In sports, it’s often stated that a good defense is the best offense. The same can be said when it comes to your investments. Setting up a protection for your assets will not only safeguard your future, but your loved ones as well. Attorney Bridget Burns of Tresp, Day & Associates joins Athena Paquette Cormier to explain the technicalities involved in protecting your assets. Bridget goes through each tool you can use and discusses the details of each one to ultimately guide you in choosing the best option for yourself. In this episode, learn the difference of various trusts and how you can utilize each of them effectively and, most importantly, legally.
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Asset Protection: Shielding Your Investments Legally With Bridget Burns
I have with me Bridget Burns, an attorney who’s going to talk a little bit about two different trusts that few people have heard of and then also asset protection and other topics she’s an expert in. Welcome, Bridget.
Thank you. I’m glad to be here.
Attorney Bridget Burns is an attorney at Day & Associates, a law firm in Solana Beach, California. Ms. Burns’ practice focuses on all aspects of trust and estate law, including complex estate planning, asset protection, charitable planning, probate and trust administration. Ms. Burns also has extensive experience in business formation and corporate liability prevention. Prior to joining Day & Associates, Ms. Burns practiced at a boutique law firm handling all aspects of business law, including complex litigation. Ms. Burns handled multiple trials at both state and federal levels, as well as arbitration and mediation. Ms. Burns attended the New York University School of Law where in addition to her studies, she served as Articles Editor for the Environmental Law Journal. Prior to law school, Miss Burns attended the University of San Diego on an academic scholarship and received a degree in Political Science with a minor in English. Welcome, Bridget. This is cool. Tell us a little bit about your background and where you grew up. Were you from a small family or a large family? Tell us what your parents did so we know a little bit about you.
I’m from Phoenix, Arizona. I work here in San Diego, so I haven’t moved that far. I come from a family of lawyers. I had a grandfather who was a criminal lawyer. Both my parents are lawyers and my sister is a lawyer. My brother-in-law is a lawyer. It was a natural progression for me to go into law as well. I used to be a litigator. I refer to myself now as a recovering litigator. Luckily, I don’t do any of that anymore. I was doing primarily business litigation so I was working with small businesses. Typically, in contract disputes. Often, we would get to know our clients and they would ask us to help with things like their estate plans.
After they had been involved in a lawsuit, they wanted to know how I prevent this in the future. I started getting into asset protection type of planning. I got the opportunity to join Kevin Day at his firm, Day & Associates. He’s a well-known asset protection attorney. He was one of the first people to get into that area of law back in the ‘90s when that became a viable option for Americans. I’ve learned a lot from him. We focus 100% on trusts and estates and asset protection, that area of law. We work with tons of real estate investors from single-family homeowners that rent out one to condo building owners to syndicators who have investments in tons of different projects.
While you were in school, you were assisting a professor who was doing some research or something around environmental law, is that right?
Yeah. In law school, I went to New York University and one of the subjects that they are known for is environmental law. I worked with a professor there on his book on nuclear waste. It had to do with what we do with the nuclear waste that’s produced if we moved to more nuclear energy options, and the US doesn’t have a plan for that. That nuclear energy has not taken off that well. His book was exploring legal avenues to come up with a plan to deal with nuclear waste.
From a legal perspective, I guess.
Yeah.
Did you have any interest in jobs before you were in law school as a teenager? What kind of jobs did you do before that or interested to have?
Yeah. I ran the gamut of your typical teenager’s job. I worked at a grocery store. I worked as a receptionist. When I was in college, I worked as a barista at the campus coffee shop. It was a range of your typical starting out jobs.
Our main topic was to learn about charitable remainder trust and charitable lead trust, what the difference is and how might that help an investor. I’ve had a couple of people tell me that those could be vehicles to sell your property and instead of exchanging into another property, maybe you want to be generous and create a trust to have an ongoing impact instead of just another apartment building. I wanted to know a little bit about that.
There's no way for you to sell a property and not pay any capital gains. Share on XI’m sure that you and your clients are familiar with all of the various taxes that are associated with owning real estate, having income-producing real estate and selling real estate. There are a lot of charitable options that you can do to lessen those taxes. There would be the standard donating a real estate asset to charity, getting that income tax deduction and not having to pay capital gains. That’s the easy one.
