Questions & Answers

[Answers to All of Your Offshore Questions]

NOTE: Many of the answers provided below include specific references to either U.S. law or Canadian Law. This reflects the most prominent source of clientele for the services related to our "offshore strategies." Actually, the specific points made in these answers are frequently accurate in a general sense to the nationals of other countries. We have clientele from all over Europe, South America and Asia. Sometimes there are specific nuances that must be accounted for, but the information provided below is generally applicable. It is also important to note that this information is provided for your general edification and information. It is not intended to substitute for either legal or accounting advice. You should not rely directly upon the information found herein. This is an area of constantly changing laws, and there is a risk that a reader may rely upon some specific information that has changed since the last review of the text. For that reason, the author, this web site, its owners, officers, managers, agents, employees, representatives and those of any associated or linked sites, disclaim any liability whatsoever for any damages claimed to have been sustained as a result of reliance upon any information found in these questions and answers or otherwise found on this site. We strive to update this information and to ensure its accuracy, but it is always prudent to seek and obtain expert professional legal and fiduciary advice before committing to a comprehensive legal or financial reorganization. You should always consult with experienced offshore service professionals before proceeding.

 1. What is a Trust?
2. What is a Foreign Trust?
3. What does the IRS mean by a "Grantor Trust?"
4. What does the IRS mean by the term "Abusive Trust?"
5. When should you transfer your property directly to a foreign trust?
6. What can a trust own?
7. Why would I need more than one trust if I am using the trust for asset protection?
8. How does the office of "Protector" work?
9. What is a "Protector's Representative Law Firm?"
10. What is the advantage of having a law firm actually serve as the nominal "Protector?"
11. What is a "Protector's Order?"
12. Should I ever be the "trustee" of a foreign trust?
13. Should any American citizen or resident ever be the "Trustee" of a foreign trust?
14. Should any American citizen ever be named as the beneficiary of a foreign trust?
15. Can a foreign trust own a securities account with an American Brokerage firm?
16. Can a foreign trust own real estate?
17. Can a foreign trust own shares in other entities?
18. Can a foreign trust be a partner in a limited partnership?
19. Who should be the trustee of a foreign trust?
20. How does an American communicate with the Trustee of a foreign trust?
21. What is an IBC?
22. Who can own an IBC?
23. Should a U.S. Person or a Canadian own an IBC?
24. How have IBCs typically been used?
25. Do you have to report ownership in an IBC?
26. What can an IBC own?
27. What can an IBC do?
28. How are IBCs properly utilized in offshore strategies?
29. What is an LLC?
30. How is an LLC taxed?
31. How is a foreign LLC different from a domestic LLC?
32. Why is a transfer to a foreign LLC considered "arm's length?"
33. Why is the purchase of an LLC "Interest" considered a "Fair Value Transaction?"
34. How does the use of an LLC help with "Fraudulent Conveyance" problems?
35. How does a foreign LLC protect your property from creditors?
36. Can a creditor force a foreign LLC to turn over assets you have transferred to it?
37. What is a "Charging Order" and how does it work?
38. Is there a special procedure for purchasing a foreign LLC Interest?
39. What is a "Segregation Agreement" with the LLC Manager?
40. Is there any special tax advantage to the use of a foreign LLC?

TRUSTS:

1. What is a Trust?
  • A trust is a legal relationship between several parties, that is typically set out in a written instrument called either a "settlement" of trust or a "deed" of trust. Every trust has a "Settlor" who establishes the Trust. There is usually a "Grantor" who is the party that transfers money or other property to the Trust. There is always a "Trustee" which can be either a natural person (or a committee of natural persons) or a company. The "Trustee" is responsible for accepting the property in the name of the trust and then holding, managing and disbursing the property according to the terms of the trust instrument. The "Beneficiaries" of a trust are the persons or companies on whose behalf the Trustee holds, manages and disburses the trust assets.
  • In a foreign trust, the named beneficiaries can be changed throughout the trust period. The beneficiaries have no authority to require the Trustee to do anything with the trust assets. Foreign Trusts also have an office known as the "Protector." The protector has the power to veto any proposed action by the Trustee. The Trustee must have the Protector's consent in order to transfer assets, borrow funds or otherwise deal with the trust assets. The Protector cannot "order" or compel the Trustee to take any particular action, but must exercise his/her/its power in restraining the discretion of the Trustee. The Protector can suggest and advise the Trustee, but the Trustee is not required to follow the advice or suggestion. When the Trustee wants to take a certain action, it must secure a "Protector's Order" authorizing the action in advance. In recent years, many Protectors have opted for the use of a "Protector's Representative Law Firm." That system is discussed below. Others have elected to have a law firm actually be appointed as the Protector of the trust, and the client then deals with the law firm under the protection of the attorney-client privilege. In short, a trust is an arrangement whereby the legal title to assets are held by a trustee, in the name of the trust, for the eventual benefit of the named class of beneficiaries. Creditors of the grantors, trustee or beneficiaries are unable to gain access to the trust assets. Where there is no "fraudulent conveyance" of assets to a trust, they are thereafter protected from creditor claims.

