Advanced Trust Presentation
WHAT IS A TRUST?
• A trust, at its core, is a financial relationship in which one party (the settlor) gives assets to a separate person ororganization (the trustee) to be held and managed for the benefit of a third party (the beneficiary).
WHY WOULD A PERSON WANT TO SET UP A TRUST?
✓ provide future financial security to children and other family members;
✓ for charitable purposes;
✓ for tax savings;
✓ as an improved wealth management too.
WHAT IS A TRUST COMPANY?
Trust companies do the TRUSTEE functions, following the orders ofthe Settlor or Director.
Private Trust Companies:
→ limited to a single family lineage, but often include multiplegenerations;
→ does not act for unrelated families or accept outside business.
Public Trust Companies:
→ solicits and accepts new accounts from unrelated families orindividuals;
→ holds title to almost any kind of asset a client might have, fromshares of private companies, to real estate, to investment accounts.
CHOOSING THE JURISDICTION
WHY SOUTH DAKOTA?
→ No State Tax;
→ Unlimited duration for Dynasty Trusts;
→ First Domestic Trust Protector Statute;
→ Allows Self-Settled Trusts combining with the Domestic Asset Protection Trust (DAPT);
→ Best Asset Protection for Discretionary Trusts (discretionary interest is not a property interest nor anentitlement).
LAND OF PRIVACY
✓ Possibility to eliminate any legal record of the Trust by simple request;
✓ Trust documents are not required to be registered publicly;
✓ Any legal proceedings that maybe brought against the Trust are automatically kept in private;
✓ Trustee has a duty to not disclose the existence of the Trust to any source (including beneficiaries) except with the consent of the Settlor.
SELF SETTLED TRUSTS
Also known as Asset Protection Trust, South Dakota has enacted legislation which prohibits judicial foreclosure and creditor attachment on beneficial interests intrusts, powers of appointment held by beneficiaries, and reserved powers by a beneficiary. Additionally, a power of appointment in a trust is specifically excluded as aproperty interest. South Dakota was the first state with a discretionary trust statute for asset protection.
South Dakota is one of a handful of states in the United States that provide creditor protection for self-settled trusts. This is a type of trust into which a client transfers assets and he ors he is the beneficiary. The client may retain a level of control over trustees or trust advisors, retain cert a indisposition rights to the trust, and the trust assets can still be protected from creditors.
WHEN ASSETS ARE PROTECTED?
Third-Party Trusts → An asset transferred into a South Dakota Irrevocable Trust settled by a third party receives protection from creditors immediately upon receipt of the asset by theTrustee.
Self-Settled Trusts → An asset transferred into a South Dakota Irrevocable Trust settled by a Grantor-Beneficiary of such Trust (aself-settled Trust) receives protection from creditors two calendar years after the date of receipt of the asset by the Trustee.
“CLEAR AND CONVINCING”
South Dakota has one of the shortest fraudulent conveyance periods at 2 years as well as a “clearand convincing” burden of proof as to the specific creditor. An intent to hinder, delay or defraud must be proved.
WHAT IS DECANTING IN A TRUST?Decanting is the act of distributing assets from an OLD TRUST into a NEW TRUST with NEW TERMS, for the benefit of one or more of the beneficiaries of the first trust, leaving behind all unwanted trust terms.
SOUTH DAKOTA LAWS FOR DECANTED TRUSTS: Provided that a de canting or court reformation is the latest event, a trust subject to a decantingin South Dakota will be effective for asset protection as of the date of the decanting where as a trust subject to court reformation in South Dakota will be effective for asset protection from the date of the asset transfer into the original trust.
WHEN SD LAW TAKES PRECEDENCE?
South Dakota versus Foreign Original Jurisdiction, a Three-Prong Test.
A provision stating that the laws of South Dakota take precedence isvalid, effective, and conclusive if all of the following are true (even for atrust created in a foreign jurisdiction):
• Some or all of the trust assets are deposited in South Dakota or physicalevidence of such assets is held in South Dakota and the trust is beingadministered by a qualified person;
• A trustee is a qualified person who is designated as a trustee under thegoverning instrument; and
• The administration, for example, physically maintaining trust records, occurswholly or partly in South Dakota. (SDCL 55-3-39)
SOUTH DAKOTA RECOGNITION OF A FOREIGN ORDER
Per the South Dakota Supreme Court, permitting domestication of a foreign order “does not mean that [South Dakota] must adopt the practices of other [jurisdictions] foren forcing judgments … as such measures remain subject to the even hand ed control of forum law.” (CleopatraCameronGiftTrust.2019)
In order to bring a law suit to a Trust and/or its Trustee, a plaintiff would have to domesticate the out-of-state/out-of country judgement but have such judgment or order enforced under the laws of South Dakota, which would take precedence.
The fact that the foreign liability-implicating incident resultingin a foreign judgment that it self would not implicate liability in South Dakota is relevant to the determination and enforcement of fraudulent transferin South Dakota.
