In this episode, Clint Coons of Anderson Business Advisors welcomes Brian Bradley, Director/Partner at Bradley Legal Corp. He’s also the director of the Asset Protection Council.
Brian explains what offshore trusts can and can’t protect you from (not divorce!), who is the right candidate for offshore trusts, and why he recommends the Cook Islands and hybrid trusts. Brian tells us why and when you might need to “break the bridge” that ties you to your money in case of a doomsday lawsuit that will literally take your entire legacy from you. In most cases, when someone comes after you and discovers your money is offshore, particularly in the Cook Islands, 9 times out of 10 they settle or back off, because of the high likelihood of losing against this scenario.
Do your research, vet the organizations setting up your trust, and do all this before getting into any trouble, because coming to set up a trust after any litigation has begun is like getting insurance after a car accident. Plan ahead!
Highlights/Topics:
- Who is the right candidate for an offshore trust? High unprotected income (over $1M), doctor/surgeon, rental real estate in multiple states, at high risk from doomsday lawsuits
- The Cook Islands – benefits for tax-neutral trusts
- Hybrid trusts and your position
- Swiss bank accounts – they can be overkill and burdensome
- Protecting your assets from doomsday lawsuits
- Only about 20 states recognize asset protection trusts – so hybrids are better
- Questions you should ask when vetting
- Hybrid trusts and the IRS
- Asset protection trusts do not protect you in divorce court!
Resources:
Asset Protection Council Website
Full Episode Transcript:
Clint: What’s up, guys? Hey, it’s Clint Coons here. In this episode, what I wanted to do is interview someone when it comes to trust planning, especially offshore trust planning. I get a lot of questions about this periodically on certain videos.
People say, well, Clint, that’s a great strategy, but how about setting up those asset protection trusts, or taking those assets offshore and holding your entities in a Nevis Asset Protection Trust or some other obscure jurisdiction? Here’s the thing, I’m not an expert in it.
In fact, we don’t even set that stuff up. What I want to do is I want to get this information out to you all, that are interested in that. The person that I know is Brian Bradley of Bradley Legal Corp. He’s the director, the partner, he started it. He’s a director of the asset protection council.
This is the guy that I would send people to if they want to know about asset protection, taking their assets, putting them into a trust or going offshore, because this is what he does. Brian, thanks for coming on.
Brian: Thanks, Clint, for having me on. Today’s going to be a fun topic. It’s going to be a little bit different. We’re going to try to keep it fun and not that dense. I just hope that the concepts we talk about with trust and the different types of trust help your listeners and audience understand and navigate this little bit different role that we’re in.
Clint: Someone probably is going, hell, two attorneys? That’s crazy. I don’t want to listen to those guys.
Brian: It’s the most boring part of the conversation ever. But I think between the two of us, it would be pretty fun.
Clint: All right. Let’s just jump right into it and break it down. You’ve been doing this stuff and we’ve had conversations in the past about setting up asset protection trusts. Who’s the right candidate to consider using a trust?
Brian: If we’re just going to go strictly offshore, generally, the right profile for a candidate, you’re going to be high risk, high profile. Think of it like a doctor or surgeon. You’re generally making a good, high income. You’re also investing in real estate, probably multiple states, or in some commercial real estate.
Your unprotected net worth—we’re not talking about 401(k)s or 403(b)s—is going to be over a million. Generally, we’re seeing around $2.5 million or more, plus the risks that warrants it. That’s going to be a general candidate when we’re looking at do we want to go offshore? I would prefer just a general, like a hybrid, which is an offshore trust domesticated here in the US.
For the profile, it is just not someone starting out. If you’re coming to us with one or two properties, or you’re just a regular W-2 employee working at Microsoft with a rental property, I would not recommend starting out with a high level asset protection trust. It’s just way overkill for you at that point.
Clint: When it comes to asset protection trust, you mentioned the hybrid. We’ll unpack that in a moment, this offshore concept. You said you have to have a high net worth in order to go there, but what does that look like? If I fit that profile, immediately what comes to mind, tax evasion.