    2. What is a Foreign Trust?

  • A foreign Trust is nothing more than a trust which is settled under the laws of a jurisdiction other than the jurisdiction of the principal responsible for its formation. Domestic trusts (for most of our clients this would mean a trust settled in either the U.S. or Canada) generally do not utilize the office of Protector or the use of a Protector's Representative Law Firm. A trust is organized and administered pursuant to the laws of it home jurisdiction. Thus a trust settled under the law of the Federation of St. Kitts & Nevis would use Nevis law even though the trust was administered by a trustee located in another country such as the Bahamas.

    3. What does the IRS mean by a "Grantor Trust?"
  • The IRS has enacted a number of provisions in the U.S. Tax Code that attempt to end any tax advantages that may have previously existed for the use of foreign trusts. Under these rules, a trust settled or funded by a "U.S. Person" (a U.S. Person includes both natural and corporate entities, and includes not only citizens but residents of the U.S.) will be deemed to be a "Grantor Trust" by the government. Accordingly, the tax authorities will disregard the trust and will impute the income of the trust to the "Grantor" as if the trust had never been settled. This tax will be due from the Grantor, even if the Trustee makes no distribution of the profits from the trust. Where the Grantor is not a U.S. Person, but any U.S. Person is designated as a "Beneficiary" or a member of the class of potential beneficiaries, then the tax authorities may declare the trust to be a Grantor Trust and they will impute the income of the trust to the identifiable U.S. beneficiaries in proportion to their beneficial interest. This was an expected response to the abuse of the old law where U.S. citizens transferred substantial wealth offshore, reinvested that wealth tax free from various tax havens, and avoided tax consequences while their fortunes grew very rapidly, without the burden of taxation. The old saying is that "The IRS may have been born at night but it was not LAST night. In any event, there is little or no advantage left for an American to simply transfer assets to a foreign trust. There can be some asset protection advantages, if done carefully, but there are no remaining tax advantages. There are other strategies that can still accomplish tax deferral and tax reduction.

    4. What does the IRS mean by the term "Abusive Trust?"

  • Following implementation of its new Grantor Trust rules, the IRS determined to go after those who were using trusts in any form, to attempt to illegally (according to the IRS) evade taxes. In addition to the foreign trusts, the IRS targeted the scamsters that are found all over the Internet who are tauting and selling instruments that they variously refer to as "Constitutional Trusts," "Pure Trusts," "Constitutional Business Trusts," "Constitutional Unit Trusts," etc. The common factor in all of these products is that they are absolutely worthless for the purpose for which they are marketed. The promoters claim that the Constitution guarantees the right to contract and that this form of trust is the sort of contract that is beyond the jurisdiction of the government to intrude. They suggest that by some sort of magic, you can use these trusts to completely avoid federal income taxation. It is the very real abuse of such trust products as these that has produced so much unwanted and unwarranted attention to be focused on legitimate uses of trusts. Properly formed and properly funded trusts still play a valuable role in a total financial plan. The consumer needs to be wary of unbelievable promises by non-lawyer promoters (especially when they begin to spout on about how helpless the government is in the face of their special, secret or sovereign products.)

