What Is a Bridge Trust and How Does It Work?

What Is a Bridge Trust?

A bridge trust is a type of irrevocable trust used in offshore asset protection planning. It combines the features of domestic and offshore trusts. This means it starts as a domestic trust but can “bridge” to an offshore trust if needed.

This type of trust has become popular as a less expensive alternative to a full offshore trust so long as it is created before the onset of legal threats.

How Does a Bridge Trust Work?

A bridge trust starts as a domestic irrevocable trust, meaning it operates under the laws of the United States. If a legal threat arises, it converts to an offshore trust, moving your assets to a jurisdiction with stronger asset protection laws.

The offshore trust is managed by a trustee in the Cook Islands, who ensures your assets are handled according to the trust’s terms. This structure allows you to maintain the domestic trust inexpensively when not under legal duress, leaving the high costs of an offshore trust only when needed.

Benefits of a Bridge Trust

The main benefit of a bridge trust is that its annual fees are minimal compared to those of an offshore trust. Once the bridge trust is created, the Cook Islands trustee does not charge an annual fee.

The other benefit is that a bridge trust lets you start the statute of limitations on fraudulent conveyances prior to the onset of legal issues. Assets can be transferred into the bridge trust while it is a domestic trust. If a legal issue comes up later on, the trust can automatically convert to an offshore trust without needing to make additional transfers into the trust at that time.

Finally, a bridge trust lets you stay in direct control of trust assets domestically until there is an event of legal duress. Once a judgment is imminent, the trust can automatically convert to an offshore trust with a foreign trustee.

Disadvantages

While a bridge trust offers a less expensive gateway to offshore asset protection planning, it does not offer quite the same level of protection as starting with an offshore trust at the beginning.

Before a bridge trust switches jurisdiction to the Cook Islands, it is still subject to U.S. court decisions and pre-suit asset freezes.

What Makes a Bridge Trust Valid?

A bridge trust must first be registered with an offshore trustee company from the beginning. That includes appointing a foreign trustee and performing due diligence.

The trust must also comply with all necessary legal formalities of both the offshore and domestic jurisdictions. This includes drafting a trust deed that outlines the terms and conditions, appointing the initial domestic trustee and the successor offshore trustee, and ensuring that the trust complies with the relevant laws.

For tax purposes, the Bridge Trust starts as a domestic grantor trust. This means it does not require a separate tax ID number or need to file separate tax returns, simplifying compliance with IRS requirements. This status remains until an “event of duress” triggers the offshore provisions.

A key feature of the bridge trust is its ability to “cross the bridge” to full offshore status if a legal threat arises. This involves activating the offshore trustee and moving the trust’s jurisdiction offshore, leveraging the protections of the offshore legal system while maintaining the trust’s original establishment date.

The cost of the bridge trust is under $20,000. So long as it is a domestic trust, annual fees will be low or zero. Offshore trustee fees do not kick in until the trust converts to an offshore trust.