The Squire Organization, LLC - Asset Protection, Tax Planning, and Financial Privacy

The Charitable Beneficiary Offshore Trust System®

Recent Problems with Offshore Trusts

In recent years we have seen the traditional Offshore Asset Protection Trust come under attack from a variety of sources. It is not against the law to form an offshore trust, nor is it against the law to be the beneficiary of an offshore trust. But the Internal Revenue Service has decided to force the Grantor (the person who formed the Trust) and any and all Beneficiaries of the Trust to file declaratory statements describing their involvement. This puts the participants under the observation of the IRS, completely destroys the privacy element of forming such a trust, and seriously reduces the value the trust could have served as an asset protection program.

To make matters worse various Courts have been undermining the legal integrity of the Trust structure by setting aside a number of trusts as merely fraudulent shams to avoid liability. As such the Offshore Asset Protection Trust as a stand alone entity is no longer the ideal entity to use for asset protection due to the total lack of confidentiality caused by IRS disclosure requirements, and the animosity of the Judicial System. It most certainly is inappropriate for any efforts to legally reduce ones tax burden.

Fortunately, The Squire Organization, LLC has developed The Charitable Beneficiary Offshore Trust System® or (CBOT) that is a cost-effective yet comprehensive solution for asset protection and tax planning.

What is an Offshore Asset Protection Trust

Before we start discussing the solution to this problem, let us define more accurately the Offshore Asset Protection Trust. This entity goes under many names depending upon who is the provider, but in short, an Offshore Asset Protection Trust is a trust established by a Grantor with the intention of protecting the Grantor’s assets while at the same time providing the Grantor access to and control over those assets, and naming him or her as a beneficiary of the trust. This is done by placing clauses in the Trust that alienate the assets from the Grantor and any beneficiary should any liability and/or legal action be threatened against the individual in question, also known as a “triggering event”. In other words, you have complete and total control over the trust and the assets of the trust until such time as you become liable to someone else at which time you theoretically lose all control. The trust and its assets then come under the control of a successor trustee who will then refuse to pay out on any demands made by creditors against you. These trusts are usually formed in jurisdictions whose laws specifically provide for the safeguarding of the assets of such trusts. Often the Grantor is also named as the Trustee of the trust, with such position to be relinquished in the event of a “triggering event”.

In recent years the Offshore Asset Protection Trust has come under attack, and these attacks are proving devastating to those who have relied upon these trusts. First of all, the requirement that Grantors and Beneficiaries must declare their positions in the trust makes any effort at confidentiality impossible. Anyone who can get a copy of your tax return will know you have an offshore trust. Furthermore, the IRS takes a rather dim view of these trusts and will most likely audit Grantors and Beneficiaries of such trusts, even if the trusts were established only for asset protection purposes and all taxes are being paid.

A much more serious problem regarding the Offshore Asset Protection Trust is the fact that many have dramatically failed when challenged by Plaintiffs and other creditors. There are numerous cases in recent years where US Courts have refused to honor these trusts. In fairness, most of the trusts that have failed in Court have failed because of a rather amateur structuring of the trusts or in some sloppiness by the parties, but all the same the shift in the attitude of the Judicial System towards these trusts is unmistakable. Offshore Asset Protection Trusts are suspect, and the parties involved in them are therefore suspect.

Other Options

What is the solution? Many have decided to use offshore companies, since they are not trusts, to protect their assets. In recent years offshore jurisdictions who offer such companies have seen a dramatic rise in their use. But this is really not an effective means of handling the issue. Under the IRS Code ownership in such offshore companies must be disclosed (unless carefully structured) in the same way as offshore trusts, and once disclosed provide very little asset protection to the owner.

Another possible option is an interesting entity out of Panama called the Foundation. Under Panamanian law, the Foundation operates very much like a trust, but is classified as a not-for-profit corporation by the IRS. This is not really an accurate classification since the Foundation is not usually established as a not-for-profit company, but as an asset protection vehicle for an individual or group. But because the IRS inaccurately classifies the Foundation, the participants in a Foundation can benefit in many ways, at least for the moment. How long we can rely upon the state of confusion at the IRS is unknown.

Many wealthy individuals, families and groups have adopted the Panama Foundation as a replacement for the Offshore Asset Protection Trust. However, the Foundation is very unwieldy entity and very expensive to form and operate. Of even greater concern is the fact that the only reason that the Foundation is currently effective is because of the inaccurate entity classification structure developed by the IRS. All that is required to end the utility of the Foundation is for the IRS to update its entity classification criteria to more accurately deal with the Foundation, or perhaps to simply require greater transparency in regards to all charitable and/or not-for-profit entities. Furthermore, on a more practical level most Foundations are being incorrectly structured such that they do not even provide the protection that is currently available.

The Ultimate Solution

The ultimate solution available is a hybrid entity called the Charitable Beneficiary Offshore Trust System® (CBOT®). First of all let us define what a CBOT® does not do:

* The CBOT® does not attempt to hide assets in a poorly structured offshore company;
* The CBOT® does not utilize out-of-date trust schemes that no longer provide adequate asset protection or privacy;
* The CBOT® does not rely on a temporary inadequacy and confusion of the IRS as in the case of the Panama Foundation.

The Charitable Beneficiary Offshore Trust® is designed to work with the established rules and regulations propounded by the I.R.S. by meeting them and exceeding them.

