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The Best Asset Protection: the Trophy Wife Trust
Many people in this day and age believe that with CRS, international tax agreements, and transparency, the trust is no longer either valuable or effective in protecting assets. However, properly drafted trusts have remained the “Fort Knox” of asset protection for the world’s wealthiest families. In 800 years, no one has found anything better.
If the world’s wealthiest families use them, then it is very unlikely that things will change soon or at least in the next 100 years or so. Nevertheless, many jurisdictions have indeed been pressured by the OECD to “review” their trusts by using court remedies to create fairness. At least one jurisdiction we will be discussing has resisted this pressure.
In this article, I will be talking about what a real trust is meant to do and indeed why every wealthy person needs one. You will also understand why protecting your assets using trusts is one of the best options for families and individuals.
What does a trust do?
I once had a client in Latin America who had one official wife and approximately 15 mistresses in different cities, half of whom had children, not to mention numerous illegitimate and unknown children in various parts of the continent. This, in itself, is not unusual for the wealthy Latin American lover, what is unusual is the number. This client was close to becoming a billionaire and, therefore, could afford his vices.
Such a situation would in normal circumstances cause the erosion of his fortune via claims from his wife, his mistresses, and the children; indeed, these claims could range from anything like a division of the assets to maintenance for their educational needs to, in some cases, neglect claims. If he were to die, there could be claims for inheritance and (as is usual in Latin America) even falsified DNA records and corrupt judges.
You see, in Latin America, like in many countries, the hunt for rich husbands (usually but of course also wives) is a blood sport. If your grandfather suddenly falls for that gorgeous 21-year-old nurse with the huge sunglasses, it may be that the family fortune would be tied up in litigation for years, especially if she gives him children (sometimes, even if these children are not his own, as is often the case).
The solution for all families who are properly advised is simple: place the family assets in a family trust. Thus, you will get the best asset protection and will preserve the family´s wealth for generations.
If the trust is properly structured and in the right jurisdiction, the following will definitely occur:
- No creditor, including the tax collector, assignee in bankruptcy, and certainly no legal or extramarital wife, girlfriend, boyfriend, child, or indeed anybody can claim against the trust.
- The trust can exist forever (if properly drafted to roll over into new trusts).
- The beneficiaries (in this case, the creator) can use the trust’s assets by various mechanisms such as loans to live the usual lifestyle so that the yachts, mansions, bank accounts, businesses he effectively controls belong to the trust but in a manner where in law he does not own them. As Rockefeller famously said: “Control everything, own nothing.”
What is the best jurisdiction?
The key to choosing the best jurisdiction is to make sure that the Court where the trust and the trustees are located (the situs or jurisdiction of the trust) has almost no power to set aside the trust, no matter how unfair it may be to everyone else.
Now, to most courts and indeed most people who follow socialist or communist philosophies, the trust is the most immoral instrument on earth.
Imagine if you have a trust set up 20 years ago before you were married and it has 1 billion USD in it and your wife gives you children, sacrifices her entire life for you cooking and cleaning, and all of a sudden you find a younger wife and throw her out of the house owned by the trust. She ends up starving on the streets of Guatemala, Peru, or wherever with the children, and she goes to court because her child needs and operation for cancer.
Sounds horrible, doesn’t it? Indeed, any judge would be tempted to do something to at least set aside the trust or give her some relief from your trust income.
Unfair as it may seem, if the trust is in the right jurisdiction, there is nothing, absolutely nothing the judge can do, even if he or she wants to.
I have used an outrageous example, which, in fact, has occurred in the world many times. The philosophy behind this time of legislation is that what you do with your assets is a moral issue and not a legal one where can we draw the line.
For example, what if your wife cheated on you prior to you leaving her? What if the grown children hated you? In matters of money, many believe the State should not interfere; especially, in cases where the judiciary is corrupt and can be bribed to set aside the trust.
So, what are the best jurisdictions for the trust? I can say that, although numerous territories recognize the trust, there are actually very, very few who give the Court almost no power to set aside the trust. These include St. Kitts and Nevis, The Cook Islands, and Belize.
While it may be fair to say that these three jurisdictions are in many ways similar, we are a little biased because our parent company has the oldest trust company in Nevis. We chose Nevis because, after detailed research on the world´s trust territories, we found Nevis to be not only one of the top (if not the top) but also to be highly cost-effective.
Even the Cook Islands, with its famed ability to ignore foreign courts, allowed one of its trusts to be broken, but Nevis never has. We can safely say that Nevis offers the best asset protection structure in the world.
Why St. Kitts and Nevis trusts?
Nevis is a small island in the middle of the Caribbean with very little going for it, except having the best trust legislation available anywhere.
Indeed, there have been a series of cases in the 1970s that were filed by the US Internal Revenue to try and set aside trusts whose beneficiaries had allegedly defrauded the State. The US Government failed and has not really tried since. To be fair, they also failed on similar legislation in the Cook Islands.