That would be just donating the building straight away to the charity? Like I donate to X, Y, Z Church or whatever.
You don’t have any control over it anymore. You’re not getting any income for it anymore, but you get those tax deductions. If you’re in that situation, it’s better to donate the real estate itself rather than selling it and donating the money because the charity is not going to have to pay those taxes so they’re going to get more. They’re going to prefer that. If you do want to retain some control or you want to retain some income from those assets, or even if you want to be able to ultimately leave that asset to your beneficiaries, but give the charity something, you can use a trust to do that.
Charitable lead trust and charitable remainder trust are going to be the two main options and they’re mirror images of each other. The charitable lead trust is you’re giving the lead interest to the charity. You’ll choose an asset, you’ll put it in the trust, and then the charity will get annual distributions from the trust based on a percentage of the trust value. That will be set for a term of years and then when that term of years expires, the asset will go to your beneficiaries. Those trusts are set up as what we call grantor trust, which means the trust income flows through to the person who sets it up, the donor in this case, and then the donor gets to take an income tax deduction on the money that went to the charity. That asset is also removed from your estate. If you are a larger estate that might have to deal with estate taxes or gift taxes, it’s getting that asset out so your heirs aren’t going to have to deal with estate taxes on that asset. That’s the main trust.
The charitable remainder trust is the opposite of that. You would put an asset in a trust and then you would take payments annually or quarterly or however you set it up for a span of time, which might be based on your lifetime or your spouse’s lifetime or just a period of years. At the end of the term of the trust, the asset goes to charity so you’re going to get an income tax write-off at the beginning for the value of the charities remainder interest. In charitable lead trust, it’s getting that asset out of your estate, so it’s not going to have state taxes either.
If I get it right, in the charitable lead trust, I’m keeping the property but I’m letting the cashflow go to the charity. Is that right?
The property would be owned by the trust, but ultimately left to your beneficiaries.
The charity will not have the property.
The charity will have this guaranteed cashflow so they like that. Good for you because you get to leave it to your beneficiary and you still get that income tax write-off.
What happens when I pass away? Do they get the cashflow back? Does the charity always get that cashflow?
After you pass away, the checks to the charity or what have you stop and then lot property passes outright to your beneficiaries.
My heirs do not have to keep giving some of the guaranteed cashflow to the charity. That ends when I die.
There’s a term of it. It might not be based on your life. It might just be, “I’m going to set this up for fifteen years,” and then it’s going to go to your heirs.
If I wanted to do something like that for 2 years or 5 years, it could be as short as that, is there a minimum time I have to do that?
It’s probably going to need to be longer because of the costs of setting it up. You’re going to want to get enough directions to make it worth it. For charitable remainder trust, they maxed out at twenty years and charitable lead trusts are a little bit more flexible. I would say it’s going to be a longer period of time because you’re going to need to have enough time for those deductions to make the cost worth it.
Let’s say I have an apartment building and it’s worth $2 million. It generates $6,000 per month. I would put this $2 million apartment building into this trust and I would then commit to giving them the charity. Could you do more than one charity? Maybe I could do two?
Yeah.
I’m taking this cashflow and I’m sending it to 1 or 2 or more charities for a certain amount of time. If I do it for ten years, I might not have passed away so I might still be alive and get it back.
You probably wouldn’t leave it to your beneficiaries at that point because you want it to stay out of your estate. An estate tax isn’t one of your issues. I suppose you could have it revert to you but typically, the way we’re setting this up, it’s going to pass to a beneficiary.
I heard of people giving the amount. I’m selling the property and giving the amount of the capital gain to the charity instead of paying the capital gain or something like that. Is that possible? I’m hearing that it’s going into trust.
If you saw the property, as far as I’m aware, you have to pay that tax. There are options where you can, for example, sell a partial interest to a charity. You can do what’s called a bargain sale where you’re selling to a charity for less than fair market value and then you get some write-off of the taxes. I don’t think there’s a way for you to sell the property and not pay any capital gains tax.
I’m going to have to go back to those people and ask them how they did that. Could you explain to people the difference between a revocable trust and irrevocable trust and how these things fit in here? People don’t realize that there are consequences to one and the other.