    5. When should you transfer your property directly to a foreign trust?
  • When it is your intent to actually transfer property to a trust, with the intent that it be eventually distributed for the benefit of the beneficiaries of the trust, and where there is a concern that creditors may lay claim to the assets before the time comes to distribute the assets to the ultimate beneficiaries, there may be a place for a direct transfer. Even then, the U.S. Person should consult their tax advisor as to the possible consequences of transferring appreciated assets to a trust. One also needs to be mindful of the tax consequences that may attend such a transfer. If the IRS deems the trust to be a Grantor Trust, the Grantor may be called upon to pay the imputed taxes on the income enjoyed by the trust, even thought the trust agreement may not call for a distribution to the Grantor to cover such taxes. It is our considered opinion that the problems associated with a direct transfer of assets to a foreign trust always outweigh the advantages of such a transfer. While it is not illegal to transfer domestic assets to a foreign trust, the person effecting the transfer is required to promptly report that transfer. This will generate a lot of unnecessary attention and will almost certainly guarantee an audit of your most recent tax returns. There are other strategies for expatriation of assets that are less intrusive.

    6. What can a trust own?

  • A trust can own virtually anything that a person or a corporation can own. It is a separate legal entity. It can own real and personal property. It can own tangible and intangible property. It can be a creditor as well as a debtor. If the trust is the proper legal owner of an item of property, then the creditors of the grantor, trustee and beneficiaries are without remedy to attach the property owned by the trust (usually in the name of the Trustee.) The better question related to what a trust should own rather than what it can own. It is also important in most well designed strategies to determine the chain of ownership of assets that eventually arrive under the ownership of a trust. There are principals associated with what is called "fraudulent conveyance" or "fraudulent transfer." This is discussed elsewhere on this site, but it is important not to make a fraudulent transfer of property because the courts may step in and void the transfer. If that happens, the assets are unprotected and there are additional costs that can be assessed.

    7. Why would I need more than one trust if I am using the trust for asset protection?
  • You never want to place "safe" assets into the same trust as assets that may generate liability. For example, stock certificates, certificates of deposit, or other intangible assets that do not create liability, should not be held in the same trust as vehicles or rental property. The reason is simple, the vehicle or the rental property could be the cause of a successful lawsuit against the trust as the owner of the vehicle or rental property. When the creditor goes to collect on that judgment, you do not want your "safe" assets to be endangered or seized to satisfy the judgment. Thus, each asset that is likely to expose the owner to liability should have its own trust. Truly safe assets can be held in a single trust. Active businesses should always have their own trust as owners of the stock.

    8. How does the office of "Protector" work?
  • We mentioned the office of Protector above. Trusts settled in the U.S., Canada and most of the world lack this important feature. Trusts settled in other Common Law jurisdictions have found great value in this concept. The role of the Protector is to exercise a restraint on the otherwise unlimited discretion of the Trustee. Where an individual wants to maintain effective influence over a trust, without having legal "control," the office of Protector is the answer. If a person has the power to command a Trustee to do an act, then the Courts may deem the trust to be a sham, or deem the person to be a "co-trustee." To avoid this, the office of Protector was designed to permit power to be exercised only in the negative. The Protector can veto any act or intended act by a Trustee. The Trustee must have the consent of the Protector in order to act. Thus, where you have an interest in the use of trust funds, but are not the Grantor or Settlor, the way in which you exercise your influence is by appointment as the Protector. A Protector can be an individual, a committee of individuals, or a corporate trustee. Each has its advantages and disadvantages, but in our experience the use of a professional trustee company has the greatest advantage.

    9. What is a "Protector's Representative Law Firm?"

  • As various governments of industrialized nations continue their assault on privacy, new strategies are undertaken to preserve privacy wherever possible. The use of a "Protector's Representative Law Firm" is such a strategy. Where a Canadian or American has the power to influence the decision making of the Trustee of a foreign trust, it is often important to be able to avoid forced disclosures about that process. By inserting a Protector's Representative Law Firm between an appointed Protector and the Trustee, much can be accomplished. This is particularly so if the law firm is located outside Canada and the U.S. and the jurisdiction of their courts. In this scenario, the Protector has privileged communications with a law firm. These communications are protected by the attorney-client privilege and may not be compelled. The law firm then communicates with the Trustee under an arrangement whereby the Trustee is protected if it acts in concert with consent given by the Law Firm. Neither the foreign law firm nor the foreign trustee are subject to subpoena by the Courts of Canada or the U.S. Even identification of the Protector may be beyond the legal grasp of these authorities. The small additional cost associated with the use of this strategy is a small price to pay for the added layer of protection.

