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Trusting the Trustee

Q. How can I be confident my offshore trustee won’t steal something — or everything?

A.  There are two ways for you to get the comfort you’re looking for.  You may want to use both.

The first solution is to buy an airplane ticket and visit the trustee.  After one or two meetings, you probably will have a strong idea about whether the institution is reliable. Facts quiet the imagination.

The second solution is to use the right structure.  There is no need for the trustee to directly own the assets you want to protect.

To impose the tightest financial controls, keep all the investments in a foreign limited liability company. Your trust would own that LLC, but you would be the company’s Manager. You would have hands-on management control over all the company’s assets. You, not the trustee, would be the signer on the LLC’s bank and brokerage accounts. That would make it impossible for a less-than-ethical trustee or trust company employee to run off with anything. The trustee won’t even know what the assets are.

Audit Profile

Q. I want the safety advantages of an international trust. But if I set one up, will I be setting myself up for an IRS audit?

A.  No.  Forming an international trust will not increase the chance of an audit or other scrutiny.  Just be sure to file all the IRS-required reports.

The tax rules for offshore trusts are clear and unambiguous. There’s nothing to argue about.  So just follow the rules.  Go on green and stop on red, and you won’t get a ticket.

Include the trust’s investment income on your own tax return. That’s what the rules tell you to do. And tell your accountant about your offshore trust, so he can prepare and file the reports the IRS wants. Keeping your accountant in the loop keeps you out of trouble.

If you talk to any tax attorney or accountant who deals with international financial planning about whether an offshore trust will attract trouble with the IRS, the answer will be “No. But make sure you file the required reports.”

When you pay your taxes and follow the reporting rules, there’s nothing for the IRS to argue about. Go on green, stop on red.