A revocable trust means you can revoke it, you can change it, and you can amend it. That’s going to be your standard living trust and estate planning trust. Those are the terms that most estates use. Those are usually used for probate avoidance. Those aren’t going to have asset protection benefits and they’re not going to have any tax benefits. All the tax is going to be exactly the same but if your asset is in a revocable living trust, your family isn’t going to have to go through probate.
An irrevocable trust, as it sounds, means you cannot revoke it and you cannot change it. It is a separate legal entity from you. The text might still flow through to you depending on how we set it up, but it is its own legal owner. Nobody owns an irrevocable trust just like nobody owns me or you. They are often used to remove assets from estates for estate tax purposes and they’re also used for asset protection purposes. If you get sued and you get a judgment against you, somebody can’t take an asset that you don’t own. It’s owned by an irrevocable trust and it’s not owned by you. An irrevocable trust can’t be revoked or changed. We are able to build in quite a bit of flexibility so that you can adjust things like trustees and beneficiaries. Typically, it would be hard to revoke the whole trust and take everything back.
Simply getting insurance is a good asset protection. Share on XThe charitable lead or remainder trust, are those guys irrevocable?
Charitable trusts are going to be irrevocable. There’s a ton of IRS regulations related to these trusts, which I couldn’t possibly go into. Being an irrevocable trust is a requirement for this.
Once you made the decision to give building one to this charity, you can’t take it back?
Right.
Could you change which charity or when you set it up, it’s decided and you can’t say, “I don’t want this church to get that building I want. Save the cats to get the building?”
We can build in the flexibility to change the charitable beneficiaries as long as it’s an approved charity of 501(c)(3). Typically, you are able to change those though.
I won’t go and start to save the cats just yet. How does the charitable remainder trust work?
You will put an asset into the trust and then you will retain an income stream from that trust. It doesn’t have to be the donor. The donor could decide that the income stream is going to go to a child, to a sister, and to anybody they want to, but you’ll retain an income stream. It might be for a lifetime or it might be a term of years like the lead trust. At the end of the term of the trust, the charity gets whatever is left over.
There are different kinds of charitable remainder trust. The two main ones are charitable remainder annuity trust and that’s going to be, you set up the trust, you put a certain asset in it, and you calculate what the annual fee to you is going to be. That’s going to be a fixed payment and it’s never going to change and then you move forward like that. More popular is the charitable remainder unitrust. That is a trust where instead of a fixed payment, you’re receiving a percentage every year. Since it’s based on a percentage rather than a figure, you can add more assets to the trust throughout your lifetime.
That’s definitely more popular because it’s more flexible within the realm of charitable remainder unitrust. There’s even more flexibility we can build in about not distributing any payments until the asset produces a certain amount of income. Payments delay when income is low. People like them, because the payments will change as the market changes so payments can keep up with inflation. If the market is doing well, they’ll get more out of the trust. It happens a lot with real estate investors because they’re so flexible.
If I put in this trust that I get $5,000 a month in income then there are repairs on the building, there’s only $4,000, am I breaking the rules or is there flexibility to give you whatever it is that the income-producing property produces? Also, if it’s more income, who gets that income?
That’s going to be determined under several different laws. For example, California has a uniform income and principal act. The accounting for trust is different than accounting for income tax. First, you have to determine what the trust income is and then depending on what the payment is, it might be 100% covered by income or it might be a situation where you have to remain principal. You might have one of these more flexible trusts where you can say, “There wasn’t a lot of income this year so we’re not going to make a big payment and we’ll make it up later.” That’s the benefit of unitrust. You can make up payments later and it’s going to fluctuate with the market and be able to keep up with the interest.
Which of those two trusts is more popular? Which do you see used more than the other?
We definitely see more unitrust, the ones where it’s a percentage rather than a fixed payment because people want the flexibility to add more assets. They want the flexibility to determine that they’re going to put off payment because it’s a bad year or they don’t need the income and then make it up in a year where they want to make a big purchase or something like that. The annuity trust is a complicated calculation up front as the amount of the payment, and they can fail. If there’s not enough money to pay and you end up using up all of the assets in the trust, they can fail because it’s an IRS regulation. There has to be at least 10% of the value of the asset left for the charity. If you are taking too much out of your annuity trust and the market is bad or whatever the reason is, those trust can fail. The unitrust is certainly more flexible and therefore more popular.
