What is a Living Trust?

One of the most frequent questions answered by asset protection attorneys is: What is a living trust? This question is often followed by a more detailed inquiry involving matters related to privacy, effective strategies to handle taxation, dealing with overzealous creditors, and flexibility in terms of money management.

The first part of the question above can be answered with a little history. Living trusts have been around for many centuries, and they are some of the most important contributions made by British common law with regard to the legal protection of property and assets.

What is a Living Trust? Historical Background

Living trusts were created in the 13th century to protect the property of noblemen in England who feared that the ruling monarchy would fabricate accusations against them in an effort to take their property. This was a major concern during periods of rule by despotic royal families who resorted to treachery and deceit to their advantage. To prevent such unjust enrichment, noblemen resorted to revocable living trust arrangements.

Early living trusts were constructed in such a way that the property of noblemen would be entrusted to their families; this effectively prevented the ruling King or Queen from taking possession of assets when a nobleman was carted off to a Crown Prison or died in battle. The English judiciary at the time was pleased to adopt a legal strategy that effectively put an end to unjust enrichment of the most egregious kind.

These days, living trusts are used in many parts of the world to assign legal title to beneficiaries who hold property and assets in trust. Asset protection attorneys, civil court systems and legislatures around the world have shaped these legal instruments into two main categories: irrevocable and revocable living trusts. The former cannot be modified while the latter allows some flexibility.

What is a Living Trust? Offshore History

In a way, the United States of America can be considered to have been one of the first offshore jurisdictions to use living trusts as part of a legal strategy against an overzealous British Crown that sought to take property and impose undue taxes on the Founding Fathers. To this end, living trusts are connected to the zeitgeist of the American Revolution.

After World War I, international competition on matters of taxation and business regulation led to the enactment of corporate-friendly jurisdictions such as Switzerland and Liechtenstein that offered privacy and certain advantages in terms of business formation and banking. By the early 1970s, certain jurisdictions in the Caribbean had enacted estate and trust legislation and procedures that were considered progressive and advantageous to individuals interested in protecting their wealth.

Offshore Living Trusts These Days

Privacy, tax advantages and peace of mind for high net worth individuals are at the heart of irrevocable living trusts structured in offshore jurisdictions. The irrevocable nature of an offshore living trust means that the grantor has opted to not make any amendments to the arrangement during his or her lifetime. This is important in case creditors or revenue agents attempt to compel a change.

Asset protection attorneys often recommend irrevocable offshore living trusts to high net worth clients who have absolute reliance on the good faith and efficiency of the trustee to hold property and manage assets. The protection comes not only from the structure of the trust but also from the rights and warranties of the offshore jurisdiction. In other words, creditors from North America and Europe cannot simply enter into an offshore jurisdiction and exercise their authority; they must respect local laws that protect grantors, trustees and beneficiaries.

IRS Circular 230 Notice: The Statements contained herein are not intended to and do not constitute an opinion as to any tax or other matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding penalties that may be imposed under any U.S. Federal tax laws or otherwise.