The legislation specifically designed to create rock-solid asset protection was the Nevis International Exempt Trust Ordinance of 1994, which was later amended in 2020. Some of its highlights include:
- Rule against perpetuities it’s not applied.
- Exemption from taxation and exchange controls (only if said transactions take place with non-residents).
- An International Exempt Trust (IET) will be valid, even if it’s considered invalid according to the law of the settlor’s domicile or place of current incorporation.
- Exclusion from forced heirship rules.
- Exclusion from the Statute of Queen Elizabeth.
- The data required for the registration only include the trust’s and the trustee’s names, and the office address.
- You can be both the settlor and the beneficiary, even the protector as well.
- The trustee may be either a Nevis offshore company or a trust licensed company.
- Charitable trusts are allowed.
- If there is a cause of action on the trust, it will not be considered fraudulent if it was created up to 2 years before the date.
- In case of defrauding accusations, the creditor has to prove evidence considered clear and convincing.
One of the requirements of trusts in St. Kitts and Nevis is to have net assets of at least XCD 540,000 (USD 200,000), which is a condition stablished by the Financial Services Order from 1997. This applies to applicants that want a trust for both unrestricted and restricted businesses (in this last case, the amount required is XCD 54,000 or USD 20,000).
Besides, a bond of USD 100,000 is required to initiate an action against the property of the trust. It used to be USD 25,000 but it was increased with the 2009 amendment of the Nevis International Exempt Trust. Keep in mind that an IET has to pay an annual fee for registration of USD 220.
To summarize the advantages in simple language:
- Nevis does not recognize foreign judgements against the trust, so you have to come to Nevis.
- When you come to Nevis, if the trust was established two years before any existing claim, there is nothing a judge can do so you get thrown out.
- If less than two years, you have to post a bond of USD 100,000 and have absolutely clear proof that the trust was created in order to defraud that particular creditor and be prepared to argue your case in Nevis law (good luck).
Sounds like trying to go through the looking glass, and it is.
Trust law originated in the UK which enacted “The statute of frauds.” This allowed the development of the law that claimed that even if you set up a trust 20 years ago but anticipated a creditor event, it could be the case that trusts could be set aside for trying to avoid creditors. Obviously, UK trusts and those based on this statute and those that allow the Court to stick their sticky fingers into the trust are dangerous.
Case law, as we will see below, in many countries has allowed judges to decide according to their own often delusional conceptions of fairness as to what can or cannot be set aside. In the United States, sadly, this has also been the case, so it is an exercise in confusion to actually request an American lawyer to tell you how the trust can protect you in cases of so-called fraud or perceptions of fraud (whatever that word may mean).
Divorces in London
During a divorce, many family courts in the UK are allowed to violate trusts when they consider these have been unfair. The legally binding nexus of this type of protection structure is overlooked when the Court allows divorcing spouses the privilege of demanding huge stakes of the offshore trusts, even when these have been settled legitimately for future generations.
In the Prest v. Prest case from 2013, the courts pierced the corporate veil in the Isle of Man. How? The Court in London is even allowed to set aside dispositions by offering binding orders using Matrimonial Causes Act s37 and the Insolvency Act s423.
US and bankruptcy
What can happen if there’s bankruptcy in the US? Well, trust law tends to be favorable to the official assignees. The trust will be set aside if there is proof that the settlor is still receiving benefits from the trust, as it occurred with Duttle v. Bandler and Kass back in 1992 (in this case, the settlor also tried to hide the assets).
There is another crucial term that must be considered regarding trusts in the United States, the spendthrift trust. This is considered to be a structure in which one fund is provided for the benefit of another, beyond the reach of creditors.
If the entities consider it to be such a trust, it must be unwound. This occurred in a 1998 case, In Re Brooks, in which a woman was depositing cash into trusts located in Jersey and Bermuda and, although the trusts were supposed to be irrevocable and administered according to the trustee’s objectives, the judge invoked Connecticut law under public pressure and the trust was terminated.
How to protect your assets using trusts? The important thing is to ensure that your trust is properly drafted and in the right jurisdiction. I would say there are 5 main rules:
- Choose the right jurisdiction, this is the most crucial step.
- Draft the deed in such a way (along with a professional trust expert) that if there is a court action you are not seen as having control.
- Make sure your trust goes through all the legal formalities of having accounts, appropriate trust minutes, and the proper trustees in charge of the trust assets.
- Don’t tell anyone about your trust and where it is located.
If you make sure to accomplish all steps and go through the process with the support of experts, you won’t have any legal issues with your trust. Not now, not in the near future. Achieve a successful asset protection structure by working along with professionals.
At Mundo, we are ready to help you. We have more than 20 years of experience. Contact us and find out how to protect your assets using trusts.
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