If you donate the building, is it the idea that you’re writing off the value of the building in one year or do you have to spread it over years?
It depends on if it’s a lead trust or remainder trust. For a remainder trust, you are writing off the charity’s remainder interest. It’s going to be a calculation with your CPA about what is the interest of your annual payments versus what is the interest of what’s expected to be left for the charity. There is a cap on how much a person can write-off so you can carry forward those deductions if you need to. For the lead trust, it’s the opposite. It’s what’s the value of the charities, leave payments, you can write those off, but those are written off annually. You write off what the charity receives.
I wonder why wouldn’t you just take the cashflow from your building and donate it? Why would I set up the lead trust if I could just take the cashflow and donate it straight away?
The benefit is getting that building out of your estate so you’re going to worry about estate taxes. You might have to do a gift tax return or something, but most likely, you’re not going to have it because the exemption is high. It’s owned by the remainder trust so there are no capital gains because the charity has the property and they don’t think of capital gains.
That is one thing on the remainder trust.
Even with the lead trust, you can put that real estate asset in the trust and then the trustee can sell the asset while it’s in the trust or income-producing asset. The same thing with no capital gains tax there.
That we might have hit on why that gentleman thought he would avoid capital gains in selling his property. He was putting the trust and then having the trustee sell it. He was excited. That’s all I know.
It has to be a charitable trust. That is how you avoid capital gains.
We have a lot of clients and a lot of people reading that they have a lot of property and they want to pass it onto their kids, but they don’t want them to sell everything. Is there one of these trusts that would allow someone to set up some rules that you can’t sell it all at once? A couple of families I work with have built up this huge amount of real estate and they worked hard for it. I don’t know why they’re so worried because they’ll be gone. They’re worried that the kids will sell all the properties or mismanage them. Is there one of your fancy trusts here that would allow these people to ensure that the cashflow continues, the properties don’t get sold, they maintain or keep the integrity especially when they’ve inherited property? Some of these properties get handed down 2, 3 generations. Is there something that would fit something like that?
Definitely. Any trust is going to be great for that. You set up a revocable living trust and you choose your successor or trustee. Somebody that you trust will uphold your values and your wishes. When you pass away your revocable living trust then becomes irrevocable, so you can put provisions in there, “I want to leave this property to my kids, but I don’t want it sold. I want them to benefit from the cashflow that I’ve built up.” Your trustee and upholding and managing that property, ensuring the kids get the cashflow and following your wishes. A trust is a contract so they would be contractionary obliged to follow your direction not to sell that property. You set up those provisions in a standard living trust. Any of our revocable trusts are going to have beneficiary designations the same way the living trust does, so you can put in provisions. Some of our fancy trusts are to get assets out of your estate, so they’re going to transfer assets to your kids, but you can still put in those provisions, “I don’t want this property sold. I want it held in the cashflow distributed,” until whatever date you choose.
Getting the information that you need as your estate builds is important. It's never too early to set up a living revocable trust. Share on XYou could also mandate the property management company. If they do sell it, you could say, “Only use this realtor because they know the history of the property,” or whatever.
Practically, you put those directions in. We put in contingencies like, “Use this person as long as they’re still practicing.” We try to plan for every contingency, but you can put in as many directions as you want to.
Sarah has a question. It says, “Does this work when selling a house and the value over original price improvements, the percentage would be paid to capital gains? Can it be just the amount and not a building or property?”
I’m going to be selling my house soon. I know you get a $250,000 deduction off the value if you’re single so it will be over the value if I paid less improvement. I’ll have to pay a capital gains tax on the amount over after that deduction. I’m wondering, for a trust if you could set this up, can it be in the amount of money or does it have to be property or a house to avoid capital gains?
The answer is that you’d have to put the whole house into a trust before selling it in order to take advantage of this. You typically can’t use a charitable trust for your personal interest. It needs to be a person’s entire interest and it would have to be prior to the sale. It couldn’t be cash after the sale.
I have a living trust and I have that all setup. That’s perfect, but I was trying to figure out how to avoid paying the capital gains. If I donated to charity, that would be good.
