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Kinetic Asset Protection: The Players.

By Rob Lambert - Email Editor

Date: 04-Aug-2005

Just who are the players, and what do they do in a typical Kinetic Asset Protection Trust set-up?

Most Asset Protection experts take the position that the creator of an Asset Protection Trust should relinquish all control from day one. They advise their clients that the only safe and effective way to implement an Asset Protection Trust is to actually give up 100 percent control of their protected assets to some far away and often undercapitalized Trust Company. In short, they advise their clients that they must trust the Trust Company with their hard-earned nest egg if they want solid protection. As I pointed out last week, nothing could be further from the truth. As long as the creator of a Trust implements his plan when the financial seas are calm and retains plenty of unprotected wealth outside of the plan to satisfy his reasonably anticipated debts, he can and should retain control over the protected assets as long as the financial seas are calm. To do otherwise exposes the Creator of the Trust to a risk that the Foreign Trust Company will steal his hard earned money. Always a bad idea…and never necessary.

To understand who the players are and what they do, it is best to take a snap-shot of a properly done “Kinetic” Asset Protection Plan at two stages: when the financial seas are calm, and again in red alert mode. This newsletter identifies the players, while the next newsletter analyses their functions at the various stages in the life of a Kinetic Asset Protection Trust.

In each case the players are the same. The four key players are:

1. The Settlor or Creator or Grantor or Trustmaker:

In most cases, this is the client or the person who established the Trust, and is the person who we are trying to protect. One rule - which has been long embedded in the common law of the USA —is that “Self-Settled” Trusts can be invaded by the creditors of the Settlor. (In a future newsletter I will elaborate on the largely ineffective attempts of some States to invalidate this long-standing rule.)

2. The Trustee:

The Trustee is the person or company who accepts the assets put into the Trust and agrees to take care of them in accordance with the instructions provided by the Settlor. The Trustee has the highest of fiduciary duties to both the Settlor and the Beneficiaries. In most Trusts that are prepared on the Kinetic Asset Protection Model, there are two trustees. One will normally be called the U.S. Trustee, and the other is normally called the Foreign Trustee or Foreign Trust Company. With properly done Kinetic Asset Protection Trusts, it is possible to structure them so that they are treated as Domestic Grantor—meaning disregarded—Trusts for income tax purposes.

This is done in part by giving the U.S. Trustee a significant level of control over the assets while the financial seas are calm. It is very interesting that a typical Trust will be domestic for tax purposes and foreign for debtor-creditor purposes. That is the reason why we attach a Foreign Trust Company to the Trust.

When the financial seas are calm, the main service provided by the Foreign Trust Company is to establish the “foreign situs,” or site, of the Trust for debtor-creditor purposes. In short, we rent the foreign situs of the Trust from the Foreign Trust Company. The presence of the Foreign Trustee, in properly done plans based on the Kinetic Model, will often force a creditor to litigate outside of the U.S. in an environment which is hostile to the typical contingent fee litigator (much more on this later). The Foreign Trust Company should always be a solid and experienced Trust Company; however, as I will explain in great detail in a later newsletter, I do not think it matters which jurisdiction you choose for the trustee in a Kinetic Asset Protection Trust set up when the financial seas are calm. The reason: In many cases the original Foreign Trust Company will be replaced as part of the process of going to Red Alert Status. Changing the situs of the Trust from one jurisdiction to another is as simple as removing the old trustee in favor of a new trustee in another jurisdiction (much more on this later too!).

3. The Protector: The Protector's job is like an ombudsman or policeman to the Trustee. The Protector's job is to make sure that the Trustee operates the Trust in a way that was intended by the Settlor. The Protector has no real power to deal with the Trust assets; however, the Protector is often given the power to veto any act of the Trustee. The Protector is also often given the power to remove the U.S. Trustee when the Trust is faced with attack (more on “duress provisions” in a later newsletter).

4. The Beneficiaries: These are the folks who are to be benefited by the Trust. Normally, the Settlor is the primary Beneficiary, and then other family members. An Asset Protection Trust prepared on the Kinetic Model will normally provide that assets in the Asset Protection Trust are distributed to Beneficiaries in accordance with whatever will or estate planning trust the Settlor has put into place. This is very convenient as it allows the Settlor to change the distribution pattern at any time by redoing his estate plan WITHOUT touching his OLD AND COLD Asset Protection Trust.

Next week's newsletter will deal with the interaction of these four key players at various stages in the life of a Kinetic Asset Protection Trust. It will also explain why I think it is perfectly appropriate—and in fact important—that the Settlor also be the U.S. Trustee and sometime even the Protector when the financial seas are completely calm. Remember, I do not think a Settlor should ever give up control of assets unless and until there are no other alternatives.

I wish you a happy, healthy and protected week.

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