations where the settlor and beneficiaries are unavailable to review the management of a trust, it is common to appoint a protector to provide guidance to the trustee and to ensure that the settlor's wishes are met. The protector does not control the trustee or usurp the trustee's function - rather, the trustee may be required to seek out the advice or consent of the protector on certain specified matters. A protector has a monitoring role with respect to trust administration; ultimately, however, a protector has the power to replace the trustee.

The third safeguard is the letter of wishes, which is a nonbinding letter written by the settlor to the trustees. Generally, it describes the settlor's reasons for creating the trust and offers guidance on the administration and management of the trust. In many cases, it will suggest the appointment of an asset management company as investment counsel and may even attach an investment policy statement (IPS). While the trustee is under no legal obligation to comply with the letter of wishes, the letter will generally be followed as long as it serves the beneficiaries' best interests.

One of the most frequent uses of an offshore trust is for wealth preservation. Certainly, that's the case at Assante Asset Management (Bermuda) Limited. An 11 asset protection trust" (APT) enables a settlor to relinquish ownership of assets to a trust in order to protect them from creditor's claims, taking into account the following provisos:

Most APT jurisdictions will protect a transfer to a trust provided the settlor is not insolvent at the time of the transfer and the transfer does not render the settlor insolvent. In addition, the transfer cannot occur with the intent to defraud creditors existing at the time.

There is a limitation period in most jurisdictions (the period is generally two years or more), after which the creditor will lose its right to impeach a trust or set aside a transfer.

In all cases, the burden of proof is on the impeaching creditor. Most asset protection trust jurisdictions will not recognize foreign orders, and the creditor will be required to bring a fresh action in the jurisdiction in which the trust is resident.

* This is not a tax-driven strategy. There may be a departure tax on assets leaving the country, and there are Canadian tax implications for the trust, its settlor and beneficiaries.

In asset protection we trust

The example below illustrates the mechanics of establishing an asset protection trust. Joe Canuck (our fictitious settlor) is a successful entrepreneur. He's recently sold his business and is looking for new opportunities. He realizes he may not be as successful in his next venture and wants some protection. He is also concerned about potential liability regarding several company boards on which he serves. In particular, Joe is a director of, and has an interest in, his brother's gas station. Recent news about gas spills and associated environmental issues - and thoughts of personal liability - are keeping Joe awake during the night. Even worse, his 20-year-old daughter is engaged to an uneducated man who has never held a job. Joe is convinced this man has his eye on his daughter's future inheritance.

Joe's financial adviser hears about his concerns and recommends an APT as a multipurpose solution: the trust will provide his family with a nest egg in case his next venture fails (or he's sued), and it can be structured to protect the family estate from the deadbeat future son-in-law.

Having decided that an APT is just the thing for Joe, the following steps are taken:

1. The adviser contacts an offshore service provider to assist in the establishment of an APT.

2. The structure of the trust is created, and the trust deed is prepared.

3. Once the settlor and his advisers approve the deed, the settlor signs the deed and returns it to the trustee with the initial "corpus" (a gold coin, US$ 100 or some other amount) to settle the trust.

4. Assets are transferred to the trust, usually by wire transfer.

5. The letter of wishes is written by the settlor and is forwarded to the trustees.

6. An asset management company is engaged to manage the money by the trustee, and the trust fund is invested pursuant to the IPS.

Once these steps are taken, Joe can rest easy knowing his assets are protected for future generations.

[Author Affiliation]

Gary Lyons, LLB, is the managing director ofAssante Asset Management (Bermuda) Limited in Hamilton, Bermuda.

[Author Affiliation]

Technical Editor: Ian Davidson, MBA, CFP, RFP, CA, vice-president and senior financial adviser, Assante Capital Management Ltd., Toronto