The relationship among the four participants of an offshore or international trust is set out in a written, legally enforceable trust instrument. That document defines the rights retained by the Grantor, the rights of the Beneficiaries, the duties of the Trustee and the powers of the Protector.
To deliver maximum asset protection and tax savings, the trust instrument needs two key provisions. It should say that the trust is “irrevocable” and that it is “discretionary.”
Irrevocable means that you don’t keep the right to order the Trustee to wind up the trust and immediately return all the assets to you. It is critical that you not have such a right. If you did, a court could order you to revoke your trust and retrieve the assets – making them easy pickings for anyone who had won a lawsuit against you. Your trust can’t protect you unless it is irrevocable.
(Because the trust is irrevocable, you generally should include yourself as one of the Beneficiaries. This allows the Trustee to make distributions to you.)
Discretionary means that the Trustee has a duty to decide which Beneficiaries receive distributions or other benefits, how much they receive and how and when they receive them. With such a discretionary provision, no Beneficiary owns a fixed, percentage share of the trust. No Beneficiary has, for example, a right to receive 50% of the income or 25% of the principal.
A discretionary trust protects the Beneficiaries because it creates no rights that a Beneficiary (including yourself) can be compelled to sign over to a creditor.
An international trust that is both irrevocable and discretionary is a thick wall against potential future lawsuits, and those same two provisions lead to valuable tax advantages. But they also are highly cautionary for the Grantor. How can the Grantor be confident that the Trustee will use its discretion correctly? Putting that concern to rest is one reason for naming a Protector for your trust and giving him the right powers.
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