The best known legal tool involved in offshore planning is the offshore asset protection trust. The offshore asset protection 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 advisers 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 assset protection 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.
When 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, several courts around the U.S. have forced either of these parties to dissolve the trust. Judges have held the debtor, his trust adviser, or trust protector, in contempt of court and put them in jail to make them until they comply with the court’s order. Nevertheless, 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 asset protection 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. A U.S. bankruptcy judge may compel the bankruptcy debtor to turn over to the trustee all of the debtors assets wherever located throughout the world.
Offshore asset protection trust plans have been successfully attacked by recent court decisions in other states. A 2015 Florida federal court decision suggests that Florida courts have jurisdiction over a Florida debtor’s beneficial interest in an offshore asset protection trust.
Offshore asset protection trusts are not designed to reduce or avoid U.S. income tax.
Often a better alternative to an offshore asset protection trust is an offshore LLC.