Introduction
To devise the most potent asset protection strategy, it is helpful to know precisely what you want to protect ahead of time. After a lifetime of work, you will hopefully have several different assets and properties that you want to keep safe from creditors using asset protection. Then, working with an asset protection attorney, you will want to figure out which of these assets are already protected by law and which assets you will need to take steps to protect.
The first step you will take in the asset protection process is finding an attorney specializing in the field. While there may be a temptation to do it yourself to save money, this is an area where you need to do everything right. If your asset protection strategy is based on false assumptions or someone has made an error, you may be unprotected when you previously thought your assets were safe. You will want to find an attorney specializing across multiple legal disciplines since there is no single way to ensure asset protection.
How do offshore trusts work?
An offshore trust works by first giving a person’s assets the legal title over to a trustee outside the United States to protect those assets from civil creditors. At that point, both the assets and the trustee will be outside the jurisdiction of a U.S. trustee. A civil creditor is left with no ability to collect on its judgment without spending a lot of time and money trying to go after the offshore trustee—and even then, there is no guarantee of success.
Ultimately, having assets in an offshore trust provides the U.S. debtor substantial leverage in negotiating a settlement to a civil claim.
Offshore trusts do not work as well in bankruptcy proceedings or for debt other than civil monetary judgments.
Types of Assets Held in an Offshore Trust
Offshore trusts are most effective when protecting movable assets such as bank deposits, marketable securities, small business stock, limited partnership interests, and LLC interests.
Offshore trusts are not as effective in protecting real estate located in the U.S. In general, real estate remains subject to the powers of the courts of the jurisdiction where the property is located. Even if a debtor re-titles U.S. real estate in the name of an offshore trust or an offshore LLC, a U.S. court will likely still control the debtor’s equity and the property title because the property remains within the U.S. court’s geographical jurisdiction.
Analysis
The “exotic pets” of estate planning and asset protection, offshore trusts get discussed a lot but used very little. Most are grantor trusts, but if non-grantor/foreign trust, there is a greater risk of being uncharacterized. (see the SEC v. Wyly case, 56 F. Supp. 3d 394 (S.D.N.Y. Sept. 24, 2014))
The cost, uncertainty of continuing control over the property, and political considerations in the country of the trust play a role in curbing the enthusiasm for offshore trusts for most but the ultra-intrepid. Some offshore trust beneficiaries have even been willing to go to jail for contempt of court when a usually upset federal judge orders them to repatriate the trust assets for seizure or sit in jail. (see, e.g., Federal Trade Commission v. Affordable Media, LLC)
Someone with international ties and contacts who is able and willing to stay out of the country after a substantial adverse judgment may find tremendous success in using offshore trusts since it may be hard for any ordinary creditor even to get the parties into a U.S. court if all the parties and assets are outside of the U.S.
Essential Points About Offshore Trusts
There are ten essential considerations regarding offshore asset protection trusts:
1. Offshore trusts are designed to place the trust assets and trust parties beyond the jurisdiction of U.S. courts enforcing a domestic civil judgment.
2. Offshore trusts are less effective in personal bankruptcy because bankruptcy courts have jurisdiction over a debtor’s assets wherever they are located worldwide.
3. Offshore asset protection trusts are less effective against IRS collection, criminal restitution judgments, and family support obligations.
4. Even if a U.S. court does not have jurisdiction over offshore trust assets, the U.S. court still has personal jurisdiction over the trust maker. The courts may try to compel a trustmaker to dissolve a trust or bring back trust assets.
5. The trustmaker must be willing to give up legal rights and control over their trust assets for an offshore trust to protect these assets from U.S. judgments effectively.
6. Selection of a professional and reliable trustee who will defend an offshore trust is more important than selecting an offshore trust jurisdiction. Trustmakers should interview, and if possible, personally meet prospective trustees of their offshore trusts.
7. Offshore trusts are irrevocable. The trustmaker cannot change the beneficiaries, trustees, or terms of an irrevocable offshore trust.
8. Offshore trusts are treated as “grantor trusts” for tax purposes meaning that trust income, including capital gains, is treated as the trustmaker’s ordinary income for U.S. tax purposes.
9. Most internet information about offshore trusts, including most advertising of offshore trusts, is published by document preparation companies that are not attorneys and that do not employ their attorneys. People who “buy” an offshore trust package from a non-attorney company will likely not have adequate asset protection.
10. Offshore trusts are complicated and expensive. Most Florida residents can achieve asset protection with traditional asset protection tools.
source: Alper Law.com
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