Although an offshore trust effectively protects financial assets, protecting U.S. real estate is more challenging. Financial assets and personal property may easily be moved offshore to be titled in an offshore trust or LLC. Real estate is fixed in its physical location and may not be transported to a foreign jurisdiction.
Florida and most states recognize a general legal rule that makes real estate subject to the laws and courts of the place where it is physically located. Changing the real estate title to an offshore legal entity will not remove the property from the jurisdiction of the courts where it lies.
Equity Stripping
To solve the challenge of protecting real estate, offshore trust structures can use a legal technique called equity stripping.
Equity stripping is a lending structure that “strips” the equity from a property. In an equity stripping plan, the property’s net value, or equity, is encumbered by a foreign lender that acquires rights in the property that are superior to the interests of subsequent judgment creditors.
This plan essentially converts your equity, or profit, in your real estate to cash, and protects the cash in the offshore trust as long as you anticipate a legal problem in the U.S.
The most well-known jurisdiction for offshore trusts is the Cook Islands. Cook Islands trust laws allow you to use equity stripping to protect their domestic real property.
How Equity Stripping Works in an Offshore Trust
Here are the steps to protect real estate with an offshore trust:
- You establish the offshore trust.
- An offshore bank agrees to loan money to you.
- Loan proceeds are placed in the offshore trust’s account.
- You give a mortgage in favor of the offshore bank.
First, you establish an offshore trust. You and your family are the trust beneficiaries. A foreign individual or foreign trust company serves as the initial trustee. Moveable trust assets, such as cash and securities, are held in foreign financial institutions.
Second, the trustee of the offshore trust facilitates a loan from an offshore bank to you or to a Nevis LLC you have formed to hold an operating business or other assets. The loan amount and interest rate are based on the real estate equity and the type of real estate asset. The foreign bank typically will loan you at least 80 percent of the real estate’s equity.
Third, the loan proceeds are placed in your offshore trust’s financial accounts. The trustee typically uses the funds to purchase a Certificate of Deposit or similarly risk-free financial instrument. The interest earned is applied to pay the loan interest. In most instances, the interest rate the bank charges for the loan is less than the interest you earn on the CD. Additional loan interest due, if any, is paid from the offshore trust.
Fourth, you or your Nevis LLC gives a mortgage in favor of the offshore bank to secure repayment of the loan. The bank records the mortgage in the county where the real estate is located. The mortgage serves as a protective blanket over the property. A judgment creditor would not benefit from a foreclosure on your real property because the foreign bank would be in the first position to either acquire the property or proceeds from its sale.
How to Unwind the Equity Stripping Structure
Once you no longer anticipate future legal issues, your offshore trustee may liquidate the C.D. and use the C.D. proceeds and other trust money to pay off the foreign bank’s mortgage. Title to the property may then be transferred back to your personal name or your domestic LLC.
Is Equity Stripping a Fraudulent Transfer?
A U.S. judge may reverse transactions that are found to be fraudulent transfers. Remember that U.S. courts retain control over any real property in their jurisdiction. A U.S. court may reverse a title transfer or mortgage that they find is a fraudulent transfer designed to hinder or delay judgment creditors.
For example, if you would transfer legal title to your U.S. real estate to your offshore trust without receiving anything of value in return, a U.S. court would likely reverse the transaction if your transfer appeared to be done to avoid judgment collection.
One effective defense to a fraudulent conveyance allegation is the receipt of reasonably equivalent value for the transfer. A simple example is when you sell an asset and receive reasonable amounts of money in consideration for transferring the asset to a buyer.
In offshore equity stripping, the debtor is transferring a security interest in real estate (the mortgage), and the debtor is receiving cash based on the property value. The equity stripping plan should not be unwound as a fraudulent transfer because the property owner is receiving money in exchange for the creation of mortgage security in favor of the lender. The transaction is a typical commercial mortgage loan transaction, the main difference being that the lender is a foreign bank.
How Much Does Equity Stripping with an Offshore Trust Cost?
Offshore equity stripping first requires an underlying offshore asset protection trust. That requires separate legal and trustee fees. The costs of equity stripping through the offshore trust are comparable to other commercial loans through U.S. banks. These costs include:
- Lender origination fees (points) range from one to two percent.
- Lender annual administration fees.
- Mortgage interest if mortgage payment exceeds interest earned.
- Legal fees.
- Mortgage recording fees and taxes where the property is located.