Do You Need a Bridge Trust?
Some years ago, a client presented something called a Bridge Trust to us. He was told it was somehow “better” than a domestic trust and offshore trust. How? By combining the two together into one powerful tool.
But is it really? We’ll explore that in this article.
Trust Basics
A settlor (called a “grantor” in some states and in the Internal Revenue Code) is the one who establishes and funds the trust. If you’re thinking about setting up a trust, that’s you.
The trustee is the person who’s responsible for managing the settlor’s assets on behalf of the beneficiaries — the person, charity or organization that will receive the assets when the settlor dies.
There’s also an optional fourth participant: the protector. This is a person or company who oversees the trustee to ensure they’re abiding by the terms of the trust. If they’re not, the protector can fire the trustee and appoint a new one.
Bridge Trusts in a Nutshell
A Bridge Trust is an asset protection tool that promoters say combines the strengths of both domestic and offshore asset protection trusts. It’s supposed to offer strong protection that offshore trusts are famous for. But it’s also supposed to be as simple and easy as domestic trust… at least, at first.
A Bridge Trust starts life as a domestic “irrevocable” trust. You, as the settlor, set it up and convey assets to it. You appoint a US-based third-party trustee (often a lawyer) to manage those assets according to the trust agreement. In addition, you need to have a domestic protector in this type of trust.
So far, nothing fancy about that. It’s a good, solid, well-established asset protection tool.
But what makes it different is that it has a standby foreign trustee. If someone threatens a lawsuit against you, it’s considered an “Event of Duress” under the trust’s terms. At that point, the foreign trustee has the authority to fire the domestic trustee and take over administration of the trust.
A Bridge Trust is a domestic trust for tax purposes because it has a domestic managing trustee and a domestic protector. As such, it doesn’t come with the complex tax and reporting obligations required for a foreign trust. It doesn’t become a foreign trust for tax purposes until the foreign trustee takes over.
The Difference Between a Revocable and Irrevocable Trust
A revocable trust, as its name indicates, can be amended or revoked anytime by the settlor. But it offers little if any asset protection.
An irrevocable trust is much less flexible, but can offer outstanding asset protection to its beneficiaries. It can’t be amended or revoked, although there are a few techniques available to deal with changing circumstances in this type of trusts.
Historically, there was one big exception to asset protection in an irrevocable trust. That was if the settlor named themselves as a beneficiary or possible beneficiary.
But in the late 1980s, that started to change. The Cook Islands, a small island chain in the Pacific Ocean, amended its trust laws such that a settlor named as a beneficiary of a Cook Islands trust would have asset protection.
This innovation was very popular. Within a few years, many wealthy Americans were forming what become known as asset protection trusts.
Many other countries amended their trust laws to provide asset protection to a settlor named as a trust beneficiary. And in 1997, Alaska became the first state to offer what became known as “domestic asset protection trusts” (DAPTs). Today, more than 20 states have such laws in effect.
DAPTs are very effective at deterring litigation. But if you are sued, a determined creditor would have an easier time enforcing a judgment against a DAPT than an asset protection trust formed in another country.
That’s because a US court has very few tools available to enforce a judgment against the assets in a foreign asset protection trust, especially if those assets are outside the United States.
Mark Nestmann and Bridge Trusts
“I met a lawyer named Alan Eber some 15-20 years ago after he approached me at an international conference where I was speaking. He was very knowledgeable about both domestic and offshore asset protection and so I spent some time learning about his work. To my knowledge, he’s the first person to develop the bridge trust idea (he called it a ‘Low Profiler’; ‘Bridge Trust’ is a marketing term.)
“What struck me most about his trust idea was his doubt that it would stand up in a US court. He was clear that the validity of the trust relied on very small legal distinctions that a judge might use to prevent the trust from working as advertised. For that reason, we’ve yet to recommend them to any of our clients.”
Pros and Cons of Bridge Trusts
In theory, a Bridge Trust offers the best of both worlds — strong domestic asset protection for “everyday” use but with the ability to convert to a highly protective foreign asset protection structure if needed.
But it’s not perfect. In fact, we don’t recommend them for one big reason, as you’ll soon see.
Let’s go through the list.
(Promoted) Advantages
- Combines the best of Offshore and Domestic Trusts: Bridge Trusts merge the protection of offshore trusts with the simplicity and ease of setup of domestic trusts. It’s designed to be the best of both worlds.
- Simpler Compliance and Maintenance: As long as the “Event of Duress” clause isn’t triggered, bridge trusts work like regular domestic trusts. That makes taxes and reporting very simple.
- Lawsuit Deterrence: Bridge Trusts can serve as a deterrent against lawsuits. They will likely scare off all but the most determined of creditors (frivolous or otherwise).
Disadvantages
- Sold as “offshore” but not as safe as offshore: Some experts (including us) view Bridge Trusts as an incomplete solution. They can lull people into a false sense of confidence — they think they’re getting something as good as an offshore trust when they’re not.
- Assets could be frozen: Despite the claim of being free of domestic government and court control, a bridge trust that hasn’t been converted to an offshore one is still subject to local, state, and federal laws. It’s possible that a US court could forbid the foreign trustee from firing the domestic trustee or even reinstate the domestic trustee.\
- Untested in Court: In our minds, this is the biggest problem with this tool. Even though a Bridge Trust is promoted as offering the best of both worlds, we’ve seen no case law to support that idea. It might work – or not.
