International Privacy Protections: Closer to Home Than You Might Think

In an era in which hundreds of millions of people have voluntarily disclosed some of their most sensitive personal data to tech behemoths like Facebook, Google, and Amazon in exchange for free access to social networking or email, it feels almost quaint for privacy concerns to play a role in decision-making these days. Yet precisely because of such oversharing, privacy is arguably more valuable today than at any time in history.

Increased privacy concerns may cause some families and their wealth planners to consider international trusts. International trusts are perhaps best known in popular culture because of their perceived tax benefits, protections from creditors, and association with criminal schemes. And while it is true that when used properly, international trusts may offer a risk-mitigation and estate-planning strategy for high-asset individuals interested in protecting their wealth and personal privacy, for many, South Dakota trusts can provide very similar appeal while at the same time avoiding some of the drawbacks inherent with international trusts.

UNIVERSAL TRUST CONCEPTS APPLY

International trusts and domestic asset protection trusts such as those available in South Dakota share many features with garden-variety trusts. In each, a creating party (the settlor) transfers complete legal ownership of assets (the trust property) to a trustee to administer, invest, and distribute for the benefit of a person or class of people (the beneficiaries). The settlor generally sets the terms and rules upon which the trustee holds the trust assets in a document called the trust instrument or trust deed. This document clearly explains the respective rights, duties, and powers of the trustee and the beneficiaries. While a settlor may be a trust beneficiary and may retain some control over the trust by reserving certain powers—such as the ability to approve distributions and appoint or remove trustees—it is vital that the settlor actually transfers ownership of the trust assets to the trust. The settlor may create a revocable trust, which she can alter or terminate at any time or after a particular date, or an irrevocable trust, which the settlor cannot change or terminate at any time.

BOTH FOREIGN JURISDICTIONS AS WELL AS SOUTH DAKOTA CAN OFFER ADDED PRIVACY BENEFITS

Beyond standard trust features, the extent to which a trust can offer a settlor her desired level of privacy and other benefits will depend on the laws of the jurisdiction in which the trust is established. Famed offshore banking and trust locale the Cayman Islands, for example, do not require the filing of financial statements or audits for non-investmentfund entities. Other jurisdictions offer similar benefits. Nevis, a small Caribbean island, has neither a public registry nor a database of corporate records accessible to the public. And trusts set up in the Cook Islands—a tiny nation in the Pacific with political ties to New Zealand—benefit from local laws that make it illegal to identify who owns a trust or to provide any information about them.

Closer to home, South Dakota presents an appealing option for many who may otherwise consider international trusts. The state has adopted robust and easily accessible privacy laws. Specifically, South Dakota Code § 21-22-28 requires only a simple petition to permanently seal court filings and orders related to a trust. In addition, South Dakota is appealing when evaluating the price settlors are willing to pay for privacy. When compared to South Dakota, setting up and maintaining international trusts will almost always be a more expensive proposition.

And there can be other issues that are not directly monetary—although they may result in increased expense. Establishing a trust in South Dakota eliminates the need to worry about IRS international trust reporting rules, including Form 3520, Form 1040 sched. B part III, FinCEN Form 114, or Form 709. In addition, there can be financial, economic, and political uncertainty associated with the jurisdictions in which most international trusts are located as well as concerns about the reliability of locally based trustees and infrastructure. Not to mention the fact that domestic trusts do not raise the same kind of eyebrows as transactions involving offshore activity. For all of these reasons, individuals seeking a combination of financial security and privacy protection should consider domestic alternatives to offshore trusts.

KEY TAKEAWAYS

Experienced wealth management counsel can help clients who are concerned about privacy in evaluating the best jurisdiction for a particular trust. Such counselors are also the best means of navigating the byzantine U.S. tax and reporting requirements that accompany the establishment and use of either an international trust or a South Dakota trust, and they can ensure that privacy-focused settlors can stay in the good graces of the IRS while staying out of the headlines.