Many consider an offshore trust to be an essential requirement of any serious asset protection plan. This is because of an offshore trust's strength and capacity to solve the one weakness identified with any domestic asset protection tool––an inability to shield your assets from U.S. courts.
What follows is a brief overview of the primary differences between domestic irrevocable trusts and offshore trust for asset protection.
Domestic Asset Protection Trusts
A spendthrift provision is a trust provisions that prevent the creditors of any beneficiary from touching the trust assets, as long as the assets remain in the trust. It essentially disenfranchises creditors completely, even in bankruptcy.
Spendthrift provisions are very effective and very powerful and are recognized in all 50 states and most of the English-speaking world. However, until about 20 years ago, spendthrift provisions were only allowed to be used for a trust that you create for someone else.
In other words, a spendthrift provision could not be used with what is called a self-settled trust - a trust that you create for yourself, with yourself as the beneficiary.
In the 1980s, however, a jurisdiction in The Cook Islands created a specific legal statute that allowed for a self-settled spendthrift trust. This was the very first asset protection trust.
Today, seventeen U.S. jurisdictions have also enacted statutes that allow for self-settled spendthrift trusts, most notably Nevada, Delaware, and Alaska. These have become known as Domestic Asset Protection Trusts.
Domestic Trust Drawbacks
Even though a third of all U.S. states now have statutes that allow domestic asset protection trusts, there are certain things that can affect how safe your assets truly are. The statutes in one state may provide for complete protection, while a court in another state may not agree.
What's more, all states must adhere to the U.S. Constitution, which says in Article IV, Section 1:
“Full faith and credit shall be given in each state to the public Acts, records, and judicial proceedings of every other state.”
Consequently, no matter how good the laws in Nevada, Delaware, or Alaska happen to be, no state can simply ignore a judgment or court order from another state or from the Federal Court System, which sits on top state law.
So, while theoretically, a domestic asset protection trust should offer you a great deal of asset protection, there are thousands of cases, judges, courts, and juries that say otherwise, seemingly ignoring statutes and precedents.
Add to that, an army of attorneys who literally make their living in what has become a $300 billion-a-year lawsuit industry, and it is pretty easy to see that the U.S. legal system can be very unpredictable when it comes to domestic asset protection trusts. This is where an offshore asset protection trust can help.
Offshore Asset Protection Trusts
When it comes to serious domestic asset protection, the best jurisdiction in which to create a trust may not be a domestic jurisdiction at all, but a jurisdiction that lies outside the United States, such as The Cook Islands. This tiny South Pacific island is where the very first piece of legislation was enacted which specifically allowed for the combination of a self-settled trust and a spendthrift provision and was the birthplace of what we now refer to as an Offshore Asset Protection Trust.
Offshore asset protection trusts make it very difficult for creditors to get to the assets held in the trust. This is because the asset protection trusts are usually set up in countries, such as The Cook Islands, that do not recognize U.S. judgments and court orders.
Furthermore, if the creditor wants to pursue an action against you in the country where the offshore trust is set up, they had better do so quickly, because the statute of limitations for filing a case in these jurisdictions are typically very short and final. Even if a creditor can get a case filed in time, it may still need to prove its case beyond a reasonable doubt, which is the highest possible burden of proof anywhere in the world.
What's more, the creditor won't be able to use its U.S. lawyers because they won’t be allowed to practice in the foreign jurisdiction. Nor will the creditor be able to hire a local attorney on a contingency fee basis, because contingency fees are typically not allowed.
This is why many believe that protecting your assets in an offshore trust is the best asset protection you can get.
Cost vs. Benefits
Every benefit has a cost and when it comes to using an offshore trust, that cost is in the form of expense, control, and compliance:
- The expense of maintaining an offshore trust can easily run between $4000 and $10,000 per year.
- Control of an offshore trust must be with a foreign trustee if you want the trust to out of the reach of US courts; and
- Compliance with IRS regulations requires an offshore trust to files several forms each year, as well as a growing list of disclosures required by the Fair and Accurate Credit Transactions Act (FACTA).
However, if you are defending your assets from an aggressive creditor, these costs may be a small price to pay for the asset protection you need. But, for many people, these costs tip the cost-benefit scale enough for them to decide an offshore trust is not worth the trouble or expense.
On the other hand, in some U.S. jurisdictions that offer domestic asset protection trusts, the statutes and the case law are very good and can provide a sufficient level of asset protection without the expense of going offshore. Also, domestic asset protection trusts are generally easier to maintain and will not require you to comply with IRS foreign trust reporting requirements.
For more detailed information on the differences between a domestic trust and offshore trust for asset protection, or for advice with choosing one or the other for your asset protection plan, contact our qualified and experienced attorneys through the contact link on our website.