Sarah, it also sounds like you probably need to talk to a CPA. It’s always better to think about your strategy before you do something. We probably need to talk to a CPA who could think of some different ways that you could shelter or different ways that you could maybe minimize that capital gain.
Thank you.
You’re welcome.
Part of the trusts that I see on your list are interesting but something that’s along these lines is the qualified personal residence trust. You want to tell us what that one is and how that enters into the estate planning that people could do?
A qualified personal residence trust is one of these trusts that we use when there is a large estate that may be subject to the estate tax. One of the big assets is the personal residence of the grantor. You set up this trust, transfer your property to the trust and still retain the right to live in it. After the period of years of the trust, which is based on life expectancy and other calculations, the trust is transferred to your beneficiaries. Out of your estate, it will not be counted as one of your assets to take us to taxes from and it’s a transfer to your beneficiaries.
I’m putting my house in a trust and I’m assuming it’s an irrevocable trust. I’m giving up the control so I get to keep living there, I assume, right?
Exactly. You’re getting it out of your steam, but you’re still retaining the right to live in it.
When I pass away, what happens to that house?
It goes to your beneficiaries. Most likely your children, your family members or whoever doesn’t need it. I keep talking about the estate tax. The exemption per person is $11.4 million, so it’s high. There are few people that need to worry about the estate tax. That is the last scheduled to sunset on December 31, 2025. At which point, the estate tax is scheduled to go back down to $5 million per person. That is an index for inflation, so by that time, it’s going to be closer to $6 million or maybe even over it, but be cut in half. People that don’t need to worry about estate tax, assuming that they’re still alive in six more years, many of them are going to need to worry about estate taxes.
This is still valuable information.
Even if your estate is smaller, once your estate does hit that $5 million mark, you’re going to want to start thinking about these planning vehicles.
I’m trying to understand. This qualified personal residence trust, I’m putting it in a trust, but it sounds like nothing bad happens that I’m not giving up any rights. You probably can’t finance the house. You probably can’t refinance it or I’d have to find a special lender.
You have to find a lender who’s familiar with these vehicles, which some of them are. It’s probably not going to be a bank, but there are smaller institutions that are familiar with complex estate planning. It’s a downside. After the term of the trust expires, that trust is not in your ownership and control anymore. Say that your beneficiaries are your children, which it often is. My children are the owners of that house, so you have to make sure that you trust them and you know they’re not going to keep you out. That’s the downside. You’re giving up that control of that asset which you have to do to remove it from your estate.
The term is over and I’m still alive. I still want to live in the house, but now I don’t have control. They could sell it from under me right now.
Typically, to keep it out of your estate, the IRS would want to see rent payments. If you are subject to estate tax, it’s 40%. People are willing to do these crazy things to avoid that 40% tax. It’s a high amount.
It’s your estate and it’s your heirs that you’re protecting because you’ll be gone. Why do you care? That’s going to be 90% if you’re dead. What’s the difference between that and a dynasty trust? I’d heard dynasty trust and I thought that was the same.
A dynasty trust is typically going to be set up as part of your living trust. It can be set up in any of these revocable trusts, but it can be set up in your living trust. It’s a way for wealth to pass down through multiple generations and only be taxed once at the estate tax level. Essentially, you’re going to be leaving assets to your children, but you put certain restrictions on their access to the principal. You give them income rights, but you restrict their access to the principal so that asset doesn’t technically enter their estate so then when they pass away, there’s not an estate tax and then the terms of the trust keep passing through generations this way.
These are powerful tools because those assets can keep growing and all of that growth is shielded from estate taxes after the first time. For estates that are close to the estate tax mark or may be subject to it in the future, it’s a good idea. You do have to be okay with the idea that your children may not have full access to assets. We’re building quite a few safeguards that they can get into that principal if they need to.
Asset protection planning needs to be done when your legal seas are calm. Share on XProbably like the Getty family and people like that use this thing where you be trust babies. That’s what it is. They’re getting the income but they don’t know where the investments are. They don’t have anything to do with that. Another one that a couple of people have asked me about is this Family Limited Partnership trust. How does that one function? How does that work for people?
