          
          
          
                                  Trusts
          
          
               A common form of asset protection is a "trust."
          
               Asset protection planning is simply the process of
          organizing one's assets in advance to safeguard them
          from loss or dissipation because of potential risks. 
          One method of protection can be found in a trust which
          severs legal and beneficial title to property by
          investing legal title in a trustee and equitable title
          in the beneficiary. 
          
               The trust is a popular but often complex legal
          device employed by citizens of English common law
          nations in order to achieve various purposes such as
          protecting heirs and avoiding probate.  A trust can
          provide a lifetime income and control of the post-
          mortem disposition of wealth in an advantageous way for
          the benefit of a spouse, child or other individual.  
          
               In its simplest definition, a "trust" is a
          property interest held, used and/or cared for by one
          person for the benefit of another.  The earliest known
          example is an Egyptian testamentary trust part of a
          will written in 1805 B.C.  In the Middle Ages, when the
          Knights Templar acted as international financiers, the
          trust was a common method used for royal and
          ecclesiastical investors who wished to shield their
          identity.
          
               Over centuries the concept of the trust has been
          greatly refined by use and development, especially in
          British Commonwealth nations and the United States. 
          Court decisions have also played a large role in
          shaping U.S. trust law down to the finest of details,
          often with major legal and tax consequences.
          
          
          Domestic Trusts
          
               Decades ago the trust was promoted by U.S.
          investment advisers and lawyers (whose assistance has
          become essential for trust creation) as one of the best
          methods for people of wealth to both avoid creditor or
          other attacks and guarantee the future use they intend
          for their property after death.  Unfortunately for many
          U.S. investors and/or their heirs, many of these trust-
          advocating financial advisors provided legally faulty
          trust plans and implementing documents later nullified
          by state or federal court decisions or U.S. Internal
          Revenue Service rulings beginning in the 1970s.  In the
          U.S. there have been a host of bogus "trust experts"
          offering supposedly fool-proof trust arrangements which
          the courts subsequently found to be non-binding or
          illegal.
          
               Depending on applicable national and local tax
          law, properly created trusts often can avoid
          inheritance taxes which diminish or destroy the value
          of property sought to be passed to the next generation. 
          But the attorney you choose to create your trust must
          know U.S. federal and state trust and tax law
          thoroughly, or you and your heirs could not only lose
          money and assets but be tied up in legal and tax
          battles for years.
          
          
          Trust Creation
          
               The person who creates a trust, usually called the
          "grantor" or "settlor," conveys legal title to his
          property or money (the "corpus") to a third party (the
          "trustee"), perhaps a trusted friend, professional
          financial manager or a bank which has a trust
          department, to be managed or invested by the trustee
          for the benefit of a named person(s) or other
          "beneficiary."  A document the grantor must sign
          describing the terms of the trust, called a
          "declaration" or "indenture" gives specific details of
          the manner in which the trust is to be administered and
          how its income is to be distributed, either or both
          during the grantor's life or afterward.  
          
          
          The Testamentary Trust
          
               Trusts can be created while the grantor is living
          ("inter vivos") but the most common form is a
          "testamentary trust" included by a person in his last
          will, to take effect at death.  This allows provision
          for loved ones, especially when the grantor has concern
          about the beneficiary's ability to manage his or her
          own affairs, i.e., the so-called "spendthrift trust"
          the assets of which are immune from creditor attacks.
          
               While popular, testamentary trusts have distinct
          disadvantages often unexplained by legal advisors:
          estate and income taxes must be paid at the death of
          the grantor although successive estate tax levies often
          can be avoided as trust property passes to
          beneficiaries and their heirs in later years;
          testamentary trusts are subject to initial probate and
          sometimes to continuous court supervision which often
          entails great legal expense; all the activity of the
          testamentary trust and its trustee is a matter of
          public record and scrutiny.
          
               In addition to trusts created in wills, trusts can
          be created formally ("express trusts") by contract, or,
          when real or personal property is involved, by a deed
          of trust.  An "implied trust" may result in the absence
          of a formal trust when a court finds its creation from
          factual circumstances.
          
