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What Are the Pros and Cons of an Offshore Asset Protection Trust?

As a high-net-worth individual, implementing an effective asset protection strategy is essential for preserving your hard-earned wealth. Lawsuits, governmental investigations, and various other risks can put your assets in jeopardy if they aren’t adequately protected. Implementing an asset protection strategy is a completely legal way of preserving your wealth, and a key component of many asset protection strategies is an offshore asset protection trust.

Nick Oberheiden
Attorney Nick Oberheiden
Offshore Asset Protection Trust Team Leadenvelope iconContact Nick
Alina Veneziano
Attorney Alina Veneziano
Offshore Asset Protection Trust Team Lead
Attorney & CPAenvelope iconContact Alina
John W. Sellers
Attorney John Sellers
Offshore Asset Protection Trust Team Lead
Former DOJ Trial Attorneyenvelope iconContact John

What is an Offshore Asset Protection Trust?

An offshore asset protection trust is a specific type of trust that allows U.S. citizens to hold property overseas and out of reach from most creditors in the United States. Several countries have adopted laws that are favorable for foreign citizens seeking to lawfully shield their assets by moving them abroad. These include Belize, the Cayman Islands, the Cook Islands, Nevis, and Luxembourg, among others.

Similar to other types of asset protection trusts, offshore asset protection trusts have both pros and cons. When developing an asset protection strategy, it is critical to carefully assess the benefits and limitations of each of the various options that you have available. Certain options (including offshore asset protection trusts) will make more sense in certain circumstances than others; and, before going through the process of setting up a trust in another country, high-net-worth individuals should ensure that this option makes sense based on their personal assets, risks, and long-term plans.

What are the Pros of Using an Offshore Asset Protection Trust?

So, what are the benefits of using an offshore asset protection trust? While these trusts do have limitations (as we discuss below), the pros will outweigh the cons in many cases. As these trusts continue to withstand scrutiny in the courts, they are becoming an increasingly popular choice for high-net-worth individuals who are willing to transfer their assets outside of the United States. More countries are adopting offshore asset protection trust laws as well, which means that high-net-worth U.S. citizens now have more options than ever. With this overview in mind, some of the key benefits of offshore asset protection trusts include:

Offshore Asset Protection Trusts Offer Greater Protection than Domestic Asset Protection Trusts in Many Cases

Since they involve placing assets into a trust outside of U.S. jurisdiction, offshore asset protection trusts offer greater protection than domestic asset protection trusts in many cases. As a result, for high-net-worth individuals who are focused on ensuring maximum protection for their wealth, forming an offshore asset protection trust (or perhaps forming multiple trusts in multiple foreign jurisdictions) will often be the best approach.

Many of the Foreign Laws that Authorize These Trusts Were Written with Offshore Asset Protection in Mind

Seeking to attract business and investment from wealthy U.S. individuals, many countries have adopted trust laws specifically with offshore asset protection in mind. In many cases, these laws speak directly to the concerns that can put high-net-worth individuals’ assets at risk, and they are structured specifically to provide the maximum protection possible. With that said, asset protection trust laws still vary greatly between countries. So, when forming an offshore asset protection trust, it is critical to conduct a thorough comparative analysis and determine which country’s laws provide the greatest benefits based on your specific needs.

Creditors Often Have a High Burden of Proof to Establish a Fraudulent Transfer

One way that creditors often seek to target assets placed into an asset protection trust is by claiming a fraudulent transfer. Courts in the United States have the authority to unwind fraudulent transfers in many cases. However, in the foreign jurisdictions where offshore asset protection trusts are regularly formed, the law often establishes a high burden of proof—significantly higher than that in the United States. Thus, not only do offshore asset protection trusts in these jurisdictions provide strong protection, but they also minimize the risk of facing litigation that can lead to unnecessary costs and give creditors leverage to seek a settlement.

Many Foreign Jurisdictions Also Have Shorter Statutes of Limitations for Creditor Claims

Along with limitations on fraudulent transfer claims, many foreign jurisdictions also have shorter statutes of limitations for creditor claims than those in the United States. This further reduces the risk of litigation—and provides benefits beyond those offered by an offshore asset protection trust itself. Once the statute of limitations for a claim seeking to attach offshore assets expires, the creditor is barred from pursuing the claim regardless of its substantive validity.