It’s not a trust, it’s just a partnership and the partners of the family members. The way that it works is related to estate taxes. You have a family, it might be business, it might just be real estate, whatever your family assets are, and you have multiple family members that are partners in that. The elder generation is going to have a minority interest. When the IRS values estates, they give a discount to minority interests because those interests aren’t marketable and they’re not controlling interest. The IRS says, “These aren’t worth as much.”
An older person might have 10% of the family partnership and maybe that’s worth $1 million, but the IRS for estate tax purposes might discount that 30% because it’s not a controlling interest and there’s no market for it. That is a good tool. If you do have an estate tax problem, we used to see them a lot. Towards the end of the Obama years, the IRS was talking about doing away with discounts on Family Limited Partnerships, but when President Trump came in, he pulled that off the table so they’re still a viable planning tool. At this point, people are planning more for income taxes than estate taxes. They don’t want those discounts because they want to get the full step up of the basis. For people who are still worried about estate taxes, those discounts are significant.
There’s no other reason to do this.
A partnership has other benefits from a business planning perspective and asset protection perspective. There are other benefits. You can have restrictions and operating agreements and buyer and seller restrictions so that family members can’t sell their interests to third parties and they can’t essentially dilute the family assets without permission. Those are other side benefits to it as well.
From an asset protection point of view, what would you say are the tools that you see your office using most often, especially the real estate investors to protect what we’ve built? What would you say are the tools that we should be aware of as far as asset protection?
Asset protection spans a wide range of tools and some of the people will be familiar with it. Getting insurance is asset protection. I’m sure all of your readers and your clients are familiar with LLCs. That’s going to be the base thing that we use with anybody who has real estate that they’re renting out should use an LLC. The benefit of the LLC is that it separates that business asset from your personal asset. If you have a tenant that gets injured or some liability within that property, creditors are limited to the assets in that LLC. It makes sure that your personal assets are at risk with these business assets. That’s going to be the base level of asset protection.
The next step up is going to be using irrevocable trusts and those come in both domestic forms and the big kahunas are the international trusts. We do trust in the Cook Islands, Niue’s and the Isle of Man. Those are going to be for people with bigger states. An irrevocable trust is a separate legal owner, so it takes assets out of your ownership and puts them with another owner. You’re creating two different pots and making sure that you have something that is safe even if you do have that big lawsuit or that big creditor or whatever happens.
What are your thoughts on whether each property should have its own LLC? Can you combine a couple of properties? You hear this argument quite a bit. How many LLC do you need and how many are too many?
The reason it’s an argument is because there’s not an easy answer. From being a conservative lawyer type, my ideal world is that you have all of your assets separated into different LLCs. We have many investors that own 20, 30, 50, 100 and 200 properties and that’s not realistic. You can’t overlook the benefits of being streamlined. As much as you can stand to divide things up into different pots, you should, but I understand that it’s not feasible to have an LLC for every different asset. There are ways to group things so that you have a low liability asset with higher assets that are worth more so that you’re dividing it up. If one of these LLC got hit, it wouldn’t totally wipe out everything.
What kind of irrevocable trust would enter into asset protection?
We do a lot of trust-based out of Nevada. We’re up to eighteen states that allow asset protection trusts. An asset to protect a trust that you settle and you can also be the beneficiary of. It’s possible in the United States until the mid-‘90s. In the mid-’90s, the United States signed to The Hague Convention on trust, which meant that US citizens can enter into trust under another country’s laws and the US will respect to those laws. Others like the Cook Islands have laws that you can settle trust and either beneficiary of the trust and you have asset protection. That became big in the mid-’90s and then some states looked at that and said, “We need to take advantage of that. We’re going to pass a similar law.” Alaska was the first state and we’re up to about eighteen.
Some of those laws don’t have teeth. They’ll allow creditors to pierce the trust for various reasons, but other than that, they are the best ones because they don’t let any creditors in. It depends on both the settler’s tolerance for risk and the size of their estate. When people get into the $4 million or $5 million net worth, they start to want to look offshore because they don’t want to start over. The benefit of being offshore is that you’re removing US court jurisdiction. If you have a Nevada trust, you’re still dealing with US courts. There’s full faith and credit in the United States so you’d be dealing with a battle between states if you’re outside of that. Going offshore means removing that US court jurisdiction, but there are states that haven’t reached that level yet or somebody might have a higher tolerance for risk. The Nevada option is a great alternative.
