International Asset Protection Trust

The Low Profiler, with requirements, drafting instructions, and
implementing language.

by Alan R. Eber

Excerpted from Asset Protection Strategies & Forms

A Low Profiler is a foreign trust that is a domestic trust for IRS reporting purposes until perhaps a lawsuit is threatened and the foreign trustee is given the discretionary power to fire the trustee in the jurisdiction of the threat; that trustee may or may not exercise it. If he does, the U.S. protector can still “negate” his action.

Thus, the “Low Profiler” takes advantage of all of the benefits of being foreign, and yet is exempt from IRS reporting requirements.

That is, these trusts are all tax-neutral to the U.S. Settlor.

The “Low Profiler” is most useful for those clients who:

• Do not want to spend the time and money involved in filing IRS reports.

• Are concerned that filing will raise their IRS profile.

• Fear that creditors will obtain their filing.

• Want no trace of their IAPT to be publicly available until after they are in litigation and only then, if and when the U.S. trustees are removed, does the trust turn foreign for IRS reporting purposes and only then does it need to begin to file the 3520s and 3520As.

§5:161     Use Caution With This Type of Planning

There are differences of opinion about the use of the Low Profiler.

Some knowledgeable attorneys believe that moving the trust offshore after a challenge has arisen is a fraudulent transfer.

I disagree because:

• First, the person being sued (the settlor) is not involved in the transfer.

• Second, no U.S. person is directly involved in the transfer.

However, the practitioner, because of the differences of opinion in the profession, should review the law carefully.

In addition, some knowledgeable attorneys believe that unless the triggering mechanism is carefully thought out, the technique will draw a request by the service for IRS Forms 3520 and 3520-A.

Some believe it does not work under any conditions. I hold that it does work, based on the following Treasury Regulations:

The court test is not satisfied if the trust states that if a creditor attacks, a lawsuit is filed, or the court attempts to assert its jurisdiction over the trust, the trust will automatically migrate from the U.S. [Treas. Reg. §301,7701-7(c)(4)(ii) (emphasis added).]

The trust is not subject to an automatic migration provision described in paragraph (c)(4)(ii) of this section. [Treas. Reg. §301.7701-7(c)(3) (emphasis added).]

Automatic migration provisions. Notwithstanding any other provision in this section, a court within the United States is not considered to have primary supervision over the administration of the trust if the trust instrument provides that a United States court’s attempt to assert jurisdiction or otherwise supervise the administration of the trust directly or indirectly would cause the trust to migrate from the United States. [Treas. Reg. §301.7701-7(c)(4)(ii) (emphasis added).]

If Treasury wanted to say “any migration” it could have. Instead, the Regulations use the phrases “automatically migrate” and “automatic migration provision” and “would cause the trust to migrate.”

I believe that this technique works as long as the clause is drafted so that the action (which is always discretionary with the trustee, not mandated) can only be taken, after the right to take the action arises and the discretionary right arises. Thus, the action is not automatic; it is always “discretionary” with the trustee.

§5:162     Trust Filing Requirements

If a trust is “foreign,” both IRS Forms 3520 and 3520-A must be filed.

• Form 3520 “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” This form reports transfers “to” and distributions “from” a foreign trust.

• Form 3520-A “Annual Information Return of Foreign Trust with a U.S. Owner.” This form reports all distributions to a U.S. beneficiary from a foreign trust.

Forms:

CD5-13 IRS Form 3520 (Transfer to Foreign Trust)

CD5-14 IRS Form 3520-I (Instructions)

CD5-15 IRS Form 3520-A (Foreign Trust Annual Return)

CD5-16 IRS Form 3520-A-I (Instructions)

§5:163     Two Tests Determine Whether a Trust Is Foreign

A trust that is set up in a foreign country is not necessarily foreign for U.S. tax purposes, and a trust set up in the United States is not necessarily domestic for U.S. tax purposes.

A Trust must meet two IRS requirements to be a U.S. Trust according to the Safe Harbor rules. [Treas. Reg. §301.7701-7(c)(1).] If it fails either of the two tests, it is a foreign trust.

Test 1: The Court Test

A court within the U.S. must be able to exercise primary supervision over the trust’s administration. [Treas. Reg. §301.7701-7(a).]

However, if both a United States court and a foreign court are able to exercise primary supervision over the administration of the trust, the trust meets the court test. [Treas. Reg. §301.7701-7(c)(4)(i) (D).]

The court test is not satisfied if the trust states that if a creditor attacks, a lawsuit is filed or the court attempts to assert its jurisdiction over the trust, the trust will automatically migrate from the U.S. [Treas. Reg. §301.7701-7(c)(4)(ii).]

Test 2: The Control Test

One or more U.S. persons must have the authority to control all substantial decisions of the trust.

The term control means having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions. To determine whether United States persons have control, it is necessary to consider all persons who have authority to make a substantial decision of the trust, not only the trust fiduciaries. [Treas. Reg. §301.7701(d)(1)(iii).]

Note:

A U.S. protector can negate any decision made by a non-U.S. trustee and control by the veto power any disagreements between the U.S. and foreign trustee.