    10. What is the advantage of having a law firm actually serve as the nominal "Protector?"
  • The next logical extension of the strategy mentioned above is to have a law firm appointed as the actual Protector. It is then, as a matter of law, the right and authority of the law firm to grant or withhold consent tot he Trustee. It is up to the law firm to approve appointment of whoever as a financial or investment advisor to the Trust. The Canadian or U.S. person will have an agreement with the law firm, whereby his or her wishes are made known to the law firm. The firm relies upon this sage advice in deciding whether to grant or deny consent to the Trustee for any given action. If subjected to a deposition, the Canadian or American can correctly and legally deny holding the position of Settlor, Grantor, Beneficiary or Protector. If asked about communications with the foreign law firm, the attorney-client privilege stands as a protective bar. This strategy is the most advanced currently available. Again, for the small cost of adding this layer of insulation, great peace of mind can be obtained.

    11. What is a "Protector's Order?"

  • A Protector's Order is the device by which the Trustee company protects itself. Typically, the Settlement of Trust (sometimes called the Deed of Trust) provides that the Trustee is indemnified and held harmless in the exercise of its fiduciary responsibilities where it acts in accord with the written consent of the Protector. Although not technically an "order", the Protector's Order is the instrument by which the Protector (or Protector's Representative Law Firm) grants consent to the Trustee to enter into a particular transaction. This is, for example the way in which a Trustee is authorized to enter into a particular investment with trust funds and rest assured that if the investment goes south, that the Trustee will not be facing a suit by beneficiaries or others for failure to meet the prudent trustee or prudent investor standard (as interpreted by some court after the fact.) A properly run Trustee company will seek standing Protector's orders with respect to repetitive transactions or a particular business transaction. As to every transaction or act not covered by such standing orders, the Trustee will require a separate written authorization for each new event. This is frequently done through heavily encrypted email for confidentiality reasons.


    12. Should I ever be the "trustee" of a foreign trust?

  • NO!!! There is absolutely no point in undertaking an "offshore strategy", with the goal of asset protection or financial privacy, if you are going to subject the trustee to the jurisdiction and power of the Courts of the U.S. or Canada. It makes no difference where you relocate the assets. It makes no difference what arguments you present as to why the trust is sacrosanct. If the Canadian or U.S. Courts happen to disagree and opt to assist a creditor or governmental agency, then the court need only order the American or Canadian Trustee to repatriate the assets held by the trust to the location of the Court's choice. Failure to comply will result in a contempt citation and the likely incarceration of the recalcitrant trustee. Where better planning has taken place, and the trustee of the foreign trust is a foreign trustee company, the courts of the U.S., Canada or any other nation other than the jurisdiction where the strategy is implemented, will have no power to compel either information or a transfer of assets. For a strategy to be effective, both the assets and the trustee holding and managing the assets, need to be located "offshore."

    13. Should any American citizen or resident ever be the "Trustee" of a foreign trust?

  • NO!!! In 1999, the Courts in the U.S. handed down the now-famous "Anderson case." The Andersons operated an illegal Ponzi scheme that bilked many "investors" out of millions of dollars. The Andersons had set up a trust in the Cook Islands prior to running this Ponzi scheme. They quickly expatriated the proceeds from their activities into this foreign trust. Unfortunately for the Andersons, they had poor advice when they set up their trust. They had themselves appointed as the "U.S. Trustees" of the trust, with the understanding that they would resign if legal action was brought. They also reserved the right to determine whether an "event of duress" existed if a Court ordered either information or money from the trust. The Court jailed the Andersons for contempt when they failed and refused to repatriate the money to the U.S. The Court ruled that by being appointed as trustees until they were sued and further by retaining too much power over the trustee, that they had established a sham trust and that they in fact had the capacity to regain possession of the funds. The Andersons spent six months in jail as the price for their poor planning. (Of course, as fraud merchants and cheats, they deserved the time in jail--- but they should have planned better so that their incarceration was related only to any criminal activity and not ignorance.)

