The best known 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. office or affiliation. Most often, an offshore asset protection trust will have additional people serving as trust advisors or trust protectors. These individuals are not under the settlor’s control and have powers in the administration and protection of the trust and its assets while having no beneficial interest in trust property.
Much discussion of offshore trusts has focused on choice of foreign jurisdiction. In that regard, the Cook Islands is generally accepted as providing the best legal protection. 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 if the trust protectors or trust advisors 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 incarcerate them until they comply with the court’s order. An offshore trust will be most effective if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee and if all parties to the trust other than the settlor are outside the jurisdiction of the United States.
Offshore trusts are especially vulnerable in bankruptcy. If the debtor files for bankruptcy petition he is responsible to surrender assets wherever held. U.S. bankruptcy courts have world wide jurisdiction and are not deterred by foreign countries’ refusal to recognize general civil court orders from the U.S.
Offshore asset protection trusts are not designed to reduce or avoid U.S. income tax.