This test is not met if a non-U.S. person has the ability to remove, add, or replace a trustee. [Treas. Reg. §301-7.7701(d)(4). Example (4).]

The test is also not met if there is an automatic migration provision.

Automatic migration provisions. Notwithstanding any other provision in this section, United States persons are not considered to control all substantial decisions of the trust if an attempt by any governmental agency or creditor to collect information from or assert a claim against the trust would cause one or more substantial decisions of the trust to no longer be controlled by United States persons.

[Treas. Reg. §301.7701-7(d)(3) (emphasis added).]

Note:

An “attempt” by itself need not cause “one or more substantial decisions . . . to no longer be controlled by United States persons.” The attempt may give the trustee discretion to remove the U.S. trustee, but the “attempt” itself does not cause the U.S. trustee to lose control. Even if in his discretion, the foreign trustee “fires” the U.S. trustee, the U.S. trustee is not removed unless the U.S. protector does not object.

§5:164     Drafting a Low Profiler

To draft a Low Profiler, set up a foreign trust that has all of the following:

• A domestic trustee

• A domestic protector

• A foreign trustee

The foreign trustee is assigned “custodial” tasks and the U.S., trustee is designated the “Managing Trustee.”

If an “Event of Duress” occurs, the trustee in the non-Event of Duress country (provided the protector does not negate his decisions) can terminate the trustee resident in the Event of Duress country.

Thus, upon an “Event of Duress,” one of two things can happen:

• The U.S. trustee resigns. When the U.S. trustee resigns, the foreign trustee is in charge (the U.S. protector can only negate, not propose, action). The issue here might be that by resigning, the trustee caused the Low Profiler to no longer be subject to the U.S. courts. Is that in itself inappropriate or could it be considered an act by a U.S. domiciliary/citizen to deprive the U.S. court of jurisdiction?

• The foreign trustee removes the U.S. trustee. If the trust permits the foreign trustee to remove a domestic trustee, this avoids the need to have the domestic trustee resign (which may subject the trustee to sanctions). However, if the foreign trustee can fire the U.S. trustee, even discretionarily, perhaps the trust fails the control test. To avoid this line of thinking, give the U.S. protector the right to veto or negate the foreign trustee within a reasonable period of time. Therefore, all substantial decisions are made in the U.S. It would be a U.S. protector’s decision to not negate and thereby allow U.S. Control to cease. But, unlike the trustee, the protector would not have to initiate an action, only fail to do something when the foreign trustee fires the U.S. trustee.

With this trust we:

• Set up a trust in a foreign domicile.

• Move assets outside of the U.S. (but the U.S. trustee has control then over a greater than $10,000 non-U.S. bank account. Discuss his reporting position with his accountant (or place them into the Trust’s accounts in the U.S.).

• Hire a foreign trustee.

• Open a foreign bank and brokerage account, at least as a backup in case of need and fund them with under $10,000.

• Do not file with the IRS because we are considered for IRS reporting purposes to be a U.S. trust.

§5:165     Determinations

The attorney drafting the Low Profiler needs to determine:

• That a court within the U.S. exercises primary supervision over the trust’s administration.

• That U.S. persons have the authority to control all substantial decisions of the trust.

The attorney must be sure that:

• U.S. trustees and protectors clearly meet the broad definition of a U.S. person.

• The all substantial decision test is satisfied.

• Those powers granted to the U.S. protector and to the U.S. trustee are adequate to maintain the trust as a U.S. trust.

(d) “Event of Duress” means:

(i)  the receipt or attempted service of any communication by a court administrative tribunal or similar governmental or quasi-governmental agency in any jurisdiction under which any person seeks relief or remedy for himself or any person by means of:

(1) the assertion of a claim adverse to the Trustee over any property held in the Trust Fund;

(2) the request for an order or instruction to a Trustee or custodian of any property in the Trust Fund in contravention to the provisions of this Agreement including the provisions allowing the Trustees to exercise any discretion; or

(3) any request for information concerning the origin, receipt, management, administration, investment, distribution, or encumbrance of property held in the Trust Fund with a view to the assertion of a claim against or the establishment of a receivership or other like arrangement over the property of the Trust Fund that is in any way materially adverse to the exercise of the powers of management, administration, investment and distribution of the Trustees under the provisions of this Agreement;

(ii) the mandatory replacement of Trustees or the placing of limitations on the powers of those Trustees other than in accordance with the terms of this Agreement;

(iii) the threat of or actual suspension or abrogation in whole or in part of this Trust, or any contract with a party involved in the Trust;

(iv) the threat of or the actual compulsion of the Trustees to sell, transfer or otherwise dispose of Trust Fund assets in a manner inconsistent with the terms and provisions of this Agreement.