Brian: Correct. One of the big concerns with most clients is we get stuck in watching TV shows or watching Netflix TVs. When you’re going offshore, it’s not about tax havens. Generally, we’re not going to Nevis, we’re not going to Caymans. Strictly, we’re going to the Cook Islands. The reason you’re going to Cook Islands is they don’t dip their toes in taxes. It’s strictly asset protection.
You’re not going to get the red flag that you generally would get if you’re going to go to the Bahamas or you’re going to go to the Caymans right there. Asset protection just in general, I think people need to realize, it’s tax neutral. When people call me and say, hey, I want to create an asset protection trust and I don’t want to pay your taxes, you immediately need to bring up the conversation. Well, hey, great, go talk to your CPA or wealth managers. That’s tax mitigation strategies.
If you’re talking about protecting your assets from creditors and doomsday lawsuits, that’s asset protection. We have to start tax neutrality. That’s just a basic distinction that has to be brought up first right there. And then, as a matter of what country we go to.
If we are going to go purely foreign, and like I said, I don’t go to the other countries like Belize because you always have to build an outdoor strategy when you go to those other countries to the Cook Islands because there are too many agreements that we have with the UN and the EU, like all these countries have, or the US.
They have other economic resources like sugar cane, black pearls, and tourism. The Cook Islands don’t have any of those agreements. Strictly asset protection is the only economic driving force that they have. There’s no tax involvement. There’s no other economy. They’re always going to be the highest and strongest in keeping up with the whole world’s asset protection strategies.
Clint: If I was considering this and I’d say I had $10 million, I was concerned about asset protection, and I wanted to set up an offshore trust, what I’m hearing is that we’re going to go to the Cook Islands and this trust is going to be created.
But immediately, when I start thinking about trust, it comes back to control. If I’m going to send $10 million in assets to the Cook Islands, how do I know if somebody’s out there and say, thank you, Clint. They’re going to put it in a suitcase and walk out the back door.
Brian: That’s a great concern, and that’s just not how the trusts are designed. When you’re creating (let’s just go like) a purely foreign trust, you’re going to have you—the trustee, the client who’s creating it—in the reserve, your offshore trustee, so the Cook Islands trustee. And then you’re going to have a trust protector, which would generally be your law firm, your attorney, my firm or your firm. It would be someone here based in the US.
There’s a check and balance system that gets created when the trusts are done properly by saying, okay, (1) You’re the client. It’s created for you, by you. They’re called self settled trust, for you, by you, as your own beneficiaries.
(2) You’re going to have your law firm, your attorney as a trust protector. Their sole job is to overlook the trust and make sure that trust’s terms and how it’s being operated are always in compliance.
(3) God forbid, you ever did have to have that doomsday lawsuit, and you are now out of control and removed as the main trustee. That’s when the offshore trustee comes in and steps in. Their sole job is to only avoid being forced into complying with another country’s court orders, judgments, and things like that. They can literally just take that judgment thrown in the trash and say, hey, sorry, we’re not going to recognize this.
The trust protector’s job is to look over and make sure the offshore trustee only follows the terms of the trust. That’s what our job is. And then the other thing that people miss is when you do have offshore trust, you also generally have an offshore bank account, like a Swiss bank account. The money is now going into the strongest banking system in the world, and not a penny can be moved, not just without the clients knowing about it, but without their direct authorization and signature.
What you want and why the foreign trusts are so effective is that you are out of control on them. That means like in the US first grant case or the Anderson’s case, all these really massive famous cases of bad people doing bad things, which I do not recommend, I just use them as teaching tools, like don’t do Ponzi schemes, don’t go doing criminal activity. It just goes to show strength. You are out of control, so a court can’t hold you in civil contempt to comply when the trust is done properly.
You want to be in control of your trust up to the point that it’s not in your best interest with a doomsday lawsuit. That’s when those hybrid trusts come into effect. You take an offshore trust, domesticate it, that puts you in control. God forbid, a doomsday lawsuit comes crashing down on your world. We break IRS compliance by removing you as the trustee. At that point, you want to be out of control, because you don’t want a US court or judge to hold you in civil contempt to comply.
