Offshore Trusts Can Protect Assets

Estate Planner Mar-Apr 2000

Setting up an offshore asset protection trust may not be as exotic as you might think. You may already be familiar with many of the concepts of an offshore trust if you have done some basic estate planning. The primary advantage is creditor protection for trust assets even if you are a beneficiary of the trust. This protection may be important for you if you presently lack malpractice or creditor concerns but your occupation entails potentially significant financial risks.

A Look at the Advantages

The majority of U.S. courts have ruled that your creditors can reach assets you place into a domestic trust for your own benefit. Alaska, Arizona, Delaware, Missouri and South Dakota offer some creditor protection for a self-settled trust. Establishing an offshore trust may provide greater protection than a domestic trust and impede creditors from reaching your assets.

Creditors seeking to recover assets from an offshore trust must overcome many obstacles:

  • US judgments are generally not enforceable in foreign courts of favorable offshore jurisdictions, so the creditor may be required to relitigate the entire case in the offshore jurisdiction.
  • Often local counsel must be retained, which can be difficult, especially when local attorneys have conflicts of interest because they also work for the trust companies.
  • Most offshore jurisdictions do not allow contingent-fee cases, so creditors owe attorney fees even if they lose the case. In addition, creditors risk paying attorney fees for both parties if they lose.
  • Governing law may also provide for a shorter statute of limitations that may bar the creditor’s claim.

Building in Flexibility

When you establish an offshore trust, you give control of trust assets to the trustee. The offshore trust is irrevocable — you cannot change it. It is typically structured so that it is not a completed gift for gift tax purposes.

Although you lack the power to revoke or amend the trust, you may achieve significant flexibility by giving a trusted person a limited power to appoint the assets. You, your spouse, parent or close friend may hold a limited power of appointment. A limited power does not allow the holder to appoint to themselves, their estate, their creditors or the creditors of their estate. You may wish to limit the scope of the power so that it will be exercised only in favor of your spouse or your descendants. But the exercise of the power may have gift tax consequences.

Many offshore trusts authorize a third party, such as the trustee, to amend the trust. You may want to limit the power to amend to complying with a change in applicable law, for example. You probably won’t want to allow a change in the dispositive provisions.

Unique Provisions

Offshore trusts also contain some provisions not typically found in domestic trusts. One example is having a trust protector in addition to a trustee. The trust protector is often a person or a committee that has the power to veto the trustee’s actions and possibly to remove and replace the trustee. A trust protector who is not a US citizen and who is generally not subject to US court jurisdiction offers even greater protection.

Another provision often found in offshore trusts is the concept of “force majeur.” This allows the trustee to take emergency action to remove and protect the trust assets in the event of economic or civil unrest in the offshore jurisdiction. An offshore trust typically also contains a duress provision preventing the trustee from acting in response to the settlor or a beneficiary being coerced by court order.

Right for You?

Offshore trusts are advantageous only in certain situations. Our professionals can help you determine if this is the right solution for you. Please contact us with any questions you may have about how offshore trusts can protect your assets from creditors.