               Under the law legal title and ownership to the
          trust corpus passes from the grantor to the trustees. 
          Control of these assets is vested in the trustee(s) so
          long as the trust exists.  The trust beneficiary
          receives only an equitable title to the income or
          property of the trust as limited under the terms of the
          trust declaration.  Powers and duties of a trustee can
          be broad or narrow according to the declaration but
          should carefully reflect the grantor's intentions as to
          how the trust is to be used. 
          
          
          Living Trusts: Revocable and Irrevocable
          
                 A "living trust," in contrast to a testamentary
          trust, is created by the grantor to take effect and
          operate immediately while he or she is still alive.  It
          avoids many of the liabilities of a testamentary trust.
          
               A "revocable living trust" is a paper entity
          sanctioned by Anglo-American law to which a grantor can
          transfer his title to assets in any amount and of any
          kind, real, personal or mixed; money, insurance
          policies, a home, auto, boat, shares of stock, or
          ownership of a corporation.  Usually there are several
          trustees named to manage the affairs of the transferred
          property which is held in the name of the trust. 
          Because it is revocable, the grantor retains the power
          during his life to vary the trust terms, withdraw
          assets, or even end the trust by formal revocation. 
          But upon the death of the grantor, the trust which
          avoids probate immediately becomes irrevocable.  Under
          its terms it is then administered by the trustees for
          the benefit of the named beneficiaries.
          
               There are real benefits to a revocable living
          trust, the most obvious being the grantor's ability to
          manage the trust assets during his life and to end the
          trust whenever changed circumstances dictate.  Other
          than his ability to arrange for the desired provision
          for family or others upon his death, the grantor
          receives no real immediate financial benefits from such
          a trust.  But for a spouse or heirs as beneficiaries,
          there are many benefits in addition to acquiring income
          from trust assets.  These advantages include: 
          
               1) avoiding judicial probate with attendant
          expense and time delays (trust property is not included
          in the grantor's personal estate); 
          
               2) allowing the uninterrupted operation of a
          family business placed in trust; 
          
               3) avoiding public scrutiny of personal financial
          matters;
          
               4) causing no temporary stop in income for
          beneficiaries during probate after death; 
          
               5) allowing the trust settlor a choice of the most
          advantageous law to govern the trust which can be
          created in any political jurisdiction.
          
          
          Trust Tax Advantages
          
               Under United States tax laws, income and assets of
          a revocable or irrevocable trust are subject to state
          and federal death taxes.  But such trusts can be
          arranged so that upon the subsequent deaths of named
          beneficiaries, or their heirs, further death taxes can
          be avoided, a real but often distant advantage for the
          trust beneficiaries.  You should know that there exists
          a substantial body of American case law in which the
          I.R.S. has successfully challenged some trusts as being
          no more than evasive devices seeking to avoid tax
          liability.
               
          
          The "Business Trust"
          
               One type of trust which once was popular in the
          United States is the so-called "business trust."  This
          hybrid legal device was designed to operate a business
          and have it produce a profit as compared to other
          conventional trusts which mainly sought asset
          protection and passive income.  The business trust is
          an association of trustees who actively hold title to
          property and operated a business under the terms of a
          trust agreement for the benefit of shareholders who are
          the owners of the trust and share in profits.  This
          arrangement is somewhat like a corporation but is
          easier to form since it requires only a signed
          agreement.  Since this trust is entirely private it can
          avoid many government reporting requirements and
          conceal the actual owners.  
          
               Obviously this arrangement does little to provide
          asset protection and thus the complicated business
          trust has nothing to do with asset protection. 
          
          
          Trust Disadvantages
          
               U.S. domestic trust law restricts the nature and
          extent of benefit and/or control that a settlor can
          retain after creating a trust.  The law says when a
          settlor fails truly to place his former assets out of
          his own reach then those assets may not be out of reach
          of the settlor's creditors, past, present or future. 
          This judicial doctrine has often been used, years
          later, when a court examines the way in which the trust
          property was actually handled, to upset even the best-
          intentioned trust plans.
          