Clint: Yeah, like with Anderson.
Brian: Correct.
Clint: In that scenario, when I set up the trust, what position would I hold?
Brian: As the client?
Clint: Yes.
Brian: If you’re using a hybrid trust, you would be the trustee, you would be the settler, and you would be the beneficiary. They’re self settled trusts and they’re grantor trusts, so they’re created for you, by you, as your own beneficiaries.
At the moment, we have to, what we call, break a bridge or we’re just no longer complying with USC Section 7701. It’s called the court test and control test. What we’re doing is removing one leg out of that IRS classification. You’re still going to be the beneficiary, you’re just no longer the main trustee. That’s when the reserve trustee, the offshore trustee steps in and does their job. They’re already created when we create the trust. That’s the benefit of it. We’re not creating it after the fact.
From day one the trust gets created, we’re adding the offshore trustee in reserve. Their sole job is they only have power to come in under a declaration of duress, which us, the attorneys, would declare, and then we’re removing you as the trustee at that point. Now the offshore trustee steps in and does their job.
Clint: All right. What I’m hearing then is I would set up a trust, I’m the beneficiary. I set it up. Here with a local firm, we choose Cook Islands, where the domicile for that trust shall exist with a Cook Island trustee, and then I opened up an account in Switzerland. That means I’m flying to Switzerland to get the account?
Brian: No, generally not. The way that Swiss bank accounts have—it’s pretty interesting—is you have an introduction. The firms who work in offshore trust generally have someone in their firm that is overseas, and they introduce you to the offshore accounts like the Swiss bankers, and then that’s how you get the ball rolling and create that. That’s the negative if you go purely foreign, to be quite honest. It’s overkill and it’s burdensome.
For me, I generally don’t go offshore. I think I only go offshore with my high risk clients maybe 2% of the time. Ninety-eight percent of the time, we’re using a hybrid, because of all these crazy statutory hurdles that you have to go through and the IRS compliance, and the fact that disclosures and 1035As create the Swiss bank account. Because if you’re going to go purely foreign, there’s no reason to then create a purely foreign trust and connect it to a US bank account, because a judge can then freeze the money that you’re putting in the US bank account.
You might as well just create a Swiss bank account, but then that comes with added costs. For most people, going purely foreign, it’s just overkill. What you want is the strength of that foreign trust, a statutory nonrecognition that even if I lose, you can’t get you my money, having to prove a case beyond a reasonable doubt, having the person suing you beyond a preponderance of the evidence. You want all that really strong strength. You just don’t want to pay for it until you need that strength, that’s why you want to domesticate it.
When you create that hybrid trust, you’re actually getting the best of both worlds. You’re getting that offshore strength in your back pocket like a tool, but then you’re domesticating it so that then I don’t have to deal with the IRS compliance. I don’t have to go run to Switzerland and get a Swiss bank account right away. We’re able to combine the best of both worlds like a hybrid car.
Clint: All right, when you’re saying it’s domesticated but it’s hybrid, it’s domesticated in the sense that I’m a resident here, so I’m the trustee and I’m the beneficiary. It exists here. I open up an account here, say, with Chase. I put my money into the Chase account, it’s in the trust name, and I can exercise control over that, make distributions to myself. But if I come under duress, then you tell me, Clint, you’re no longer the trustee, you’re out. Cook Island guy is the trustee now of the trust. What happens to the money since it’s still here?
Brian: That’s when you would want to create the offshore trustee. We then help you create that Swiss. That’s when you would want a Swiss bank account. Let’s just say a hypothetical would be a fire in your apartment, rental property, and somebody dies. Those cases are going to take time. Right when you know that’s going to happen, we’re going to probably exercise that bridge, crash it, remove you as the main trustee.