    14. Should any American citizen ever be named as the beneficiary of a foreign trust?
  • This one is little trickier. Most people are concerned that in order to eventually enjoy the benefit (hence the term "beneficiary") of assets that repose in a trust, that they must be a named beneficiary. If asset protection is the sole purpose of the trust, so as to protect the assets over a period of time from the ravages of legal action by creditors of either the grantor or the beneficiary, this might be fine. Fortunately, it is not necessary to be a named beneficiary in order to enjoy long term advantages from the assets of a trust. By not having any U.S. person named as the beneficiary of a trust in which the assets were not transferred directly by a U.S. person, it is possible to avoid the reporting and tax requirements of a "U.S. Grantor Trust." A U.S. person can receive compensation from a foreign trust as a consultant, financial advisor, investment advisor, or through contracts between the trust and some domestic business entity owned or controlled by the U.S. person. It is unnecessary to be a named beneficiary in order to enjoy the advantages usually associated with being a beneficiary. We recommend that Canadian and U.S. Persons always avoid being named as beneficiaries to the trusts that are a part of their offshore strategy.

    15. Can a foreign trust own a securities account with an American Brokerage firm?

  • YES! A trust can own any sort of intangible property, and securities are simply one form of intangible property. A trust can own individual stock certificates or it can be the nominal owner of a securities account with a brokerage firm. A trust can own not only equity stocks, but can own and can trade in options, futures, derivatives and other financial instruments. A little- known quirk of American Tax law (which exists in several other major national tax systems) permits non U.S. Persons, to bring money into the U.S., to purchase securities accounts, and to trade those securities accounts through a U.S. broker, TAX FREE. For a more complete discussion of how this is done, click HERE.

    16. Can a foreign trust own real estate?
  • Absolutely. The more important question to ask is why you want a particularly parcel of real estate to be owned by a trust, particularly a foreign trust. Remember that real estate is not movable. It cannot be hidden from either a creditor or the courts that may assist that creditor in separating you from the ownership of the real property. Since the real property itself will remain within the jurisdiction of the domestic courts, it is important to identify the advantage to be gained and the place the transaction occupies in an overall strategy before transferring real property into a foreign trust. Even where it appears to be an advantage to hold real property through a trust, it is probably better advised for the property to find its way there other than by a direct transfer by a U.S. Person. A more advantaged strategy is probably to have the real property exchanged for a Certificate of Interest in a foreign LLC, and to later have that LLC exchange the ownership of the property for a debt instrument (Promissory Note) from the Trustee. The explanation of the asset protection and tax advantages of this arrangement are discussed elsewhere on this site.

    17. Can a foreign trust own shares in other entities?

  • Once again, the answer is yes. A trust can own the shares of an IBC )International Business Company.) This arrangement is frequently a part of an offshore strategy. A trust can also own shares in domestic companies, but if the company is publicly traded, disclosure may be required of this interest. A trust can own an interest, however designated in any entity that can be owned by a person or corporation.

    18. Can a foreign trust be a partner in a limited partnership?
  • Yes again. A trust can be either a limited or a general partner in a limited partnership. It can also form an IBC, and allow that IBC to be a partner in any partnership. Depending on the specific needs and goals of a client, this may be a logical arrangement in an overall strategy.

    19. Who should be the trustee of a foreign trust?

  • We have discussed this to some extent above where we recommend that neither a U.S. nor a Canadian citizen or resident be appointed as the trustee of a foreign trust. Specifically, anyone can be appointed as a trustee. In our experience, either a law firm or a trustee company are ideally suited to be Trustee. While there may be some perceived privacy advantages to the use of a law firm, it is our belief that the best arrangement is to obtain that privacy through the use of a law firm as either the actual Protector or the Protector's Representative Law Firm. The Trustee company does this as a professional pursuit. Because it is a company, it enjoys permanent existence and continuity. The death of an employee of a trustee company does not create cause for alarm. The company remains obliged to perform the services and duties of Trustee.

    20. How does an American communicate with the Trustee of a foreign trust?
  • First, the role of the American must be selected carefully. Where a trust is settled with the needs of an American or Canadian in mind, but where there is no transfer of assets to the trust by the North American citizen, the usual role is as either the Protector or the person empowered to communicate with a law firm that has been appointed as Protector for the benefit of the North American client. Once the American's role has been established, we will know the line of communications. If the American is the Protector, he/she will communicate with the Trustee either directly or through the Protector's Representative Law Firm. In either event, we recommend the use of encrypted email as a communication device. If a law firm has been appointed as the actual Protector, then the communication will be with the law firm pursuant to a representation agreement. Again, even thought these communications should be protected by the attorney-client privilege, we recommend the use of encrypted email. The reason for the encryption is obviously driven by privacy considerations. The reason for the written form of communication is the importance of avoiding any misunderstanding and the need from time to time to memorialize your actual grant of consent or direction of other information.

