IRS Reporting and International Asset Protection Trusts

This “Low Profiler” trust has the benefits of being foreign without the IRS reporting requirements

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.

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.

   For a Low Profiler trust document from my book Asset Protection Strategies and Forms, see my article International Asset Protection Trust.

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.