The bridge trust is a relatively new innovation in the realm of asset protection.
As you know if you’ve been reading our website, there are a lot of options that you can choose if you are looking to protect your assets. Many of the most effective methods involve asset protection trusts, which are trusts specifically designed to make it hard for creditors to obtain control of the assets within.
The bridge trust is one such trust. Newer than many other forms of asset protection trust, the bridge trust has gained a good deal of attention in recent years. The bridge trust offers a plan which purports to have the benefits of several other asset protection strategies without the drawbacks.
So, what exactly is a bridge trust, and what does it so?
The Basics of the Bridge Trust
Foreign Asset Protection Trusts
The bridge trust is a variation on the foreign asset protection trust.
Foreign asset protection trusts, as you may know, are trusts that are created in an offshore jurisdiction. There are several such jurisdictions around the world, most notably the Cook Islands, which provide an array of legal benefits that the United States does not.
For instance, the Cook Islands do not recognize foreign judgments, so if a creditor wants to obtain assets from a Cook Islands trust, they will have to sue in the Islands themselves. In the Cook Islands, however, there exist a set of extremely difficult legal procedural hurdles for them to overcome that do not exist in the United States.
Cook Islands trusts provide about the strongest degree of asset protection possible, and have the added benefit of serving as a strong bargaining chip to dissuade creditors from suing you. (For more detailed information about the Cook Islands trust, check out our article on the topic.)
Moving your assets offshore is perfectly legal, so long as you pay all necessary taxes to the United States government. But the protection afforded an offshore trust comes with a couple of drawbacks.
- The first consideration is price. A good foreign trust will cost a lot of money to create and maintain. As a rough estimate, you can expect to spend tens of thousands in order to set up such a trust, along with thousands more every year in maintenance fees. This makes foreign asset trusts cost-prohibitive to all but the wealthiest few percent of Americans.
- The other consideration involves compliance costs. The federal government is very suspicious of people who move their money offshore, because a lot of people do it for illegal tax evasion purposes. As a result, they will keep a close watch on any money you take offshore, and you will have to file a lot of onerous paperwork with the IRS and other federal agencies, particularly IRS forms 3520 and 3520-A. While this compliance is more than doable with the right legal and financial help, it can be extremely irritating to do every year.
Now, there exists another type of trust by which you can protect your assets: the domestic asset protection trust. This involves setting up a trust in the United States rather than offshore, but doing so in a state which has laws more friendly to asset protection than those of California.
For Californians, the most common destination for a domestic asset protection trust is Nevada. (You can read more about this topic, as well, in our article on Nevada trusts.)
A domestic asset protection trust is much cheaper to set up than a foreign one, and you avoid a lot of the compliance costs. However, this is a tradeoff as well: while a trust set up in a state like Nevada is certainly safer than one set up in California, it is not as safe as a trust that has been moved offshore.
How a Bridge Trust Is Unique
While both domestic and foreign asset protection trusts have been around for decades, bridge trusts are much newer.
The bridge trust, as the name suggests, is intended to function as a metaphorical bridge between foreign and domestic jurisdictions. The aim of such a trust is to give you the best of both words: the security of a foreign asset protection trust with the affordability of a domestic one.
A bridge trust must be initially registered in the Cook Islands (or whatever foreign jurisdiction you choose). Once this has been done, however, you will move the trust back into the United States, where it will function as an ordinary domestic self-settled trust for all practical and legal purposes.
If you’re never sued, then the trust will stay a domestic trust for the rest of your life. However, if you find yourself in a situation where your assets are threatened by a lawsuit, referred to as an event of duress, this will trigger a process within the trust whereby the assets will be moved to the Cook Islands.
At this point, the trust will move from your hands into that of a successor trustee located in the Cook Islands. It will then take on all of the same properties as an ordinary foreign asset protection trust, including the full range of asset protection afforded to a Cook Islands trust.
Potential Concerns with a Bridge Trust
The bridge trust offers you an opportunity to have your cake and eat it too, so to speak. To enjoy the benefits of both a domestic trust and an offshore one.
But nothing in asset protection is simple, and solutions that seem to be near-ideal often have a few catches hidden in them.
This is the case with the bridge trust. While it has the potential to work under some circumstances, there are several potential problems of which the prospective asset protection planner should be aware.
Lack of Legal Precedent
As we mentioned above, the bridge trust is a much newer innovation than the foreign asset protection trust, which has been around for decades.
And while novelty might be a good thing if you’re looking to buy the next iPhone, in the legal world it’s a much more mixed bag.
Specifically, the bridge trust is potentially risky because it has not been thoroughly tested in courts, and so there is a lack of legal precedent compared with the mainstream foreign asset protection trust. Remember, in our legal system, case law written by judges is just as important as the actual statutory law.