If we’re going to go to that extent and remove you as a trustee, immediately, we’re going to start creating the Swiss bank account, stripping the equity out, or just fire selling everything right away. We move the money immediately and protect it. You’re not going to go to that extent in breaking the bridge if you’re not going to go into full tilt and create the Swiss bank account, but it needs to get done early on in the stage of litigation.
Clint: When you open up a Swiss bank account, if you’re not the trustee, how do I have signatory authority over? Under what position would I hold?
Brian: While you’re doing that, you would be creating it for yourself because it’s your money, it’s your bank account, so you’re still moving the money. We would remove you from the trust as a trustee, but you’re still the creator of it, and you’re still the beneficiary of it. You’re just not the trustee of it at that point. And then you have the offshore trustee who’s there to guide the process along, because they can then take any authority that’s needed to protect the assets in your advantage.
Clint: If I had (let’s say) $20 million in real estate held in various limited liability companies, if I wanted to protect those and put them into this type of trust relationship, I would assume that I would change the members of the LLC to the trust. Is that correct?
Brian: The way you would set it up with LLCs and either a Wyoming LLC as a management company or a limited partnership, the only way to protect real estate, you can’t move property. You can’t move bricks and mortar. The only way that thing that you’re really protecting is the equity.
In the initial setup, what you’re doing is having the LLCs be owned by your Wyoming LLC management company or your limited partnership like the traditional standard way that you would create it, and then the bridge trust or a hybrid trust would be the owner of that Wyoming LLC or that management company. From there, the doomsday lawsuit, the easiest and quickest way to protect what is it you’re trying to protect your livelihood is the money, the equity. We can’t take property with us. It’s just an impossibility.
You’re either fire selling it or you’re doing equity stripping. I wouldn’t even recommend stripping 100% of it because most courts hate that. Generally, we will strip 98% of it and leave a couple of percent behind. But the cleanest and easiest way, you just sell everything, and then move the cash, and put the cash into a Swiss bank account.
Clint: How does this compare to using a domestic asset protection trust that’s offered in several different states?
Brian: This level of protection is not for everybody at the end of the day, for one. If you don’t have the high risk, you’re not an entrepreneur, you don’t have a lot of real estate, you aren’t a surgeon, I wouldn’t recommend a bridge trust for you at that point. I probably just recommend the domestic asset protection trust.
The difference is there’s a lot of case law coming down now, where the courts aren’t recognizing domestic cases. Not all states recognize asset protection trusts. I think there are only about 20 now that recognize asset protection trust and have some self-settled spendthrift legislation.
An example of this, let’s say you’re a California resident and you try to create an asset protection trust. California doesn’t recognize them. They don’t have self-settled spendthrift trust. What you used to see is people running off to Nevada and creating Nevada asset protection trust.
In 2012, the courts came down and like, sorry, we’re not going to recognize this anymore. Kilker v. Stillman came down and put a squash to that and stopped this. What you’re realizing is, depending on the state that you’re in, unless you’re in that state and the assets’ in that state, it’s not going to benefit you, so you’re not getting the benefit that you want.
Especially for the states that don’t recognize asset protection trust, you’re in a situation where the only thing that you can do is create a hybrid trust, and then God forbid, we ever have to utilize it. Now you can take your equity and your money and protect it away from a judge who’s trying to execute a judgment on you.
Clint: I was smiling when you said that because I’ve recently dealt with a situation in this not really a law firm, but these collective attorneys out of Utah had taken one of my clients for $30,000. They’d set up for her and her husband a California asset protection trust. They said that it provides asset protection and said, give me a statute, give me some case law. Everyone knows this. It’s like, whatever.
Brian: That’s the thing I honestly got to say for your listeners. Really vet when you’re shopping around and ask for quotes, ask for statutes, because just because people sell themselves as asset protection attorneys, doesn’t mean that they actually are or that they know the laws of the states that they’re practicing in.
Every state, some recognize series LLC, some don’t. Some recognize asset protection trust, some don’t. You really need to vet the person that you’re talking to. I would just ask for statutes and case law when you’re talking to them.
