The Mechanics of The Bridge Trust®

PURPOSE OF THIS GUIDE

This guide is written specifically outline the plan structure with a focus on the mechanics of The Bridge Trust® at the various stages of the plan lifecycle.  

THE PLAN STRUCTURE

The Lodmell & Lodmell Asset Protection Plan is designed to incorporate 3 layers of protection.  

• Layer 1 – is the base layer primarily consisting of Limited Liability Companies (LLCs) which  will hold assets, such as real estate, directly. 
• Layer 2 – incorporates the holding company, registered in a superior jurisdiction such as  Arizona, which will hold the Level 1 LLCs as well as hold direct assets which are considered  safe. 
• Layer 3 – adds the most critical layer of the Asset Protection Trust. This may be a fully foreign  trust, but most often we use The Bridge Trust® which is a hybrid foreign/domestic trust which  provides offshore level of protection with domestic simplicity. 

This layered structure provides the highest level of protection while retaining a simplified structure which is clear to understand, has a single consolidated tax return for the holding  company, and is easy to manage. Below is an illustration of the layered approach in a simplified format with all 3 layers shown.

The balance of this paper will focus on the mechanics of how The Bridge Trust® is designed and  functions before, during and after an Event of Duress, such as a lawsuit. 

INITIAL STRUCTURE (PRE-DURESS EVENT) 

Upon initial set up, the Trust is designed to be registered offshore. This registration firmly  establishes the Trust in a recognized Asset Protection Jurisdiction and gives the Trust a  Certificate of Registration which is irrefutable as the inception date of the Trust. We choose to initially register our trusts in the International Asset Protection Jurisdiction of Belize for three  key reasons: 

1. Cost: Belize offers significantly lower registration costs. 
2. Trustee Flexibility: Belize does not mandate a Belize Trust company must serve as Trustee, allowing us to designate the client as the initial trustee. 
3. Immediate Statute of Limitations: Belize imposes a statute of limitation of 0 days on claims against the trust. Once the Bridge Trust is registered, there is no retrospective  scrutiny on transfers to the Trust. 

Once registered, the Trust is then “Bridged” back into the US and treated as a US domestic trust  for tax purposes. This is done by meeting the 2-part test under IRC 7701(A)(30)(E). The  provides for a very easy to manage domestic grantor trust in which the client themselves can  serve as the initial Trustee. 

The Trust, as outlined above, will own the AZ Asset Management Limited Partnership, which in  turn owns the various LLCs. The Trust may also hold the Primary Residence of the settlors  directly, adding additional protection, without jeopardizing the 3 benefits of home ownership  which are: 

1. Tax-Free capital gain on the sale of the home; 
2. Home mortgage interest deduction; 
3. Homestead Exemption. 

Assets are normally still kept in the United States for the comfort and control of the client.  Additionally, the initial 2 layers provide a high degree of asset protection domestically via the  “Corporate Shield” and limit creditors access to a charging order.  

This is often enough to dissuade any potential creditors and the full triggering of The Bridge  Trust is often not needed, even when a threat occurs. While layers 1-2 are a great start and appropriate for many types of liabilities, there are  limitations: 

1. Courts have the discretion to “pierce the corporate veil” under several legal theories  such as “Alter-Ego” and “Failure to follow corporate formalities”. Thus, the court is  free to undo the protection offered by a domestic entity if it is set on reaching a result.  This is called a “results oriented” court and happens all too often. 
2. Courts may also reverse a transfer to a domestic entity if the transfer has been made  after or in anticipation of a creditor threat under the legal theory of fraudulent  conveyance.  
3. Courts may simply find that in the name of “equity” it would be most fair to simply disregard the domestic structure and hence reach the assets directly to satisfy a creditor. The practical effect is that any court may simply determine without reference to a specific statute or case law,  that a result would be more “fair”  according to "equity" and decide accordingly.  This can and does happen.

EVENT OF DURESS 

An "Event of Duress" is an event which in the opinion of the Protector would jeopardize the assets of the Trust. This is most commonly a lawsuit but could also be something else like  political instability or a financial crisis. Basically, anything that could cause the Trust Assets to  be at risk. 

Upon occurrence of an Event of Duress the Trust Protector may make a declaration, triggering the offshore trustee to become a full Co-trustee. Subsequently, the offshore Trustee may remove  the client as a Trustee due to their presence in the jurisdiction where the event occurred. This  triggers a change in the control test results in the Bridge Trust being recognized as a fully foreign  asset protection trust. 

The new Trustee will then register the Trust in the Cook Islands, officially moving the offshore  jurisdiction from Belize to the Cook Islands. Under the Cook Islands Trust Act, the Bridge Trust  will be recognized as of its initial registration date in Belize. 