               In addition courts are hospitable to suits by
          creditors of the settlor who allege the trust was only
          a sham to avoid payment of just debts or judgments. 
          
          Points to consider:
          
               1) Income, Interest, and Dividends:  
          
               The financial productivity of a trust will depend
          on the nature of the assets placed in trust, the
          restrictions placed on trust management and the
          financial acumen and ability of the trustees.  If it is
          a revocable or living trust, the settlor who creates
          the trust will probably be around for a time as one of
          the trustees; he retains partial management, the power
          of revocation and can change assets or trust
          provisions.  If it is a testamentary trust, the settlor
          is deceased and the beneficiaries can only hope the
          chosen trustee is a good financial manager.  The
          creation of a trust does not guarantee any particular
          level of income.  Trusts have thrived financially, but
          they also have failed because of bad management or even
          illegal or dishonest acts by those in charge.
          
               2) Reporting requirements: A living trust
          generally need not be reported but many U.S.
          jurisdictions require some registration of trust
          creation.  A testamentary trust, as part of a will, is
          subjected to probate court review and approval and as
          such comes under public scrutiny.  If a trust is
          legally challenged by a party in interest or by the
          I.R.S. it can become the subject of prolonged court
          proceedings in the public spotlight.
          
               3) Exchange controls: If the U.S. imposes
          currency, price or other economic controls an existing
          trust, either domestic, or a foreign asset protection
          trust, and its income will undoubtedly be affected in
          myriad ways. 
          
               4) Protection from creditors: Poorly created
          Anglo-American trusts often have been subjected to
          successful state and federal court attack by creditors
          or the I.R.S. alleging the device is simply a debt or
          tax avoidance mechanism.  Using broad principles of
          common law, U.S. courts have declared many trusts legal
          nullities based on a wide variety of technical grounds
          thus stripping the settlor and his assets of creditor
          protection.  American courts have invalidated trusts,
          among other reasons, because there was insufficient
          independence on the part of trustees; the settlor
          retained actual control of the "irrevocable trust"
          assets or income; there was assignment of pre-tax
          personal services and related income to a trust; the
          trust was found to be a "sham devoid of economic
          reality," and; on the general grounds that the trust or
          its objectives were "against public policy" as in the
          case of the famous recent Girard trust in Pennsylvania. 
          (After more than a century of operation and millions of
          dollars in grants, the Girard trust provision providing
          educational scholarships to needy male students was
          found by a state court to be "against public policy"
          since it did not include help to needy females).
               In recent years American courts have begun
          imposing added fines and penalties after taxes on those
          found guilty of attempting to create trusts for tax
          avoidance.   Revocable trusts have proven especially
          vulnerable to attacks by determined creditors and often
          are treated by U.S. courts as additional assets of a
          debtor although such trust assets are more difficult to
          attach.
          
               5) Taxation: Most trusts are subject to U.S. and
          state death taxes at the time of the settlor's passing
          although they can be drafted to avoid further death
          taxes when beneficiaries or later heirs die.  U.S.
          income taxes are imposed on trust income, which is
          imputed to the settlor in revocable trusts, just as on
          any other ordinary income he might receive.
          
               6) Convenience:  The creation of a trust is a
          delicate and complex matter requiring expert legal and
          tax advice, often in more than one country, as we have
          seen.  Because of highly technical provisions essential
          to proper trust creation, few laymen have the ability
          to judge the end product but must take the word of
          their legal advisors.  Similarly, trust administration
          must meet strict established legal and I.R.S. rules,
          regulations and reporting requirements or the trust may
          be subject to court attack and dissolution.
          
               Termination is also an issue.  While Anglo-
          American revocable trusts can be terminated at any time
          and testamentary trusts are revocable until the
          settlor's death, some other types of trusts are
          irrevocable regardless of changed circumstances.
          
               7) Cost of Creation: The creation and
          administrative cost of a trust can be huge, especially
          in the case of a testamentary trust which is challenged
          in court after the settlor's death or in the case of a
          foreign asset protection trust which will be examined
          in the next chapter.
          
          
          
          