- Risk of IRS reclassification. IRS regulations state that if a domestic trust is drafted in such a way as to “automatically migrate” to another country under certain conditions it will be considered to be a foreign trust. And there are huge monetary penalties for failing to report a foreign trust. A Bridge Trust can be drafted to avoid automatic migration but it must be done very carefully to avoid problems with the IRS. For these reasons, we don’t generally recommend bridge trusts. If you are looking for asset protection, it’s better to go with proven options.
Sometimes, trying to get the best of both worlds doesn’t give you either.
Is a Bridge Trust Right for You?
Bridge trusts are usually promoted as being for individuals with a net worth of between $1 million and $5 million. In our view, that’s reasonable if it can deliver on its promise.
But whether such a trust is right for you comes down to more than just net worth. Ask yourself these questions:
- What’s your goal? Are you generally trying to protect your assets? Are you trying to protect against certain, specific threats? Or is this more for estate planning? Are you willing to give up total control over your wealth? Different answers will need different trusts.
- Are you comfortable going offshore? The idea of a bridge trust is to have an “escape clause” if a domestic threat rears its head. But if you’re not comfortable going offshore, then you won’t want to use the escape clause.
- What’s your risk? A bridge trust is for people with a higher level of risk — business owners, company directors, certain types of investors, and professionals in high-risk professions like doctors. If you aren’t exposed to such risk, why do you need such a solution?
- Are you prepared for the costs involved? Bridge Trusts aren’t cheap. Depending on complexity, they can cost tens of thousands of dollars to create and a few thousand each year to maintain. Is there a lower cost way to get the same level of protection?
- Are you prepared to be “made an example of”? As mentioned above, bridge trusts have yet to be tested in court. So, there’s no way to know if they really work in practice. Eventually, someone will be made an example of as the courts try to create the rules around these things. Do you want to be that person?
- How does this fit into my overall wealth protection plan? A trust — no matter what type — is simply a tool. It’s useless if not part of a solid wealth protection plan that takes your whole case into account — your goals, your risk profile, your unique situation, and yes, your net worth. We can’t tell you how many times we’ve had clients come to us with a structure or entity that someone sold them, that has absolutely no business being part of their plan.
Bridge Trust FAQs
What is a Bridge Trust?
A Bridge Trust is a type of asset protection tool that claims to combine the advantages of both domestic and offshore trusts. It tries to provide the strong protection of offshore trusts from places like the Cook Islands or Nevis. But it is also supposed to be as easy to set up as a domestic trust.
In theory, this hybrid approach allows individuals to benefit from the robust asset protection of offshore trusts without the complexities and costs often associated with them.
In practice, no one really knows, because they haven’t been tested in court. That’s why, at the moment, we cannot recommend them to clients.
How Much Does a Bridge Trust Cost?
We’ve seen quotes of up to $30,000 to set up, plus a few thousand a year to maintain. Quite frankly, we think this is greatly overpriced for what you get.
By comparison, a relatively simple Offshore Asset Protection Trust, drawn up by a credible lawyer, can be done for the same amount of money, and sometimes substantially less. Yearly maintenance fees can be expected to come in at a few thousand dollars.
A Domestic Asset Protection Trust, if it applies to your situation, can be done for $5,000-$15,000 in most cases, depending on their complexity. Ongoing fees are typically $1,000-$3,000 per year.
So again, for what you get, we just don’t see the value in this tool.
Which Is Better — An Offshore Asset Protection Trust Or a Domestic Asset Protection Trust?
As with many asset protection questions, it depends.
The choice between an offshore and domestic asset protection trust depends on things like your goals, your risk factor, what you’re comfortable with, and how much you have to protect.
If you have the asset base, the desire to go offshore, and are at a higher risk of being sued, it can make sense to set up an offshore trust in a place like Nevis or the Cook Islands.
But, they also cost a lot more than domestic trusts. Tax filings become more complicated. You have to report them yearly to the Treasury Department.
Domestic trusts are cheaper and easier to set up. But, if you want to name yourself as a beneficiary, they don’t necessarily provide the same level of protection as offshore trusts.
A domestic asset protection trust (DAPT) can work too, but only if you live in a state that recognizes them, or you have assets tied to a state with such laws.
So, the best approach is to look at your situation. Figure out what things need to be protected and to what degree. Then, build a plan around that. The tools you use should be guided by your situation, not the other way around.
Does Having a Bridge Trust make you a Target?
Sometimes people ask if tools like a Bridge Trust make you a target for the IRS or government more broadly. No one can credibly answer that question other than someone from the government.
But what we can say is this: Our founder, Mark Nestmann, has held assets overseas for 40 years. He’s always filed the required disclosures. He’s paid his taxes. Not once has he ever been targeted by the IRS for anything to do with his international holdings.
The same is true of our clients. We are not aware of a single instance of a client following the rules and being targeted as a result.
But — if you are uncomfortable for ANY reason — just don’t do it.
One of the promoted benefits of such structures is peace of mind. If you’re worried about becoming a target, you’re clearly not getting that benefit.
Need Help?
A key part of our approach is that proper wealth protection planning is not about buying the tool; it’s about buying the solution to help you reach your asset protection, privacy, and investment goals.
Building such plans is what we’ve done since 1984. We can do the same for you. Simply book a free, no-obligation call with one of our Associates to see if our planning is right for you.
