Trusts and offshore accounts controlled by shadowy companies. These financial tricks, once the stuff of spy movies, are now commonplace when it comes to the financial planning of millionaires. And divorce lawyers say the practice is increasingly attracting attention as a way for wealthy people to hide money from their partners.
Beware of so-called secret trusts, lawyers told Fortune. Although the exact structure may vary, a secret trust does not have to be disclosed even to the beneficiaries for a certain number of years. Instead, it works by having the trust creator assign a secret trustee. Its job is to ensure that the gift reaches the intended beneficiary.
Although these trusts are becoming available in more states (Michigan legalized them earlier this year, according to Estate Planning Attorney), New York City-based family and divorce attorney Jonathan Levoritz said he refuses to set up trusts for his clients. It’s unethical. ”
Traditional trusts are a common legal instrument and have a variety of legitimate uses. These include removing assets from the donor’s estate during probate, reducing or eliminating the estate’s tax liability, and imposing conditions on the beneficiaries of the estate. Many wealthy families use trusts for these reasons, as well as to protect their assets from the prying eyes of the public. But Levolitz says secret trusts can be formed with the intent to deceive, especially in divorce cases.
When a couple divorces, each spouse must list their assets, debts, and income. Trusts are a little different because they may not be technically controlled by the person who set them up, Levortis said. There are also unscrupulous types who take advantage of legal gray areas.
This means that one spouse can establish a secret trust and place money, property, and other assets that would become part of the marital estate in it. When a couple divorces, assets can effectively disappear. The spouse who formed the trust may intentionally omit assets even though they are supposed to include them on their net worth report. Levolitz gives the example of a husband who may have had an affair and fathered a child out of wedlock. He was able to establish a secret trust that benefited the other woman and her children without his wife’s knowledge. Less sneakily, depending on state law, he could also simply set up a secret trust to make it more difficult for his partner to receive all the assets he or she is entitled to in the event of a divorce.
Take, for example, the divorce of billionaire Hyatt Hotels heir Tony Pritzker and his wife Jeanne Pritzker. The Wall Street Journal reported last month that at the time of the divorce, Jeanne claimed that the $150 million to $200 million, 50,000 square foot property was not owned by the couple, but rather was owned by a “complex trust company and limited liability company.” I learned that it is owned by. Tony’s lawyer argued that Jeanne was not entitled to live there because she was not a beneficiary of the trust.
Although an extreme example, cases like the Pritzker family’s are not uncommon, Levolitz said. Spouses hide things from each other. And in the case of divorce, he says, “sharing is not caring.” It’s up to lawyers like Levolitz to uncover secrets throughout the divorce process. Levoritz and other lawyers and accountants do this through money tracking.
“The challenge is to find the lost money,” Levolitz says. He combs through years of bank records, credit card statements, real estate records, and more to uncover suspiciously empty bank accounts, stock exchanges, or large discrepancies between income and total savings. Try to find discrepancies.
If the lost money is found, it may mean the so-called waste of the marital life. This could mean that the assets were intentionally hidden by something like a secret trust, or that one spouse was an alcoholic, gambled, had exorbitant legal fees, bought diamonds for his girlfriend, etc. This may be a case where the court finds that the person was extremely foolish with money. rings etc. If the court finds that the marital life has been wasted, then in theory the spouse who has done nothing wrong should be given equal treatment.
“This is money that has been reduced from the marital estate specifically to cause harm,” he says.
“The court should punish that person.”
Because of this type of deception, lawyers like Levolitz avoid this arrangement altogether when working with their own clients. “You can’t come to court with clean hands,” he says.
However, there are attorneys who engage in this practice, and a divorce attorney’s job may include tracking them down as part of the money tracking process.
“The key here is to find out how many lawyers the person has hired over the years, and then subpoena them and ask what the purpose of this lawyer or that lawyer was.” says. “Either they hid the money, or they took the money and put it in a trust.”
More common than secret trusts is sending money to another family member or friend, or to a “bankrupt” company, Levolitz said. Limited liability company (LLC) hierarchies are also common.
“If you put your home in an LLC and put that LLC in a trust, that trust becomes a Subchapter C corporation,” he says. “It won’t show up on your personal tax return.”
For the Cook Islands
A good lawyer may be able to discover the existence of a secret trust or LLC. Unfortunately, it is not always possible to recover the funds, especially if the trust is formed in another country, such as the Cook Islands.
The Cook Islands is a Polynesian country that is home to one of the most popular offshore trust destinations for wealthy Americans. This country’s trust system protects assets from U.S. creditors, lacks jurisdiction in U.S. courts, does not require public registration of trust deeds, and has an extensive history of legal precedent. and countless other benefits. While not necessarily a “secret”, offshore trusts offer many of the same benefits, and then some.
There are many good reasons to establish a Cook Islands trust. Many people in litigious professions, such as doctors and lawyers, do so to protect their assets from frivolous lawsuits.
“When you get to the ultra-high net worth, you’ll find a lot of trusts, but they’re designed for very specific purposes, like asset protection, tax savings, and transfers that can be held for generations.” Levolitz says. “If you’re doing it for a specific purpose, that’s fine.”
But the fact that U.S. courts don’t have access to this country also appeals to some people with fewer ethical concerns, he says, especially in divorce cases.
Blake Harris is an asset protection attorney who has spent the past decade helping the world’s ultra-high net worth individuals establish offshore trusts. The Cook Islands is a top spot for U.S. customers, along with the Bahamas, Belize, and St. Kitts and Nevis. Harris emphasizes that offshore trusts are perfectly legal for wealthy individuals interested in protecting their assets. Spouses must disclose this during divorce.
“When an individual is ordered by a court to disclose assets, it doesn’t matter how secret they are or whether they have gold buried deep in their backyard,” Harris said. “That has to be reported.”
But he says people shouldn’t be ashamed of setting them up. He says offshore trusts can help protect assets from beneficiaries such as children, or people who simply want a quick paycheck from creditors or the ultra-rich. In Harris’ view, these are important elements of estate planning for the top 1% and even the top 10%.
“I 100% disagree with the idea that protecting yourself is unethical or weak,” he says. “Weak people have never led a revolution. Once they have privacy and protection, power falls into the hands of the people.”
For example, if a U.S. court finds that one spouse is owed the other half of the Cook Island trust’s assets, most plaintiffs would prefer not to jump through the legal hoops necessary to secure a judgment. Instead, Harris says, he would prefer reconciliation. The Cook Islands is asking the plaintiffs to travel to the country and refile the case under Cook Islands law. The plaintiff must prove beyond a reasonable doubt that the person who created the trust created the trust for the purpose of defrauding the plaintiff, which is extremely difficult.
That makes offshore trusts in countries like the Cook Islands even more attractive than those kept “secretly” in the United States, Harris said. Even in states like Nevada, where the trust industry is booming. After all, U.S. law still applies in Nevada. Does not apply to the Cook Islands.
“Nevada, I’m not going to set up a trust there because I don’t want to be responsible for my clients losing their money if it goes wrong,” Harris says. “If it’s offshore and structured properly, it’s indestructible.”