Many Foreign Jurisdictions Have Adopted Other Laws Designed to Protect Offshore Trusts As Well

Many foreign jurisdictions have adopted other laws that are designed to protect offshore trusts as well. In the Cook Islands and Nevis, for example, creditors must post a substantial bond in order to file a lawsuit. The Cook Islands also prohibit contingency-fee representation, which means that creditors must pay their attorneys out-of-pocket in order to pursue claims against Cook Islands trusts—which many creditors aren’t willing (or able) to do.

Offshore Asset Protection Trusts Often Offer Greater Privacy Than Domestic Asset Protection Trusts

In addition to the litigation-related benefits discussed above, offshore asset protection trusts often offer greater privacy than domestic asset protection trusts. In many foreign jurisdictions, identifying trust settlors and beneficiaries can be extremely difficult—and in some cases next to impossible. As a result, for high-net-worth individuals seeking both protection and privacy, making use of an offshore asset protection trust will often be the best option.

Offshore Asset Protection Trusts Can Offer Tax Benefits, Too

Finally, establishing an offshore asset protection trust can also provide access to tax benefits in many cases. While the U.S. government generally taxes U.S. citizens’ worldwide income from all sources (and requires disclosure of taxpayers’ foreign financial assets), offshore asset protection trusts can fall outside of the U.S. government’s taxing jurisdiction.

What are the Cons of Using an Offshore Asset Protection Trust?

Now, what about the cons? As we mentioned above, offshore asset protection trusts do have some limitations—and these limitations mean that forming an offshore trust isn’t the best option in all circumstances. For example, some of the key considerations to keep in mind when you are thinking about forming an offshore asset protection trust include:

U.S. Taxpayers May Have a Duty to Disclose Their Offshore Asset Protection Trusts to the Federal Government

While offshore asset protection trusts can offer privacy and tax benefits, they are still generally subject to the federal reporting requirements under the Foreign Account Tax Compliance Act (FATCA). This means that, generally speaking, they must be disclosed to the Internal Revenue Service (IRS) annually. This doesn’t distinguish offshore asset protection trusts from domestic asset protection trusts—both are subject to reporting—but it is a factor to consider when deciding whether forming an offshore asset protection trust is worth the additional investment.

Instability and Unrest Can Be Concerns in Some Foreign Jurisdictions

Instability and unrest can be concerns in some foreign jurisdictions. In the event of political upheaval or extreme economic volatility, assets held in a foreign asset protection trust could potentially become inaccessible. While the likelihood of this happening is relatively low, it is nonetheless a factor to consider when weighing the pros and cons of the various options that are available.

Offshore Asset Protection Trusts Are Usually “Spendthrift” in Nature

Offshore asset protection trusts are usually “spendthrift” in nature. While this also isn’t distinguishing from domestic asset protection trusts, it is yet another factor to consider when weighing your options. With a spendthrift trust, assets are out of reach for most creditors, but the settlor of the trust has limited access to the trust’s assets as well. However, there are still ways to benefit from these assets, and an experienced asset protection lawyer should be able to help you establish a trust with as few limitations as possible.

Offshore Asset Protection Trusts Can Be More Costly to Form and Maintain than Domestic Asset Protection Trusts

Finally, in exchange for offering protection, many foreign jurisdictions charge formation and maintenance fees that far exceed those you would incur if you formed a domestic asset protection trust in the United States. However, for many high-net-worth individuals, these costs will still be fairly inconsequential, and the benefits of forming a trust overseas will substantially outweigh the additional costs involved.

Are you interested in forming an offshore asset protection trust? Do you have questions about the other options that are available for protecting your assets in the U.S. and abroad? Our lawyers help high-net-worth clients develop and implement comprehensive asset protection strategies. We can help you explore all of your options and develop a strategy that is custom-tailored to your individual needs.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Speak with a Senior Asset Protection Lawyer at Oberheiden P.C.

For more information about the pros and cons of offshore asset protection trusts and their alternatives, please contact us to arrange a complimentary initial consultation at Oberheiden P.C. To speak with a senior asset protection lawyer in confidence, call 888-680-1745 or tell us how we can reach you online today.

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