    INTERNATIONAL BUSINESS COMPANIES (IBCs):

    21. What is an IBC?

  • An IBC is the acronym for "International Business Company." While some jurisdictions refer to these as "Exempt Companies" or other terms, the acronym "IBC " has stuck as the shorthand for this genre of legal entity. The IBC is a company that is permitted to be formed in a tax-haven jurisdiction such as the Bahamas or the British Virgin Islands. It is permitted to operate and to do business with people and other businesses all over the world, except that it can not do business locally with the inhabitants and businesses resident in the tax-haven. If an IBC operates a business from the tax haven, no income taxes are assessed by the tax haven on this business income. Depending on how the business operates, income taxes may be assessed by other countries in which the business transacts business.

    22. Who can own an IBC?
  • An IBC can be owned by a person, another business, an LLC or a trust. If an American obtains an ownership interest in an IBC, that fact must be promptly reported to the IRS. It is not illegal, but they will no doubt have questions about what you are up to and they will also be interested in your recent tax returns. In the eyes of the tax authorities, there is no good reason for an American to own an IBC and they will want to "get to the bottom" of whatever you are up to. Accordingly, it is almost always best for the IBC to be owned by a foreign trust or a foreign LLC.

    23. Should a U.S. Person or a Canadian own an IBC?

  • Our advice is almost always a resounding "NO." If the Canadian or American is in need of an asset protection structure, it does no good to own the shares of the company that comes to own the assets. A creditor will simply execute on your shares and they will then own the IBC and all of its assets. As stated above, there is also the problem in both countries of reporting requirements with respect to foreign companies. This advice may seem strange in light of the way that IBCs have been marketed all over the world. Don't confuse the marketing strategies of foreign lawyers, corporation formation companies and accountants with sound legal advice that takes into consideration the laws of your own country as well as the laws of the jurisdiction where the IBC is formed.

    24. How have IBCs typically been used?
  • For years, IBCs have been marketed to Canadians and Americans through ads in newspapers and travel magazines. Tourists, on vacation are told that by purchasing an IBC through a foreign attorney, accountant or corporation formation company that they can hide assets and avoid taxes in their home country. These IBC marketers fall into two categories: a) those who are totally ignorant of the laws of the U.S. or Canada; and b) those who know that they are setting you up for criminal behavior and who don't care. In fact, they may as well as put up a sign that reads "Help With Tax Evasion Here!" It is certainly not illegal to own an IBC. It is illegal to own an interest and not report it. It is illegal to use an IBC to hold your assets so as to avoid tax on the income produced by the assets. Anyone who tells you differently is either ignorant of the law or dishonest. There most assuredly are legitimate uses for IBCs and there is a place for them in a total offshore strategy. You need to take care that the offshore professional designing your strategy is familiar with U.S. or Canadian tax laws as well as the laws of the tax haven.

    25. Do you have to report ownership in an IBC?

  • Americans are required to promptly report their purchase of ownership of a foreign corporation. They are similarly required to report transfers of money or property to foreign corporations or trusts. They are also required to report distributions from foreign trusts or corporations. If secrecy is required in order to make your plan work, you face the "Catch 22" of violating the law by not reporting any ownership in the foreign entity. We design strategies in which you really do not obtain an ownership interest in the IBC and are therefore not required to file a report with your government.

    26. What can an IBC own?
  • An IBC, like a domestic corporation can own anything that a natural person can own. It can own both real and personal property. It can own both tangible and intangible property. It can own other corporations and can be a partner in a partnership.

    27. What can an IBC do?

  • An IBC is a corporation with a special tax status in a particular jurisdiction. Unlike a domestic corporation, an IBC may not engage in business locally. It may not transact business with the local population or local businesses (other than other IBCs). The trade-off for this limitation, it that no taxes are assessed against the IBC for profits earned in its transactions "off the island."

    28. How are IBCs properly utilized in offshore strategies?
  • In a properly designed offshore strategy, an IBC can be found to be owned by a foreign trust in which no American or Canadian person is a trustee, grantor or beneficiary. The trustee of the trust that owns the IBC will act as the director for the IBC. The Trustees actions with respect to the IBC will be always subject to the written approval of the Protector of the trust (see comments on Protectors, above.) Often, you will encounter people or businesses that are accustomed to doing business with another corporation. The IBC fills the bill here without creating new legal problems for the Protector.