SELF DIRECTED TRUSTSAND ACCOUNTS
Many Public trust companies are serving people interested in self-directed independent retirement accounts.
These financial vehicles allow an individual to make his or her own investment choices for a retirement plan. However, the Internal Revenue Service requires that a qualified trustee or custodian hold the IRA assets on be half of the IRA owner.
Enter public trust companies, many of which are playing administrative and custodial roles for individual trust sand do not invest or other wise manage trust assets.
WRITING THE “DEED OF TRUST”
TRUST REVOCABLE X IRREVOCABLE
• Revocable Trust: Allows Settlor to retain control of the assets during Settlor’ slifetime, including the power to dissolve the trust any time.
• Irrevocable Trust: Once the Settlor establish esthe trust, Settlor will technically lose control over the assets and can not directly change any terms or decide to dissolve the trust.
TRUST GRANTOR X NON-GRANTOR
• Powers that make a Grantor Trust:
• a reversionary interest in either the corpus or the income of the trust;
• if the beneficial enjoyment of the corpus or the income from the trust is subject to a power ofdisposition by the grantor (settlor) without the approval or consent of any adverse party
• certain administrative powers exercisable by the grantor (settlor) for the benefit of the grantor ratherthan for the trust beneficiaries, or powers exercisable in a nonfiduciary capacity, including:
– the power to deal with trust assets for less than full and adequate consideration;
– the power to borrow trust assets without adequate interest and security;
– other powers exercised in a nonfiduciary capacity by any person without the approval or consent of anyperson in a fiduciary capacity, including:
• power to revoke by the grantor (or grantor’s spouse);
• power to substitute assets of equal value;
• power to add charitable beneficiaries;
• Power to revoke the trust;
• Power to vote on companies held by the trust.
WHO IS THE TRUSTEE?
Trust companies come in two basic forms:
Private Trust Companies:
In a nutshell, private trust companies are family-based and have been the core of trust business until fairly recently. They are limited to a single family line age, but of ten include multiple generations. Aprivate trust company does not act for unrelated families or accept outside business.
Public Trust Companies:
A public trust company, in contrast, resembles a traditional bank trust departmentin someways; it solicits and accepts new accounts from unrelated families or individuals. It holds title to almost any kind of asset a client might have, from shares of private companies, to real estate, to investment accounts.
WHO IS THE DIRECTOR?
• May be one person or even a board;
• Is Settlor’s trusted person(or group of persons), who will act in the best interest of all trust fund. MUST BE A NON-ADVERSE PARTY, which means a person that doesn’t have beneficial interest in the trust and would not bead versely affected by exercise or non exercised his/her power. (Section672IRC)
• Must understand the trust deed and comply with the terms of the trust;
• Has the duty of fidelity to the trust and must act using diligence and prudence;
• Must seek for advise where necessary;
• May be removed in accordance with the trust deed regulations.
PROTECTOR is any person whose appointment as protector is provided for in the instrument. Such person may not be considered to be acting in a fiduciary capacity except to the extend the governing instrument provide so ther wise (SDCL55-1B-1).
Could be a person or an organization that:
• May have power to dismiss the Director any time;
• Maybe required his consent for certain actions of the Director;
• May terminate the trust;
• May Interpret terms of the trust instrument at there quest of the trustee;
• May Amend or modify the trust instrument.
US TRUST X FOREIGN TRUST
To be considered an US TRUST, the trust must be constituted under American Law (Jurisdiction Test) and the control (Trustee, Director or Protector) must be performed by an American person (ControlTest).
For US tax residents, the advantage of benefiting from a US Trust is that in come may be taxed according to the nature of the in come, which means that CAPITAL GAINS and QUALIFIED DIVIDENDS maybe taxed in the lower table from 0% to 23.8%. On the other hand, income from a foreign trust, whatever its nature, will be taxed as regular in come at the rate of 0%to37%.
TAX ISSUES (US TRUSTS)
The main difference between TRUST’s classification as Grantor and Non-Grantor applies in relation to there cognition of TRUST as an autonomo usentity.
The Grantor Trust is similarly classified as a Disregarded Entity, which implies disregarding the Trust for tax purposes. That is, the assets and in come of the Trust must be declared and taxed as if they were Settlor’ sand the in come of the Beneficiaries must be declared directly derived from Settlor.
Non-Grantor Trust is treated as a standalo neentity, implying the need to make tax returns from the Trust it self and tax payment sat the Trust level.
TAX ISSUES (FOREIGN TRUST)
All profits earned on a Foreign Non-Grantor Trust and distributed to US tax residents are taxed as Regular In come, applied to the progressive table from 0% to 37%.
Foreign Grantor Trust is similar asap ass-throught entity and will not be considered a tax entity. Accordingly, in come received by a US resident tax payer will be considered a Donation and will not be tax able as long as it is not an asset classified as a “US Situs Property”and Settlor is not an American.
THINKING OUT OF THE BOX …
NEW PLANS CAN BE CUSTOM MADE
The tax and protective planning for the establish ment of a Trust can be built, according to Settlor’s interestand tax domicile.