Clint: You’ve heard about this asset protection trust or offshore trust. What you’re saying is you got to vet whoever you’re going to be working with. What are some of the questions someone should be asking if they’re considering setting up this type of trust, to know that they’re not going to lose their money?
Brian: Ask about the checks and balance system that is set up. Bring up your concerns. I’m concerned about somebody running off with my money. Very valid question. Ask, who’s the offshore trustee? Why do you use them? What role do you play? Who’s the trust protector? What is the trust protector’s role?
Why would I want to go purely foreign? Why not domesticate it? Because then you also want to know about the cost. The maintenance cost of purely foreign trust is astronomical. We generally advise, if you are going to go purely foreign, it’s going to cost you about $35,000–40,000 just to set the trust up, and then average $10,000–$12,000 a year just to maintain it, plus the IRS disclosure.
You want to make sure that the attorney that’s setting it up actually uses offshore trust a lot, because they need to know the statutes and how to use them. Then you also want to make sure that the type of client that they have matches your profile.
For example, if you’re a doctor, how many doctors do you represent and how many doctors actually are using this? If you’re a real estate investor, how many of your clients are a real estate investor base? You want to find the right match of an attorney for your specific needs.
Clint: You brought up the IRS and we talked about it earlier in the segment. When you’re using that hybrid model, since the US resident is the trustee and the Cook Island in your example, contingent trustee isn’t in control of the funds and all the assets are here, that’s not an issue with the IRS, because you haven’t moved anything and they’re not being controlled offshore.
Brian: Correct. It’s domesticated. If you’re in a state that is one of those great states that has the self-settled spendthrift legislations, that would be the state that we would domesticate your trust in. If you’re a California resident, it would be only domesticated in Nevada to the extent we’re just naming Nevada as the state of domicile.
You need to remember, these trusts are foreign trusts. You’re just domesticating them by complying with USC Section 7701, naming you as the trustee and then naming a state just for the situs, and that’s it. When you’re not actually creating a Nevada trust or Arizona trust. You’re just creating it for compliance with the IRS.
Clint: That’s important because when you draft that trust agreement, that’s where all that language takes place. With a Nevada asset protection trust or Delaware asset protection trust, there’s specific language in there that refers to Nevada or Delaware statutes.
Whereas, I assume this type of trust that’s a foreign trust, even though it’s domesticated, it’s still referring to the foreign jurisdiction and the powers that control that, because you’re choosing, you used that word ‘situs.’ I’ll let you explain that to people because that’s a legal term. I assume a lot of people don’t know what that means.
Brian: It’s just the location of where something is going to have legal presence in itself. I’m trying to find a really dumb way down to explain this for your audience, but it’s just a location of where something is going to have a jurisdictional control.
Clint: Residence.
Brian: Yeah.
Clint: That’s where it lives, why it’s here.
Brian: Exactly. When we’re creating these hybrid trusts, you are creating a foreign trust. We’re just creating a residence of where that trust is going to be domiciled.
Clint: If I went to Spain and I’ve decided I’m going to stay there for six years or so, I got a house, I got an address there in some location, but really, my home is still in Washington State. What you’re creating is a trust whose home is in the Cook Islands, but it’s just hanging out in Nevada for a little while until it decides, hey, I got to pull ship and go back.
Brian: Exactly. It’s like having two passports. You can have your US passport, your Swiss passport. As long as you have your US passport, the US is still going to consider you a resident.
Clint: It’s a fascinating aspect of it. I didn’t look at the domestication on the US side. When I’ve talked to people in the past, I bring up the fact that there are a lot of reporting requirements or expensive to set up. Your angle is, hey, why use that now? In case of emergency, break glass, and then pay the funds. Let’s keep you in control until that has to occur, and then you do it.
Brian: That’s exactly what it is. You want it, because if you were to try to create it after the fact, it’s not going to work for you. We want that strength and power in the back pocket, but we just don’t want to pay for it all when we don’t need to use it. That’s the purpose of domesticating it. Plus, then, a domesticated trust, you don’t have to deal with all those IRS compliance and disclosures, in fact, the disclosures and full trust disclosures that you would have to do with a fully foreign trust.
