Integrated estate planning with foreign-situs trusts.

AuthorEngel, Barry S.


* IEPTs should not be used to hide assets, defraud creditors or evade taxes.

* Asset protection planning is the process of organizing assets and affairs in advance to safeguard them from loss or dissipation.

* A number of factors need to be considered when selecting which jurisdiction (domestic or foreign) will govern a client's IEPT.

For the client who needs to protect assets, estate planning may include the use of asset protection trusts (such as foreign-situs trusts) that will put assets safely out of reach. Although there are potentially many reasons to use such vehicles, their use is not for everyone; many factors must first be considered. This article explores the world of the "Integrated Estate Planning Trust," discusses why and when it is used and offers a model planning structure.

Today, asset protection planning is generally a concept familiar to wealth-planning professionals worldwide. However, while it has become more familiar and accepted, too often, such planning is done in a vacuum and without regard for its effect on the client's overall estate plan.

The same can be said for conventional estate planning; the emphasis tends to be on tax mitigation at death, the smooth transition of property, probate avoidance and ensuring that intended beneficiaries receive the intended property in the intended fashion. Unfortunately, the lifetime side of the estate plan has typically been ignored--particularly, planning to preserve the client's estate during his life.

The collective thinking of the planning community has evolved tremendously over the past 10 years. The time has come for asset protection planning and estate planning to be joined into a new concept--integrated estate plan(ning) (IEP).

Asset Protection Planning

Asset protection planning recognizes that preservation and protection of a client's estate during his life is at least as important (and in the view of many, more important) than preserving and protecting it after death.

The financial uncertainties stemming from (1) engaging in business or a profession or (2) being an entrepreneur or property owner and (3) economic and social factors have caused many successful people to adopt strategies to safeguard their accumulated wealth. A number of factors have contributed to the growing interest in and recognition of the asset protection component of an IEE including (1) expanding theories of legal liability, (2) threat of litigation, (3) result-oriented judges and juries, (4) the unavailability of affordable, adequate or appropriate insurance coverage and (5) the continuing national increase in the volume of litigation. Of course, other reasons may serve as motivating factors to persons of means who reside (or have assets) in other jurisdictions, as discussed below.


Asset protection planning may be defined as the process of organizing assets and affairs in advance to safeguard them from loss or dissipation.

Stated another way, wealth may be more or less vulnerable to risk, depending on the nature of the property and the manner in which it is held. Thus, at least in part, the asset protection component of an IEP involves reorganizing how property is held so that it is less vulnerable to threat than it otherwise would be (e.g., converting joint tenancy property to a tenancy by the entirety or placing property in trust for the benefit of third parties or the settlor).

Asset protection planning is broader than simply planning for the possibility of future litigation. Clients will be motivated to plan for different reasons, not necessarily tied to the possibility of litigation. Thus, a client in a civil-law jurisdiction may desire to achieve "testamentary freedom" and avoid the forced heirship provisions applicable in his home country; a client residing (or with assets) in a politically or socially volatile part of the world may seek to protect his accumulated wealth from the various threats posed by such instability. However, the asset protection component of an IEP is not to be used to:

Hide assets: Planning to or "hiding" assets can be dangerous; the dangers arise from the likelihood that a client will have to choose between protecting assets and committing perjury if he becomes involved in litigation. Whether or not litigation ever arises, a client may face difficult decisions each year in filing his Form 1040; full disclosure on a return is inconsistent with planning based on concealing assets. Further, hiding assets may result in criminal prosecution. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a user-friendly IEP.

While many clients appreciate the confidentiality that can be obtained through an IEP, a proper plan will not rely on secrecy for its efficacy.

Defraud creditors: There is some uncertainty as to when asset protection planning can be implemented (and the extent to which it can be implemented, if at all) when a client has a pending or expected legal threat. This uncertainty is much less prevalent today than in the past.

The easy clients are those with neither pending nor threatened claims who seek to protect against the unexpected. The difficult clients are those on the brink of bankruptcy (although pre-bankruptcy planning may help). There is a vast gray area in between.

Fraudulent conveyance law varies by state; there is also some Federal fraudulent conveyance law. For the client's (and planner's) sake, any asset protection planning must take into account applicable fraudulent conveyance law.

Our common-law system favors the free alienability of property; an individual without creditor concerns is free to dispose of his property as he sees fit, whether in the form of charitable gifts or gifts to children, to a spouse or in trust. Fraudulent conveyance laws tend to focus not on the transferee, but on the transferor's intent at the time of the transfer.

Fraudulent conveyance law generally protects present and subsequent creditors from transfers made by a person who is (or foreseeably will become) their debtor. However, "subsequent creditors" does not include every person who becomes a creditor in the future; there is also a "future potential" class of creditors. The distinction is clarified by a Florida decision,(1) which stated that asset transfers are permissible as to one's possible creditors, but not as to one's probable creditors. The operative inquiry is whether the client has any outstanding judgments, and whether he has any litigation or investigations pending, threatened or expected.(2)

Evade taxes: Some U.S. clients and their advisers are attracted to foreign-based planning by hoped-for tax advantages. As relatively few tax maneuvers involving foreign entities exist today for the global investor, a well-designed IEP will have no particular income, gift or estate tax advantages other than those that can be accomplished through conventional inter vivos or testamentary planning. Importantly, a well-designed IEP will have no particular income, gift, excise or estate tax disadvantages either, whether from a domestic or foreign standpoint. Both the planner and the client should be aware on an ongoing basis that certain tax issues will exist in the IEP setting; these tend to be not much different from (nor much more involved than) those associated with other types of entities that clients and planners are familiar with. Although there may be additional government reporting obligations (depending on the nature and design of the overall planning structure), neutrality in terms of tax liability will generally prevail under an IEP.

Practical Applications

Some of the practical applications of the asset protection component of an IEP may be summarized as follows:

  1. When coordinated with the estate plans of other family members, an IEP can be very useful in protecting an inheritance that otherwise may be at risk when distributed to the beneficiary. For example, it would make little sense for an inheritance to be received by an IEP client from his parent to be exposed to the risks the client seeks to avoid.

  2. A number of jurisdictions have "forced heirship" laws dictating the percentage of an estate that certain heirs must receive, and the timing of such distributions. IEPs have proven quite useful for clients who desire testamentary freedom as to the ultimate disposition of their property.

  3. It is not uncommon for a person who sells his business or professional practice to be concerned with protecting the sales proceeds. One concern is that the buyer may not be as successful with the business or practice as was the seller; the buyer may reappear several years later to claim that the purchase price was excessive.

  4. IEPs have been used as a replacement or supplement to liability insurance (e.g., professional...

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