    LIMITED LIABILITY COMPANIES (LLCs):

    29. What is an LLC?

  • An LLC is the acronym for a Limited Liability Company. Virtually every state in the U.S. and the Canadian Provinces now have laws that authorize the formation of LLCs. An LLC has the best attributes of both a corporation and a partnership. It can be organized so as to be taxed as either a corporation or a partnership, based upon certain criteria set up in the tax codes. Where you would buy a share or a stock certificate in a corporation, you purchase an "Interest" in an LLC. That "Interest" reflects the value in your "capital account" equal to the value of the money or other property you exchanged for your "interest." The LLCs that we utilize for our clients are also structured so that there is no chance that it will be deemed a Controlled Foreign Corporation or other tax penalized entity under the current tax code. The LLC is unquestionably the best entity for North Americans to use for initial transfers of property from their home country.

    30. How is an LLC taxed?
  • Using specific criteria found in the tax laws of the U.S. and Canada, a foreign LLC can be organized so that is taxed as either a partnership or a corporation. In the U.S., most LLCs are formed so as to be taxed as a partnership. There are reasons why this is usually an advantage in a domestic LLC. An offshore LLC is more often advantaged by being organized as a corporation. Taxed this way, a U.S. or Canadian Member (someone who transfers property in exchange for an Interest) will incur no tax liability unless the LLC makes a distribution similar to a dividend or until the Member sells his or her Interest for a profit. The Member's capital account may increase due to the business operations or investments of the LLC, but that increase in value is untaxed until the Interest is redeemed.

    31. How is a foreign LLC different from a domestic LLC?

  • There are several very important ways in which a foreign LLC differs from a domestic LLC. We utilize LLCs formed under the laws of the Federation of St. Kitts & Nevis. Specifically, Nevis has drafted an Ordinance that gives very favorable treatment to LLCs. The most immediately notable difference is that the LLC, its Manager and the assets it holds are beyond the jurisdiction of the Courts of the U.S. or Canada. Nevis does not recognize foreign judgments. A creditor, looking for assets that have been transferred will have to go to Nevis. The Creditor will have to hire local (Nevis) counsel and will have to pay up front (contingency fees are prohibited.) The creditor will have to pay a $25,000 cash bond to the Court in Nevis to protect the LLC for costs expended if the creditor loses. The burden of proof in the U.S. and Canada is only the "preponderance of the evidence" test. That means you must win by say 51% to 49% level of proof. In Nevis, the standard is the same as the criminal standard in the U.S. and Canada ("beyond a reasonable doubt.) Finally, the only remedy that a creditor can obtain against an LLC is a "charging order" (discussed below.) That is a poor remedy for a creditor who has worked so hard to get at an asset.

    32. Why is a transfer to a foreign LLC considered "arm's length?"
  • The term "arm's length" means that you are dealing with a legal stranger. You are not dealing with another company you control. You are not dealing with a spouse, a parent, a child, or a close friend. You are dealing with a legal equal. Because of this, the transaction is not considered as "suspicious" or improper. If you transferred property to someone close to you with the idea of retrieving it later, after danger to your property had passed, the court's could set it aside. Where the transaction is at "arm's length" it is likely to survive an attack.

    33. Why is the purchase of an LLC "Interest" considered a "Fair Value Transaction?"

  • The Certificate of Interest issued by the Manager of the LLC will reflect the fair value of the property transferred in exchange of the Interest. Where the Interest is Purchased with cash (or its equivalent) the Interest will evidence a capital account with the LLC equal to that payment. From the time of the acquisition of the Interest, the value will fluctuate up or down depending upon the expenses and income of the LLC.

    34. How does the use of an LLC help with "Fraudulent Conveyance" problems?
  • Really, the answers to the last two questions answers most of this. Where a transaction is both at "arm's length" and "for fair value", it is extremely difficult for a creditor to demonstrate to a court that the transaction was done with fraudulent intent. A fraudulent conveyance can be established either by direct proof of an intent to frustrate a creditor or by inference by proving what are called "badges of fraud." It is rare that a creditor can prove actual intent so the most common attack comes through these badges of fraud. Showing that the LLC is an arm's length party and that the transaction resulted in your receipt of an asset of comparable value to the money transferred (the Certificate of Interest) will make it extremely hard for a creditor to prevail. Since Nevis does not recognize foreign judgments, a creditor would have to litigate this issue in Nevis. It would have to do this before the short statute of limitations expired.