Some people think the Delaware trust is more important, so why is that? Do they have good protection, too?
We don’t do a lot of trust work in Delaware. It’s an old jurisdiction so we use a lot of trustees in Delaware because they have a ton of experience. They have deep pockets, they’re trustworthy, and they don’t necessarily cost as much as a bank. They also have great corporate laws and courts that only deal with corporations so we do see corporate work there. We don’t trust work there. Off the top of my head, I don’t know if they have an asset protection law. If they do, it’s not one of the top ones so it’s not a jurisdiction that we work in.
If we go offshore, what does that mean exactly? Where is the Cook Islands? I’m like, “Am I going there?”
If I would recommend it, I would like to go there. It’s in New Zealand. I’ve never been there myself, but it’s a tropical island. It was one of the first jurisdiction to set up these asset protection laws. Many of the other jurisdiction based their laws off of the Cook Islands, so that is one of our most common ones. It’s going to be your trust that’s based in the Cook Islands and you’ll have a Cook Islands trustee. The trust would be governed. If there was a lawsuit, the trust wouldn’t have to go through Cook Islands courts. Those courts are familiar with asset protection. The Cook Islands likes to be a hub for asset protection so of course, they want to protect that.
They have a short statute of limitations. It’s a two-year statute of limitations before claims are barred for any reason. We typically set these trusts up so they are what we call dormant trust, so you’re not going to have your money over in the Cook Islands. Trust is going to own a company and usually it’s a domestic company. It might be a Wyoming company and Nevada company and then the settler, you, the person who sets up the trust will manage that company. All of the money, investments and things will be at the LLC level controlled by you and the trustee owns the LLC interest, but they don’t have to do anything about the money.
You’re not using a bank checking account. You’re not doing all your business through a bank there. It’s like a holding company.
We find for US citizens there’s rarely a good reason to have your money offshore. Unless you’re doing business offshore, then it makes sense, but if you’re doing this in the US, you can’t shield yourself from taxes. There’s no reason to have your money outside of the US.
If someone sued me and I’m a Cook Island corporation, do they have to go there to sue and do all the paperwork through the court system?
Yeah.
That’s the international trust you were talking about. You keep doing business and everything’s normal. All your assets are owned by this trust that’s in another country.
We wouldn’t transfer all your assets over. A lot of the planning that we do has to do with appearances and how you look at setting up roadblocks. If someone wants to sue you, Athena, and they look at you and they see Athena owns a house and she has a bank account, and that’s it, that’s a regular thing. If they look at you and they see Athena doesn’t own anything, but we know that she’s a successful person with a business, then they’re going to go digging. What we want is for them to never discover this Cook Islands trust. You’re not the owner of it, you’re just a beneficiary.
For example, if you were in a deposition and somebody asked if you owned some account and that’s owned by your Cook Islands trust, you’d say no under penalty of perjury. I would say 80% of the time when one of our clients gets sued to the other side never even knows that they have an asset protection trust, which is the way this is designed to work. If we set it up, you look like you own a normal amount of assets, but no more. For some reason, if somebody does discover that trust and tries to get the money back, that’s when the Cook Islands trustee is going to say, “Great. If you have a valid claim, I will pay it but you have to come over here to the Cook Islands and we have to get a court order from the Cook Islands.”
Which is probably not easy, I would think.
No.
That’s an expensive trip for an attorney to go chasing.
The US is one of the most creditor-friendly nations and it might be the most creditor-friendly. If you want to sue someone in the Cook Islands, not only do you have to hire Cook Islands attorneys, you also have to post a bond for the amount that you’re claiming. In the US, you can sue anybody for anything and there’s no repercussion if you’re doing it out of malice. In other countries, it’s not like that. In the Cook Islands, you have to put up defense fees if you want to bring a lawsuit. Not to mention the legal fees, you’re also talking about travel fees and bond fees. You have to go through a lot of hoops to sue someone in the Cook Islands.
It has to be a big money lawsuit for an attorney to even bother doing all that, I would think.
Exactly.
If they would even find out about it, as you’re saying. What’s this intentionally defective grantor trust? That doesn’t sound good. Why is it defective and why would we want this?
