Offshore trusts
Offshore trust planning is a highly-publicized method of asset protection. Offshore planning involves establishing legal entities in favorable foreign jurisdictions under the control of trustees who are neither United States citizens nor persons having a business presence in the United States. The purpose of offshore planning is to remove legal battles with creditors to jurisdictions beyond the reach of the United States courts. Offshore planning works, foremost, when an offshore jurisdiction does not recognize judgments rendered by U.S. courts. In order for judgment creditors to reach assets located in such jurisdictions, a creditor must start over and reinstitute the lawsuit against the same defendant in the foreign court system.
The second advantage of offshore planning is that favorable offshore jurisdictions have relatively short statutes of limitation on fraudulent transfers. Domestic asset protection is often vulnerable to a creditor's allegations that the debtor has transferred assets, or has recently converted a nonexempt asset to an exempt asset, in an effort to defraud or delay creditors' collection. Most states have four-year statutes of limitations, which means that a creditor's attorney can attack any asset transfers up to four years after the transfers took place. Favored offshore jurisdictions have two-year statutes of limitation on fraudulent transfers. The shorter statute of limitations makes it easier for debtors to defend creditor challenges of their asset protection planning.
The favorite legal tool involved in offshore planning is the offshore asset protection trust which otherwise resembles a typical U.S. trust. The offshore trust is a "self-settled trust" where the settlor and the beneficiary are one and the same. In an offshore asset protection trust, the trustee is nominated by the settlor and the trustee is either an individual who is not a U.S. citizen or a trust company with no U.S. offices or affiliation. Most often, an offshore asset protection trust will have additional people serving as trust advisors or trust protectors. These are individuals not under the settlor's control who have powers in the administration and protection of the trust and its assets but who have no beneficial interest in trust property. As a practical matter, the most important decision in forming an offshore trust is the selection of a trustee. The offshore trustee can be a bank or a lawyer in another country. The trust plan works best where the trustee is professional, reliable, and most importantly, willing to defend the offshore trust against attacks initiated by creditor attorneys.
Offshore asset protection trust plans have been successfully attacked by recent court decisions. If the settlor retains control over the appointment of the offshore trustee, or even the trust protectors or trust advisors, who have the power to remove and replace the offshore trustee, a court may force either of these parties to dissolve the trust. If they refuse to obey the court, the judge can hold the settlor, trust advisor or trust protector in contempt of court and can incarcerated them until they comply with the court's order. An offshore trust will be most effective only if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee, or if all parties to the trust other than the settlor are outside the jurisdiction of U.S. courts.
Offshore asset protection trusts are not designed to hide assets from creditors nor to reduce income tax liability.
