QUESTION: My client is both a US and an Italian citizen. He resides,
works and pays taxes in the US. His mother, who resides in Central
America, is an Italian citizen. If my client establishes a foreign
trust with his mother as a trustee, is he still considered to have
"control over the trustee"? If so, would a cousin be distant enough to
avoid control?

REPLY: As long as no one attempts to get at the assets in a foreign
trust, the issue is purely academic. Some legal advisors point to a
variety of cases in which the U.S. grantor of a foreign trust has had
to spend time in jail for contempt of court because the judge didn't
believe they were unable to recover the assets in their foreign trust.
Other advisors argue that only a very few well financed organizations
would attempt to penetrate a foreign trust.

Bear in mind that most foreign trusts are what lawyers call "self
settled spendthrift trusts". A self settled trust is one that is
created by a person for his own benefit. A spendthrift trust is one
that includes language to prohibit the beneficiary from using any
assets of the trust as collateral for a loan (or other obligation) and
also prohibits any creditor of the beneficiary from satisfying a
judgement with trust assets. A self settled spendthrift trust is one
that protects the assets of the trust grantor/settlor. In most of the
U.S. states, such a trust is regarded as being contrary to public
policy. But most foreign trust jurisdictions do permit such trusts and
we now have seven U.S. states that permit such trusts.

With this type of trust, the duty of the trustee is to act on behalf
of the trust beneficiary who is also the trust grantor/settlor.
Attempting to interject safeguards that have the effect of treating
the trustee as a mere agent or nominee of the trust grantor is likely
to cause a judge to conclude that the trust is not a valid trust and
should be ignored.

As far as I can determine, there is no bright line test or rule that
marks acceptable control versus unacceptable control. At least one
advisor argues that any control exposes the trust to being held
invalid by a U.S. court. While a family relationship might influence a
judge to presume that the trust grantor has some control over the
trust assets, such control can exist without any family relationship.
The family relationship is not the issue. The extent to which the U.S.
grantor can direct or influence the trustee to act on behalf of the
trust grantor would be the more significant issue.

Bear in mind that I'm not a lawyer and therefore these comments are
not a legal opinion.

Vern

For more on this subject see
http://www.assetlaw.com/Trusts%20and%20Estates%20(Nov%202006).pdf
and
http://www.quatloos.com/traps/adtrusts.htm
and http://www.hklaw.com/Publications/OtherPublication.asp?ArticleID=2574