July
2006: by Dale R. Berg
Asset protection strategies, part two
In the last edition, my business partner Jim
Nellis detailed two strategies for asset protection. Jim wrote
about third party ownership and insurance-based strategies. In
this article I would like to profile the two others he mentioned,
which are domestic trusts and foreign trusts.
A trust is not a legal person, like an individual
or a company, but is capable of owning property. The term 'trust'
refers to the relationship the settlor (contributor) establishes
by placing assets under the control of a trustee during the settlor's
lifetime (inter vivos trusts) or upon death (testamentary trusts),
for the benefit of stated beneficiaries. A domestic trust has
three main identifying characteristics.
1. All assets held in the trust
do not become a part of the trustee's estate.
2. The trustee must manage,
and be accountable in respect to the terms of the trust and duties
imposed upon him by law.
3. The title to the trust is
in the name of the trustee.
Item No. 1 is one reason why trusts are favoured
as asset protection strategies over transfer of ownership to a
third party. The key item to be aware of is that assets held by
the trustee are a separate fund and they are not part of the trustees'
own assets nor the settlor's assets. Therefore creditors of the
trustee or settlor cannot lay claim to the assets held within
the trust.
Item No. 2 requires the settlor to ensure that
he has picked the appropriate trustee for the circumstances. A
trustee can either be a professional like a trust company, or
other financial institution.
An example of a non-professional trustee would
be a trusted family member, or a close friend. The advantage of
a professional trustee over a non-professional trustee would be
the professional would carry insurance for negligence. This could
be a very important feature in the overall plan and goal for asset
protection.
Item No. 3 requires substantial consideration
on behalf of the settlor. The result of the action of transferring
assets to the trust means the settlor relinquishes all control.
The trustee now acquires all control over the transferred assets,
and acts on behalf of the beneficiaries of the trust.
When settling a trust, one must also consider
all income tax implications in doing so. There are a number of
rules to seriously consider, and the settlor is strongly encouraged
to seek the advice of a well-qualified tax lawyer before embarking
upon this action. Some of the many tax considerations are:
- Does the 21-year disposition rule adversely
effect the establishment, and desired objectives for the trust?
- What are the impending tax consequences when
this trust is eventually wound up?
- If property is the desired asset to be transferred
to the trust, are there large gains when the property is rolled
over to the trust?
- If income-producing property is contributed
to the trust, what are the income attribution rules to the settlement
of the trust? Again, settling a domestic trust can be a detailed
and complicated asset protection strategy, but very well could
accomplish many asset protection objectives.
Another trust alternative is the foreign trust.
These have gained tremendous popularity in the last 20 years as
a result of our increasing litigious society. The countries that
boost flourishing asset protection trust dealings are Bahamas,
Barbados, Belize, Bermuda, and the Cook Islands.
The basic relationship is similar to that of
a domestic trust, but the level of asset protection the settlor
can achieve is much greater. This is due to the fact the jurisdiction
for the creditor to file the claim is often the offshore jurisdiction.
Many creditors will not go through the procedure to hire local
counsel to file the claim. The other reason, and possibly the
most compelling about an offshore trust, is the limitation period
for when a creditor can attack the transferred assets that will
usually be between two to five years from the time the trust was
established.
The final icing on the cake with an offshore
trust is the settlor of the trust can keep control over administration
provisions of the trust. This is an interesting feature for individuals
who do not wish to give up control of their assets when establishing
an asset protection vehicle. With respect to the taxation of a
foreign trust, a Canadian taxpayer will continue to pay tax on
the income earned as if it was a resident of Canada.
Again, trusts can accomplish many of the asset
protection requirements a settlor desires, but please seek the
advice of a qualified professional.
. . .
About the author
Dale R. Berg, CFP, CLU, ChFC, is a Senior Financial Advisor
with Assante Wealth Management. He can be reached at 1-877-837-3377
or 306-665-3377, or click to
email Dale Berg.
Disclaimer
Please contact a professional advisor to discuss your particular
circumstances prior to acting on the information above. The opinions
expressed are those of the author and not necessarily those of
Assante Financial Management Ltd.
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