The CBOT® works by first establishing a trust for the benefit of some worthy charitable purpose. This trust is designed to collect and hold assets for the benefit of the charitable purpose. All of the net income from the trust shall be distributed on behalf of the charitable purpose. As you will see later on, this is very important as this provides a great level of protection due to the fact that the trust is not organized merely to provide an artificial haven for those seeking asset protection and tax reduction, but actually serves a legitimate and separate charitable purpose.

At this point, the CBOT® is a stand alone entity that has absolutely nothing to do with asset protection or tax reduction strategies. It is simply a legitimate charitable trust that works to promote one or more charitable causes.

Under this system individuals choose to give donations to the trust. These donations will not be tax deductible, but will be valid and lawful all the same. Under current United States law an individual can give up to $13,000 a year to anyone without any tax consequences to either the donor or the receiver of the gift, and without having to make any declarations. A married couple can give $26,000.00.

Now it is at this point that the system becomes a useful vehicle to protect assets and reduce taxes. An individual chooses to donate money to a trust as described. We will refer to this person as the Donor. The funds from such a donation must be used by the Trustee of the trust to further the charitable interests of the charitable trust. The Donor has no say in what is done with the donation, nor how the trust is managed. This hands-off treatment is very important for asset protection purposes.

The next thing that happens under this system is that the Trustee will prudently invest some of the funds donated by the Donor by establishing an offshore entity to further the interests of the trust, and will appoint the Donor to some position of authority in the entity.

We advise the use of a United Kingdom Limited Partnership (UK LP). This little known entity is the ultimate “pass through” tax entity since all income is attributed to the limited partners without the need to file a partnership return in the UK. A UK LP is easy to establish, and once established requires zero reporting as long as there is at least one individual owner. If the limited partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no reports that need to be filed.

A UK LP is managed by a general partner with a non-economic interest and owned by non-voting limited partners with no rights to manage the UK LP in any way whatsoever. We advise that a Delaware Limited Liability Company (LLC), another effective “pass through” tax entity, be established as the General Partner, and the Donor will be the sole owner of this Delaware LLC. The UK LP will be owned by the Donor with a one percent (1%) Limited Partnership interest and the charitable trust with a ninety-nine percent (99%) Limited Partnership interest. We advise the use of the Delaware LLC to act as the General Partner for privacy and management issues.

The UK LP will have an initial bank account in the United States of America. As such, the Donor will not be required to declare his or her status as a signatory of a foreign bank account.

The Donor is now a humble employee of the Delaware LLC which acts as the General Partner of the UK LP. The Donor is not the Trustee of a Trust, nor the Beneficiary of a Trust. The Donor also does not own the UK LP, and is not a Director, President or other officer of an offshore company (positions that require disclosure statements on tax returns). The Donor is in total control over the UK LP, and in total control over all the assets that are held by the UK LP. Although the charitable trust technically owns most of the UK LP, the charitable trust does not have any control over the assets of the UK LP.

Because of this structure the Donor will not have to make any declarations to the IRS or any other organization. The Donor will have achieved true asset protection, virtually total tax reduction on future earnings of the UK LP, and an unequaled level of privacy. A Letter of Opinion supporting all the above statements will be issued by a respected United States lawyer and expert on offshore tax planning and given to the Donor to further protect the Donor from any possible negative consequences.

The end result:

* The CBOT® is a legitimate offshore charitable trust organized and operated for the benefit of a legitimate charitable purpose;
* The Donor makes a donation to the trust and becomes an employee of a wholly owned offshore subsidiary of the trust;
* The Donor will have complete control over a UK LP even though the Donor will not have control over the trust, and will not own an interest in the UK LP requiring declarations or disclosure.

All that is required is that the investment by the charitable trust in the UK LP provide reasonable returns for the benefit of the trust in the form of dividends or distributions. Any assets placed into the UK LP, if properly transferred, will be safe from creditors. Any and all income earned by the UK LP will be free of taxes unless the UK LP operates a business in a taxable jurisdiction. Since the United Kingdom has some of the best tax treaties around, it is very unlikely that any taxes will be due on traditional investment income. Only income tax on the salary actually paid to the Donor will be due. This will be determined by the Donor.

The Donor can benefit in many ways from being a humble employee of the UK LP. The entity may choose to fly him and his family to various locations to further the entity’s business interests. The UK LP may choose to provide scholarships to worthy children looking to go to college; children of the Donor perhaps. Or it may even establish various retirement programs which transfer funds into various types of pension programs for the employees. But underneath all this is the fact that the trust is providing a valuable charitable purpose, and the offshore entity is a legitimate operation independent from the Donor.

Remember, the charitable trust is not established for the benefit of the Donor. In fact it will most likely be in existence long before the Donor comes into contact with it. The charitable trust may very well receive many donations from many Donors creating numerous legitimate entities that are each operated by a separate Donor. In this way the structure is more viable since it is spreading the cost of operating and supporting the trust over many entities. This should be obvious as the entire goal and purpose of the trust is to raise funds for a charitable beneficiary. The more entities contributing, the more successful the purpose.

How do I Join?

This is the best part. Although the CBOT® system may seem somewhat complicated, in reality once it is established it will be very easy to operate. All that is required to take advantage of the CBOT® system is to make an initial contribution to the cause. When you make your non-tax deductible contribution to the CBOT®, you will be helping a charity that really needs your assistance, and you will be benefitting from the ultimate asset protection and tax reduction system in existence. There is nothing wrong with doing good and protecting your assets at the same time!

Would you like more information about the Charitable Beneficiary Offshore Trust (CBOT®) system?

Request more information at cbot@squireorg.com. A Squire Organization Consultant will be in touch with you.

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