(k) On the happening of an Event of Duress, the Trustees who are not domiciled in the country where the Settlor is domiciled shall have the power to remove the Trustee or Trustees from office who reside or are domiciled in the country where the Settlor is domiciled. No powers, authorities, benefits or discretions granted to the Trustees so removed shall survive their removal. The Trustees removed from their office under this clause shall be divested of the title to any assets belonging to the Trust Fund effective immediately on their removal, with such assets being vested in the remaining trustees. Removal pursuant to this power shall be effective immediately the notice of the Trustee’s or Trustees’ removal is received by that Trustee or Trustees, or by the Protector. In such an event the Trustees exercising this power (which may only be exercised by the remaining Trustees by their unanimous action if there shall be more than one such Trustee) shall have the sole power and authority to designate the successor or successors to the Trustee or Trustees who are so removed, or to otherwise determine in their sole and absolute discretion that there shall, for the time being or for any time, not be a successor or successors in office to the Trustee or Trustees so removed. The determination of the Trustees exercising this power as to whether or not an Event of Duress has occurred shall be conclusive and binding on the Beneficiaries of this Trust.

35.0 Custodian Trustee

(a) The Protector, or if there is no Protector, the Trustees, shall have the power to appoint any one of the existing Trustees, or any other person, to be a custodian trustee (the “Custodian Trustee”) pursuant to section 19F of the Act by signed declaration in writing.

(b) On such appointment being made and accepted the provisions set out in this Part Seven shall apply, notwithstanding any other provision of this Agreement to the contrary.

(c) Subject to Clause 35.6, title to all assets comprising the Trust Fund shall be transferred forthwith to and held by the Custodian Trustee as if the Custodian Trustee was the sole Trustee.

(d) The appointment of the remaining trustees (other than the Custodian trustee) shall be varied to the extent that such trustees shall be re-designated as managing trustees (the “Managing Trustees”), and their powers and duties shall be varied in accordance with the terms of this Part Seven.

(e) Subject only to the provisions of Clause 14, the management of the Trust Fund and the exercise of all other powers, rights, duties and discretions exercisable by the Trustees in accordance with the terms of this Agreement, or implied by law, shall be vested in the Managing Trustees to the exclusion of the Custodian Trustee as fully and effectually as if the Managing Trustees were the sole Trustees. All decisions of the Managing Trustees shall be minuted and copied to the Custodian Trustee for its information.

(f)  The sole function of the Custodian Trustee shall be to get in and hold the Trust Fund in its name, and to invest the Trust Fund, and dispose of its assets as the Managing Trustees in writing shall direct. In performing this function, the Custodian Trustee shall have all the rights, powers and discretions conferred on the Managing Trustee and Trustees generally under this Agreement and the Act as are required to allow it to perform its functions. In the interests of certainty, but not by way of limitation of the above, the Custodian Trustee:

(i)  shall have the power to delegate the performance of any part of its function to any person;

(ii)  may permit assets to be held by or in the name of the Managing Trustee to facilitate the Managing Trustee’s management and administration of the Trust Fund or as otherwise directed by the Managing Trustee;

(iii) shall have the exclusions of liability and rights to indemnity as are set out in Clauses 26 and 27 of this Agreement;

(iv) shall not be liable to any person, including any beneficiary, for acting on any direction of the Managing Trustees;

(v)  shall not be liable for any act or default on the part of the Managing Trustees;

(vi) shall have the same rights to remuneration as conferred on the Trustees pursuant to Clause 22 of this Agreement;

(vii) may resign, be removed and be replaced in the same manner as a Trustee, as provided in this Agreement; and

(viii) shall have the power to remove the Managing Trustee or Trustees from office on the same basis as set out in Clauses 25.10 and 25.11 for the removal of Trustees.

(g) For the purposes of this Part Seven, a direction given by the Managing Trustees must be given by them unanimously where there is two, or may be given by a majority where there is more than two.

(h) The Custodian Trustee is to concur in and perform all acts necessary to enable the Managing Trustees to exercise their powers of management or any other power or discretion vested in them. If the Custodian Trustee is of the opinion that any direction of the Managing Trustees conflicts with the terms of this Agreement or the law or is otherwise objectionable, the Custodian Trustee may, without being under any obligation to so do, refer the direction back to the Managing Trustees with notice of such objection. The decision and direction of the Managing Trustees in response to such notice shall be final and the Custodian Trustee shall act in accordance therewith. The Custodian Trustee is entitled to assume that any direction of the Managing Trustee has been made in accordance with the law, and with the terms of this Agreement.

(i)  All actions or proceedings concerning the Trust Fund shall be brought or defended in the name of the Custodian Trustee at the written direction of the Managing Trustees, and the Custodian Trustee shall not be liable for the costs thereof apart from as are available under the Trust Fund.

(j)  No person dealing with the Custodian Trustee shall be concerned to inquire as to the concurrence or otherwise of the Managing Trustees, or be affected by notice of the fact that the Managing Trustees have not concurred.

Alan R. Eber is a pioneer in the asset protection field and a highly sought after speaker on estate and wealth planning and protection.  Since 1974, Mr. Eber has assisted clients in establishing a wide variety of wealth preservation structures. Currently, Mr. Eber is presenting seminars on Advanced Asset Protection and Techniques and Domestic and International Trusts for the National Business Institute (NBI), the Lorman Group, and numerous other groups.  He is the author of Asset Protection Strategies & Forms, from which this article is excerpted.