A trust is a contractual agreement between its creator (the grantor) and those it benefits (the beneficiaries). The trustee oversees the trust and ensures that its charter is being fulfilled.
There may be one or more grantors, for e.g. you and your spouse, and there may be one or more beneficiaries, e.g. just you or others as well. This site will focus specifically on trusts where you are both the grantor and the beneficiary, i.e. a self-settled trust.
The trustee must be independent. However, several states now allow for the formation of Private Trust Companies (PTCs). These companies are considered independent in the eyes of the law, but allow you to avoid ceding control of the trust to a third party. This is preferable from a cost management standpoint and because it allows
Some may still prefer a Public Trust Company either to reduce the administrative burden or because they already have such an arrangement in place, to name just some reasons.
To repeat, there are three parts to every trust:
- Grantor (creates the trust)
- Beneficiary (benefits from the trust)
- Trustee (manages the trust)
Numerous states began allowing irrevocable self-settled trusts that allowed asset protection to compete against traditional offshore trust providers. Those formed in the U.S. are commonly referred to as Domestic Asset Protection Trusts.
Alaska was the first state to allow this arrangement in 1997. This was via the Alaska Trust act which allowed so called “Alaskan Trusts”. This was done to compete with traditional offshore providers such as Nevis, the Cook Islands, Seychelles, etc.
Additional states soon followed, e.g. Wyoming, Nevada, Delaware and 10 others. This watershed broke because states were first tired of losing business to traditional offshore havens, and then to Alaska.
Some High Net Worth Individuals may not mind the time and expense of establishing a proper offshore trust. However, most will prefer the relative simplicity, and reduced audit risk, of setting up a trust inside the US. This is due to enjoying the same benefits while also enjoying the benefit of US law.
It is not that offshore providers cannot be trusted, but that there are unscrupulous providers – and it’s not easy to tell the difference.
Tax minimization and asset protection are the driving reasons most create trusts. So long as a proper domicile is established, there are no limitations on where you can create a trust. This means residents of Non-DAPT states may create trusts in states that do allow it. For example, Florida residents may establish a Wyoming Trust, and enjoy its benefits, without needing to move to Wyoming.
A trust is considered its own person in the eyes of the law. For a simple metaphor, just as your creditors cannot take the assets of your neighbor, nor can they take the assets held in an irrevocable trust. This separation between you and the trust provides benefits which are not available through simply forming a holding company and subsidiaries.
Not holding title to trust property does not prevent you from controlling it nor from benefiting it. That is the advantage of a self-settled trust. You may both control and benefit from its assets, without directly owning them. This keeps the assets beyond the reach of your creditors while still allowing you to own them. This is referred to as the separation of ownership and beneficial ownership.