Trusts and offshore accounts controlled by a shadowy company. These financial tricks were once the stuff of spy movies—but today they have become commonplace when it comes to financial planning by very wealthy individuals. And increasingly, say divorce attorneys, they are gaining traction as a way for rich people to hide money from their partners.
Pay attention to so-called secret trusts, attorneys told Fortune. Though the exact structure can differ, secret trusts don't need to be disclosed even to the beneficiaries for a set number of years. Instead, they work by having the trust's creator assign a secret trustee whose job is to ensure that the gift goes to the intended beneficiary.
Though these trusts are becoming available in more states—Michigan legalized them earlier this year, according to estate planning attorneys—Yonatan Levoritz, a family and divorce attorney based in New York City, says he refuses to form them for clients because he considers them "unethical."
Traditional trusts are a common legal instrument and have a variety of legitimate uses. These include removing assets from the grantor's estate when it comes to probate, reducing or eliminating an estate's tax burden, and imposing conditions on an estate's beneficiaries. Plenty of wealthy families use trusts for these reasons—as well as to shield their assets from prying public eyes. But Levoritz says a secret trust can be formed with the intent to deceive, particularly in the case of divorce.
When a couple divorces, each spouse must list out their assets, liabilities, and income. Trusts are a little different, says Levortiz, as they may technically not be controlled by the person who set them up. Some unscrupulous types take advantage of the legal gray area.
That means one spouse would be able to set up a secret trust and put money, property, and other assets into it that are meant to be part of the marital estate. When the couple divorces, the assets can effectively vanish—even though the spouse who formed the trust is supposed to list it in a net worth statement, they purposely may omit it. Levoritz gives the example of a husband who may be unfaithful and have a child outside of his marriage. He could set up a secret trust to benefit the other woman and child, without his wife's knowledge. Less salaciously, he could simply set up a secret trust to make it more difficult for his partner to receive all of the assets she is entitled to in a divorce, depending on state law.
Take the divorce of the billionaire Hyatt hotel heir Tony Pritzker and his wife Jeanne Pritzker. As reported by the Wall Street Journal last month, Jeanne found out upon divorce that their $150–$200 million, 50,000-square-foot estate was held not by the couple but "by a complex web of trusts and limited liability companies." Because she was not a beneficiary of the trust, Tony's lawyers argued Jeanne wasn't entitled to live there.
Though an extreme example, Levoritz says a case like the Pritzkers' isn't uncommon. Spouses hide things from each other; and in a divorce, "sharing isn't caring," he says. It's up to lawyers like Levoritz to suss out any secrets throughout the divorce proceedings. Levoritz and other attorneys—as well as accountants—do this through money tracing.
"The challenge becomes finding that missing money," says Levoritz. He combs through years of bank records, credit card statements, property records, and more to try to find inconsistencies, like a bank account or brokerage that was suspiciously emptied, or a large discrepancy between income and total savings.
Finding missing money could signify something called marital waste. This could be when the courts find assets were purposely hidden via something like a secret trust, or that one spouse was "very foolish with money in one way or another"—such as alcoholism, gambling, excessive legal fees, buying a girlfriend a diamond ring, and so on. If a court finds marital waste, things would, in theory, need to be equalized for the spouse who did nothing wrong.
"This is money taken from the marital pot that was particularly diminished to cause harm," he says.
"The court should punish that person."
That type of deceit is why lawyers like Levoritz avoid the arrangement altogether when working with their own clients. "I can’t go ahead and come to court with clean hands," he says.
But since there are lawyers who will engage in this practice, a divorce attorney's job can involve tracking them down as part of the money tracing process.
"That’s where it comes down to finding out how many lawyers the person has hired over the years, and then you subpoena them and ask what was the purpose of this lawyer, that lawyer," he says. "Which one hid that money or took that money and put it into a trust."
More common than a secret trust is transferring money to another family member or friend, or to a business that has gone "bankrupt," says Levoritz. Layers of limited liability companies, or LLCs, are also common.
"You put the house in a LLC, you put the LLC in the trust, and the trust will be a subchapter C corp," he says. "That doesn't go on your personal tax return."
The case for the Cook Islands
A good lawyer may be able to ferret out the existence of a secret trust or LLC. Unfortunately, it isn't always possible to recover the funds—particularly if a trust is formed in another country, like the Cook Islands.
Cook Islands is a country in Polynesia, and is home to one of the most popular offshore trust destinations for wealthy Americans. The country's trust system provides myriad benefits, including that assets are protected from U.S. creditors, U.S. courts do not have jurisdiction there, trust deeds don’t have to be publicly registered, and it has extensive case law history. Though not necessarily "secret," offshore trusts provide many of the same benefits, and then some.
There are a number of legitimate reasons to set up a Cook Islands trust. Many people in professions that lend themselves to litigation—like doctors and lawyers—do so to protect their assets from possibly frivolous lawsuits.
"When you get to the über-wealthy, you find a lot of trusts, but they were designed for very specific purposes, like asset protection, tax savings, transferring money to be able to be held onto for multiple generations," says Levoritz. "If you’re doing it for a specific purpose, it’s aboveboard."
But the fact that U.S. courts aren't able to reach the country also holds appeal for some people with fewer ethical concerns, he says—particularly in divorce proceedings.
Blake Harris is an asset protection attorney who has assisted the world's ultrarich in setting up offshore trusts for the past decade. The Cook Islands is the top spot for U.S. clients, along with the Bahamas, Belize, and St. Kitts and Nevis. Harris stresses that offshore trusts are perfectly legal entities for wealthy people interested in asset protection. Spouses should disclose them in the case of divorce.
"If an individual is ever ordered by a court to disclose their assets, it doesn't matter how super secret it is, how deep in your backyard you buried your gold bars," Harris says. "It has to be reported."
But he says people also shouldn't feel shamed for setting them up. Offshore trusts can help protect assets for beneficiaries like children, he says, or simply from creditors or others looking for a quick payday from the ultrawealthy. In Harris's view, they are a critical component of estate planning for the top 1%—or even top 10%.
"I 100% do not support this notion that it’s unethical or weak to protect yourself," he says. "Weak men have never led a revolution. Power gets into people’s hands when they have privacy and protection."
If a U.S. court were to find that one spouse owed the other half of the assets in a Cook Island trust, for example, most plaintiffs would rather take a settlement than jump through the legal hoops required to secure a judgment, Harris says. Cook Islands requires the plaintiffs to travel to the country and plead the case again under Cook Islands law. The plaintiff must prove, beyond a reasonable doubt, that the person who set up the trust did so with the intent to defraud the plaintiff, which is exceedingly difficult.
That makes an offshore trust in a country like the Cook Islands even more appealing than one held in "secret" in the U.S., says Harris, even in states like Nevada that have booming trust industries themselves. U.S. law still applies to Nevada, after all. It doesn't apply to the Cook Islands.
"Nevada, I’m not going to set up a trust there because when it fails, I don't want to be responsible for my clients losing their funds," says Harris. "When it’s properly structured offshore, it’s unbreakable."