    35. How does a foreign LLC protect your property from creditors?

  • In addition to the protections offered by the concepts of an "arm's length" transaction, a "for fair and comparable value" transaction, and the short statute of limitations, the Nevis Ordinance provides another substantial fortress of protection. The property of the LLC is the legal property of that entity, and not the property of the person who transferred property to it. A creditor is afforded an exclusive statutory remedy. That remedy is a "charging order." A creditor cannot become a member of the LLC by use of a judgment against a member. A creditor cannot force the dissolution of the LLC. A creditor cannot force the LLC to make a distribution of the capital account or any income enjoyed by the LLC. The exclusive remedy of a charging order is so poor a remedy, that most thinking creditors forgo it.

    36. Can a creditor force a foreign LLC to turn over assets you have transferred to it?
  • No. Although a domestic Court in the U.S. or Canada may attempt to make such an order, it will have no effect. If the order is directed to the U.S. or Canadian person, their response is that they no longer have the assets and that they are powerless to require the Manager to redeem their capital account. The Canadian courts and U.S. should apply and enforce the Nevis law that grants the creditor the charging order as his exclusive remedy.

    37. What is a "Charging Order" and how does it work?

  • A Charging Order is a court order that places a creditor in the legal shoes of a member of an LLC. That means that if the Member is entitled as a Member to receive a distribution from the LLC, that the creditor is entitled, in place of the Member to have the LLC Manager make that distribution to the creditor. This distribution will go to reduce the judgment that the creditor has against the Member. Of course, if such an Order were served upon the LLC, you can be sure that there will be no more distributions and the creditor will receive nothing. Additionally, if the LLC is organized as a partnership for tax purposes, the creditor will be required in the U.S. to pay the taxes due on the earned, but undistributed income attributed to the Member. All in all, a charging order is such a poor remedy, that most creditors simply give up and walk away.

    38. Is there a special procedure for purchasing a foreign LLC Interest?
  • Yes. Since virtually every wire transfer out of the U.S. or Canada, or check to a foreign entity clearing through a U.S. or Canadian bank is reported to the tax authorities of that country, it is preferable to use a procedure that provides less information to these agencies. This is not because there is anything illegal about the transaction. Rather it is because of a legitimate privacy interest. It is your business and you are entitled to use legal means to keep it your business. The procedure is simply to use a law firm as a "closing agent" for the purchase of the Interest in the LLC, precisely as you would use a law firm or a title company to close a real estate purchase. You wire your funds to the law firm, which in turn wires the funds to either another law firm in the target jurisdiction, or to a trustee company acting as the tax haven closing agent. The law firm sees that you receive your Certificate of Interest and that the Manager of the LLC gets the proceeds. There is nothing illegal about this procedure but t does provide some measure of privacy.

    39. What is a "Segregation Agreement" with the LLC Manager?

  • A "Segregation Agreement" is an agreement between a Member of an LLC and the Manager of the LLC in which the Manager agrees not to aggregate the funds used to purchase the Interest and capital account with the funds of other Members. The Manager will agree to use or invest the funds used to purchase your capital account in a fashion consistent with your risk tolerance. The Manager may agree with you to use the funds in your capital account to make a loan to a foreign trust on the condition that you are named as the Protector of that Trust so that you are ensured that the Trustee will not make business or investment decisions that you find unwise. When this happens, you will own a Certificate of Interest, the Trust would own the funds it had borrowed from the LLC and the LLC would own the Promissory Note from the Trustee. You would be able to protect the funds that now belong to the Trust by exercising your authority as Protector.

    40. Is there any special tax advantage to the use of a foreign LLC?
  • If the LLC is organized so as to provide for taxation of the Members as if it were a corporation, then there will be no tax due from the Members until either they receive the equivalent of a dividend distribution or they sell their Interest for a gain. This is a big advantage in that the income tax is deferred and the capital account is free to grow and compound, unburdened by annual taxation. Done correctly, this is a HUGE tax advantage.