If it is determined that an “Event of Duress” exists, and it is advisable to trigger your trust, you  can expect the following steps to be followed: 

1. The Protector will draft a “Declaration of Event of Duress” for submission to the Special  Successor Trustee of the Trust. This document outlines the case and facts as they exist  which caused the Protector to declare the Event of Duress.
2. The Special Successor Trustee will have the opportunity to clarify any questions or issues  and request any updated Due Diligence on the Client or related parties. 
3. The Special Successor Trustee will accept the Trust and become a Co-Trustee with the  client. 
4. The Co-Trustee will then remove the client as Trustee, since they are in the jurisdiction in  which the Event of Duress has taken place, leaving the Special Successor Trustee as the  sole Trustee. 
5. The new Trustee will then register the Trust in the Cook Islands, thus moving the Trust  jurisdiction from Belize to the Cook Islands. 
6. The client may remain as the Investor Advisor to the Trust (allowing them to direct the  investments of Trust assets).  
7. Lodmell & Lodmell, P.C. will initially continue in the role of Trust Protector. This will  be monitored and may be changed to an appropriate foreign person or entity in the future  as determined by the needs of the Trust. 
8. L&L will recommend an offshore banking intermediary familiar with the needs of Asset  Protection clients and the client will spend time getting comfortable with the banking  intermediary. The client will ultimately recommend to the Trustee which bank they are  most comfortable working with based on these conversations. 
9. The new Trustee will open a foreign bank account as the Trustee for Trust Assets based  on the recommendation of the client. 
10. Client will be listed as the Investment Advisor and Beneficiary of the Trust holding the  foreign bank account. The client will be able to state how they would like investments  completed. 
11. Once triggered the client should expect to keep the Trust triggered and the Swiss bank  account opened for a minimum of 2 years. This is critical for the validity of both the  Trust and the Banking relationship and failure to do so would seriously damage the  relationships and the credibility of the client and the Trust and limit future options for  using the Trust. 
12. Once the Trust is triggered, it will no longer meet the test under the IRS rules as a  Domestic Trust and will be considered a Foreign Trust. As such the Trust will need to  acquire a Tax ID number from the IRS as well as begin filing the foreign trust tax  compliance.
13. Every foreign bank has reporting requirements—which will require client to pay taxes on  any earning of the Trust just as if the money were in a U.S. bank. Your CPA will also be  required to complete a form 3520 (completed within 90 days of triggered trust) and  3520A annually for taxes. There are also additional reporting requirements at the time  your assets are transferred to the Swiss bank that must be filed. In your documents are the  IRS reporting requirements for the Foreign Trust. 

POST TRIGGERING (EVENT OF DURESS ACTIVE) 

Once triggered, the Trust is now a fully Foreign Asset Protection Trust managed by the offshore Trustee. The Trustee will then take whatever actions are appropriate to protect the assets of the Trust. This may be a withdrawal from the AZ Asset Management Limited Partnership, which  under A.R.S. 29-333 a Limited Partner may demand a withdrawal upon the occurrence of a pre defined event. In our planning, we define this event as a declaration of an “event of Duress” in  the Trust, and thus the offshore Trustee is empowered to demand a distribution. Once  distributed, the assets may move to a safer jurisdiction, such as a bank account in Switzerland.  

Additionally, for any Real Estate, the Trustee may determine that stripping the equity, or even selling the property is appropriate, freeing the equity to also be moved offshore and out of the reach of a creditor.  

All of these actions are discretionary, and in practice will occur with the cooperation of the  General Partner of the LP, which is the client.  

Once the assets have been fully protected through the actions of the offshore Trustee, the client may receive benefits from the Trust as a Beneficiary. The Trustee may pay expenses, such as credit card bills, or lease payments, on behalf of the Beneficiary. This may go on as long as the creditor threat is still in place and may cease as soon as it has been resolved.  

In practice, it is rare to need to go this far. Most creditor actions are resolved well before this  point, once it is clear that reaching the assets is virtually impossible. In most cases, this happens before a trial or a full legal resolution of the case as most cases are settled on terms that are favorable to our clients.  

POST EVENT OF DURESS 

Once the case has been fully resolved the Settlors of the Trust have the option to leave the assets  offshore or bring them back. The Trust may be redomiciled back to the US and once again become a Domestic Grantor Trust and the Trustee may be changed back to the clients. This effectively resets the Trust for any future event, should it be needed. 

SUMMARY 

The Bridge Trust®, created as it is, has the ability to move the assets outside of the United States  which allows the Debtor to use and benefit from the assets while removing the assets from the  jurisdiction and discretion and reach of the US Court System.  

If the client already has LLCs in place, we will simply change the ownership of any existing LLCs to be the newly created Asset Management Limited Partnership. This reduces the complexity of funding as well as keeps existing seasoned and aged LLCs in place.  

Over the past 27 years, we've successfully executed this full triggering process upward of 100 times. While this represents a small percentage of our overall client base of over 4,000+ trusts, these cases are significant, as we have never had a forced extraction from any triggered trust. 

For these reasons, I firmly advocate that The Bridge Trust® surpasses a fully foreign trust from day  one. The higher maintenance costs associated with the latter are often prohibitive for many clients. Notably, the average lifespan of a fully foreign Cook Islands Trust is merely four years, according to the chief legal counsel of a leading trust company in the Cook Islands. These trusts are typically established hastily in response to emergencies, only to be dissolved once resolved— an inefficient and shortsighted approach. 

Contrarily, the Bridge Trust adopts a proactive stance. By initially establishing a simple domestic trust that is easy to manage, the client is able to maintain direct control and expenses and compliance are minimal. Should issues arise, we can seamlessly transition to a fully foreign Cook Islands Trust, as outlined above.