It’s called a defective trust because you’re transferring assets to a beneficiary, but you’re retaining the grantor status of the trust, so the income tax flows to you. We often see that. In our office, we call them children’s trust because it’s a trust structure to pass assets to your children and get them out of your estate, but you still pay the income tax on them. If you have young children or children who couldn’t pay income taxes on it, you retain those income taxes, but it’s outside of your estate. You can have any asset in there. It’s for state tax purposes and there’s no income tax. The income tax would still flow to you.
What would your advice be to a real estate investor who’s maybe starting off? What would your advice be to someone who’s built a lot of assets but has never formally done any trust? Many of my clients don’t even have their living trust setup. What’s your advice to both groups, the beginner investor and then a more seasoned investor?
If they’re reading this, they’re doing a great start because just getting the information that you need as your estate builds is important. It’s never too early to set up a living revocable trust. If you’re incapacitated or you pass away, what happens to your assets so your family doesn’t have to go to court. Particularly if you have minor children, those documents are going to say what you want to happen to the minor children and who you want to be their guardian. Those are super important. Everybody needs those basic documents. It doesn’t matter how big your estate is.
As far as beyond those basic documents, if you’re just starting out learning, this information is a great start. LLCs are always a good idea. Separating your business assets from your personal assets is important. Having the appropriate amount of insurance, all of those are low-cost ways to start your asset protection. If you are a larger estate or you have more assets, you should start thinking about using more complex planning like your revocable trust to shield some of your assets away, particularly when you have real estate that’s being rented to tenants. That’s a high liability.
Some of your clients might have other day jobs that are a high liability. We work with a lot of doctors, pilots, things like that where they have that separate liabilities and now you have liability in two different realms. The important thing is that for asset protection planning, it needs to be done when your legal seas are calm. If you already have a big lawsuit against you, there might be a couple of things we can do to cherry-pick what assets are available, but once a lawsuit comes, we’re not going to help you hide assets. We’re not going to help you create a fraud. Getting started when your legal seas are calm is absolutely worth it.
Thank you. If someone wanted to contact you to get some advice, get their plan done or ask a question, what’s the best way for them to contact you?
You can email me. My email is Bridget@Day-Law.com. Our law firm is Day & Associates. Our website is Day-Law.com. You can find our phone number there and I’m happy to talk. We do free consultations so anyone can contact me anytime.
Thank you so much for doing this. I appreciate it. We learned a lot. I wanted to know about those charitable trusts.
It’s definitely complex and it’s overwhelming so I’m happy to answer any follow-up or clarification questions.
Thank you so much, Bridget, for joining us here at Cash Flow Academy. I appreciate it so much. Thank you.
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About Bridget Burns, Esq.
Attorney Bridget Burns’ practice focuses on all aspects of trust and estate law, including complex estate plans, asset protection, probate and trust administration. Ms. Burns also has extensive experience in business formation and corporate liability prevention.
Prior to joining Day & Associates, Ms. Burns practiced at a boutique civil law firm handling all aspects of business law, including complex litigation. Ms. Burns handled multiple trials at both state and federal levels, as well as arbitration and mediation.
Ms. Burns attended New York University School of Law, where, in addition to her studies, she served as Articles Editor for the Environmental Law Journal and assisted Professor Richard Stewart with his book, “Fuel Cycle to Nowhere: U.S. Law and Policy on Nuclear Waste.” During her time in law school, Ms. Burns worked at the United State Attorney’s Office for the Southern District of New York, Civil Division, and at the United States Attorney’s Office for the Southern District of California. Prior to law school, Ms. Burns attended the University of San Diego on academic scholarship and received a degree in Political Science with a minor in English. Bridget is a member of The State Bar of California (Bar Number: 279671).
In her free time, Ms. Burns enjoys running, yoga, and reading. She is an active member of Lawyer’s Club, participating in the Human Trafficking Collaborative and the Women’s Advocacy Committee. Ms. Burns is a board member for the San Diego non-profit Lucky Pup Dog Rescue and serves on the task force for the Women’s Resource Fair.
You can reach Tresp, Day & Associates, Inc at (858) 755-6672 or by e-mail at info@trespday.com.
