Structuring trusts with underlying companies is a common strategy in estate planning, offering a blend of asset protection and operational flexibility. This article addresses the key questions settlors often have about this arrangement and provides a simple overview from setup to ongoing management. We’ll explore the roles and responsibilities of key parties, compliance considerations, and best practice for maintaining the integrity of the structure over time.
Balancing Convenience and Safety with a Cook Islands or Nevis Trust
In our experience, a Cook Islands or Nevis trust, holding an LLC that manages the bulk or a specific type of asset, strikes an ideal balance between convenience and protection. This structure allows clients to retain a degree of control over trust assets while maintaining the independence and oversight of the trustee, ensuring robust asset protection. Many clients use Cook Islands or Nevis LLCs as underlying companies as these have additional protective features, but US LLCs are also a popular choice.
The Structure at a Glance
When a trust holds an underlying LLC, the trustee of the trust is typically the 100% member of the LLC. The membership interest is held as an asset of the trust for the benefit of its beneficiaries, as outlined in the Trust Agreement and managed under the LLC’s Operating Agreement. This arrangement provides:
- Security: The assets are legally owned by the trustee, independent of the settlor.
- Control with Oversight: The manager of the LLC, who is usually the trust settlor, can make day-to-day operational decisions, subject to proper checks and balances.
Trustee Oversight and Manager Responsibilities
While the settlor/manager retains significant operational control, certain key functions require trustee involvement to uphold the integrity of the structure:
- Distributions: Only the trustee has the authority to approve distributions to beneficiaries. The manager cannot directly distribute assets from LLC accounts to themselves or other beneficiaries without the consent of the trustee.
- Contributions: Any non-income funds received by the LLC must be recorded by the trustee as a capital contribution to the trust followed by an immediate capital contribution to the LLC.
Managers, however, are empowered to make operational decisions, handle investments and meet company obligations without direct member/trustee involvement. The manager should regularly update the trustee on key decisions, particularly those that involve changes to the assets held by the LLC, ensuring transparency and effective communication between the two parties. This ongoing reporting will enable the trustee to remain informed and make any necessary adjustments to the trust’s administration, as well as ensure compliance both with the trust’s terms and objectives and with local compliance laws.
Where a trust holds a membership interest in a US LLC, that LLC will be a reporting company under the US Corporate Transparency Act and its beneficial owners will need to be identified and reported (although at the time of writing, CTA filing obligations have been suspended by the US Courts on grounds of constitutionality). LLCs from Nevis, the Cook Islands and other non-US jurisdictions are not CTA-reportable unless they are registered to do business in a US state.
Key Documentation for Existing LLCs
Where clients wish to gift their membership interest in an existing LLC into a trust structure, Southpac requires the following documents to be provided:
- Operating Agreement: This must include the register of members and managers, confirm the company is manager-managed, and allow for the transfer of membership interests.
- Articles of Organization (or equivalent): Foundational documents outlining the LLC’s formation and confirming its existence.
- Asset List: A detailed inventory of the assets held by the LLC.
Southpac will then draft a Deed of Gift and Assignment of Membership Interest to transfer the LLC membership interest into the Trust. Alternatively, the client’s attorney may draft the assignment documentation.
Administrative Considerations and Costs
When a trustee owns the LLC membership interest, additional administrative oversight is required. This includes recording capital contributions and ensuring compliance with distribution restrictions, which may result in higher ongoing costs. However, these measures are essential to preserving the structure’s asset protection and legal integrity.
Conclusion
A well-structured Cook Islands or Nevis Trust with an underlying LLC offers a practical solution for clients seeking asset protection and operational control. By understanding the roles of the settlor, trustee, and manager, complying with governing documents, and maintaining transparency, clients can maximize the benefits of this arrangement. Southpac’s expertise ensures that all elements of the structure are implemented and managed effectively. For more information or assistance, contact our team today.
Disclaimer: the article above is for information purposes only. It is not intended to constitute legal or tax advice. If you are planning to establish or place assets into an offshore structure, please consult beforehand with legal and tax professionals in your jurisdiction(s) of tax residence.