Clint: I got to ask this question. How many of your clients have had to break the glass?
Brian: Oh, man. I thought it was going to be a low percentage. Over 3000 clients, so we’ve had to do 300 times. It’s like 10%.
Clint: Wow.
Brian: Every time, no one’s ever followed down to the Cook Islands, because once they realize the Cook Island option is in play, they’re not going to follow you down just to lose. That’s why all the case law you see from the Cook Islands is US-versed, SEC-versed, IRS-versed, because it’s only the government that can really go down there just to lose. But I was like, 10%? That’s pretty high, but it’s been successful every time.
Clint: This is the way it’s been in my practice. When counsel is faced with this, they realize, hey, the barrier to collection is so high and the likelihood is low that it’s best to take policy limits or settle. So you don’t have to fully go through that entire process. Has that been your experience?
Brian: That’s exactly what it is. I would say 9 times out of 10, when a client is calling, panicking, your first job is to say, calm down, it’s not as bad as you think. Just like you and I are going investing in a fix and flip, and we’ve never seen one before, and we just see junk, and then the person that we’re partnering with sees a goldmine. Us, we’re used to panics. We’re like, calm down, it’s not that bad.
Nine times out of 10, just the threat of showing, hey, we have this offshore component, if you don’t leave, I will crash the bridge and break the glass, they leave. The 1% that want to try to roll a ball, because they just don’t understand the components of it yet realize how strong it is once we do break the glass or cross that bridge, and then they generally just take the insurance money or they just take the penny on the dollar, settle, leave, and never come back.
Clint: It’s the same thing with what we teach people. Hey, the more roadblocks you put up, people understand it. They want a quick buck. If they know that it’s going to cost too much to collect, they’re going to walk away. That’s really what you’re doing. You’re forcing settlement.
Brian: Exactly. I wouldn’t be recommending breaking a bridge like grandma slips and falls. You’re not doing it. We’re talking about catastrophic events. You’re going to lose basically everything that you have. Your whole legacy is going to go down. That’s when you would break these types of bridges. Pizza guy breaks his wrist, no. Check your ego at the door, just settle the case.
Clint: Just for some of those guys that always asked me this stupid question, this isn’t going to protect them from a divorce, right?
Brian: It’s a great question. I get this a lot. No. An asset protection is not going to protect you from a divorce. Just realize, after a divorce court, almost every state now has a presumption of community assets. Even if your assets come in beforehand, a lot of it, you have that capital gains, you’re going to be fighting it out through a divorce court. That’s going to be an agreement between you and your ex or a judge telling you what you have and what your spouse has. Asset protection is not there to hide assets for a divorce.
Clint: I just wanted to get that out there before people start saying, hey, because I get this quite a bit. I’m like, go somewhere else. We don’t even deal with those types of people.
Brian: No, I don’t either. I just sent them. Here’s a document and articles on fraudulent conveyance. I’ll send them from four different firms just so they can see like, hey, it’s just not me telling you this. This isn’t going to work for you.
Clint: Awesome. Hey, thanks for coming on. Is there anything else you want to leave in passing?
Brian: I would just say get your planning whatever it is going to be in place beforehand, because if you come to guys like us afterwards, it’s like going to get insurance for your car after you get in a car wreck. It’s just not going to work for you. Scale and grow. Just get your planning and scale and grow with your planning. Get it in before you get in trouble.
Clint: Great. If someone was considering setting up an asset protection trust to hold their various entities and assets, they want to get a hold of you, how do they do that?
Brian: They can just jump on my website, www.btblegal.com. I have more for education purposes, lots of case law. I like people just be educated. Just shoot me an email, brian@btblegal.com.
Clint: Brian, thanks for coming on. I’m going to put a link as well in the show notes so that if people just want to click on that link, it’ll bring them right there. If this is something that you’ve been thinking about and you’re wondering how to set it up, well, here’s someone that can teach you how to do it. I hope you do that. Thank you.
Brian: Thanks for having me on.
Clint: All right, take care.
