A wealthy executive with significant assets, separated from his wife, had begun formal divorce proceedings. An attorney experienced in high asset divorces can be a major asset partnered with a financial advisor.
The man had nearly $150 million in assets, and although he planned to offer a sizable settlement, he wanted to protect as much of his wealth as possible for his three children from a previous marriage and his grandchildren.He asked his adviser, Darin Pastor, for help securing assets for his heirs. Mr. Pastor is the chief executive of Irvine, Calif.-based Capstone Affluent Strategies, a firm with more than 2,000 clients and about $1.5 billion under management.
“He didn’t like the way the divorce was going,” Mr. Pastor says. “He was trying to protect his beneficiaries.”
Then couple was living apart but not yet legally separated at the time, and the man worried that his wife would begin making aggressive financial demands. Mr. Pastor notes that the wife was entitled to up to half of his assets.
Understanding the client’s reasons for protecting his wealth was important to Mr. Pastor, who had firsthand experience with high-net-worth divorces. His father had been an executive for a large, multinational corporation who was married five times. But he had always made sure to protect his assets for his children during his own divorce proceedings. “I knew where to go when my client was facing a similar situation,” says Mr. Pastor.
The adviser immediately moved to create a collapsing bridge trust for his client. First, Mr. Pastor worked with an experienced attorney to create an offshore asset protection trust, which is most easily set up in countries such as the Cook Islands or Belize. The team also included the client’s divorce attorneys and his accountant, who made sure to file the proper paperwork such as Internal Revenue Service form TDF 90-22.1, which is required of every U.S. citizen with an offshore account worth more than $10,000.
The offshore trust was owned by a trust department of a bank that served as the trustee of the account. The client then named a close professional friend as “protector” of the trust, who could oversee how the trust would be handled. Mr. Pastor also drafted a letter of wishes to specify that money in the trust would be used to pay education and health-care costs for the client’s children and grandchildren.
At the same time, Mr. Pastor worked with the client’s accountants to set up a domestic limited liability company that was owned entirely by the offshore trust. The client moved more than 50% of his assets into the LLC and became manager of it: He could oversee how the assets were invested, but he no longer owned them and could not withdraw funds.
The “collapsing bridge” comes into play if a lawsuit or divorce threatens the assets. At any time, the offshore trust can vote to collapse the LLC and essentially fire the manager. The assets from the LLC revert to the offshore trust, where they are overseen by the trust’s protector.
In this case, the client waited until just before filing legal separation documents. Then, as manager of the LLC, he asked the trustees of the offshore trust to vote to collapse the LLC. Because the client no longer legally owned the assets in the trust, they were off the table during the subsequent divorce proceedings.
“Now that money is helping the children and the grandchildren and will be for quite a long time,” Mr. Pastor says.
While the strategy worked in this situation, Mr. Pastor notes that collapsing bridge trusts are best suited for clients with more than $25 million in liquid net worth. He estimates that fees and expenses associated with setting up this vehicle can reach $100,000.
“For high-powered, well-paid executives, this strategy can make a lot of sense,” he says.
Source: V.L. Hartmann, Wall Street Journal, Oct. 2013