The foreign asset protection trust has been tested again and again, and the legal precedent is pretty strong. Bridge trusts are on much shakier ground. And while you may be able to defend a bridge trust with the right legal representation, do you really want to be the case that sets the precedent?
As we mentioned, the bridge trust is cheaper than the full Cook Islands trust, but this means that smaller debts may pose a problem.
If you incur a smaller debt, one which does not seem as though it is worth the trouble of transferring the assets across the “bridge” to the Cook Islands, then this debt may go unpaid. But it will not go away, and it can come back to haunt you later, sometimes at an inopportune time.
On the other hand, if you move your money into a full foreign asset protection trust, all of it will receive the maximum level of protection, and you will not have to worry about small debts accruing on your assets.
Some advocates of bridge trusts argue that full foreign asset protection trusts, even though they serve as a powerful deterrent against lawsuits, also look shady.
After all, if you have moved your assets offshore, then it may seem to the courts that you have something to hide. (And the term “offshoring” can conjure up a lot of negative images in people’s heads.)
There’s some truth to this concern. Perception matter a great deal in law, particularly asset protection law. It is important, not just to be honest, but also to have an appearance of honesty. Even if something is legal, if presented in a shady way it will leave the wrong impression in the eyes of a judge or jury.
In fact, there’s no reason to feel ashamed about protecting your assets from creditors. While popular conception often invokes the image of the “good” creditor and “evil” debtor, the opposite is true just as often, with merciless creditors hounding hapless debtors into bankruptcy. Since creditors will use every asset at their disposal, so should you. Convincing courts of this can be tough, though, and that’s where perception comes in.
However, bridge trusts will not necessarily solve this problem. In fact, they may even make it worse.
A bridge trust has the potential to appear every bit as suspicious as a trust which was a foreign asset protection trust all along. And there is every reason to believe that such a trust may actually arouse more suspicion.
If a court looks at the bridge trust and sees a trust that looks domestic but has the potential to move its assets offshore upon being triggered, then they might see this as a sly, underhanded attempt to game the system. And courts do not like feeling as though they are being played.
When it comes to the optics of any sort of asset protection trust, your mileage may vary, but there’s very little reason to believe a bridge trust will help, and more than a few reasons to believe it may be counterproductive.
This is perhaps the most serious potential pitfall with a bridge trust.
We’ve gone into greater detail about fraudulent transfer, also known as fraudulent conveyance, elsewhere. But here it is in a nutshell: when you engage in asset protection, you are prevented from taking actions that deliberately make you insolvent in order to defraud your creditors. If you do so, then you will have committed a fraudulent transfer.
The definition of fraudulent transfer is based on several factors, but one of the most important things which courts take into account when making this determination is timing.
If a transfer was made well in advance of your getting sued, then it will likely not be seen as fraudulent. But the closer a transfer happens to your actually incurring a debt, the riskier it will be.
This poses an obvious problem for bridge trusts: if the trust is designed so that it will transfer your assets out of the country only if you are sued, then this seems like it would be very likely to run afoul of fraudulent transfer laws.
The only reason that bridge trusts exist and have any hope of success is that there is some ambiguity about when the actual “transfer” of assets takes place. Did the transfer take place when you initially established the bridge trust? Or did it take place when the event of duress triggered the move of your assets to the Cook Islands? This is a difficult question and there is no definite legal answer.
If you have a bridge trust, then your attorney will try to argue the former: that the transfer took place when the trust was made. But this argument is far from foolproof, and if you create a bridge trust, you will be leaving a lot to chance.
Remember, fraudulent transfer is not a clear-cut issue, and a lot depends on the whims of the judge and jury in the case! It is best to steer far clear of it.
Should I Choose a Bridge Trust?
The decision on whether to use a bridge trust is a complicated one.
On one hand, the bridge trust does have the potential to save clients some money and headache in filling out IRS forms. On the other hand, it is a far less certain bet than a full-fledged foreign asset protection trust.
We’ve spoken to a lot of clients who are looking to protect their assets, and we are familiar with the options at their disposal. So here’s what we recommend: if you are looking to protect your assets, you should take the safest and most assured route possible to protect your assets, no matter how appealing cutting corners may be.
It’s true that the bridge trust is often cheaper than a foreign offshore trust (although even then, there will be costs). But for many of our clients, is not worth the risk.
Most of our clients who are looking to seriously protect their assets tend to have a lot to protect. And if this is the case, you should take every precaution at your disposal to do so – and the costs of this should be easily swallowed as a necessary, if regrettable, expense of living and doing business in our sue-happy society.