Disadvantages of an Offshore Trust

An offshore trust is one of the best asset protection tools available for U.S. residents. The trust allows you to transfer your assets to an offshore trustee. The offshore trustee is not subject to U.S. jurisdiction, so a Court cannot compel the trustee to transfer any assets back to the U.S. for execution on a judgment.

However, there are four distinct disadvantages to offshore trusts:

• Adds high complexity to an asset protection plan
• High initial and ongoing costs
• Limited control for trustmakers
• Low protection in bankruptcy

Legal Complexity

An offshore trust setup involves three roles: the trustmaker, the trustee, and the beneficiary. In most setups, you are the trustmaker and the beneficiary. A company in the Cook Islands is the trustee. With an offshore trust, you transfer your assets to the trustee company, which holds them for your benefit.

Having an offshore trust own your assets adds complexity to your financial setup. In most cases, you must work with the trustee company to make significant transfers. You will also have extra reporting requirements with the IRS every year.

High Initial and Ongoing Costs

Offshore trusts are some of the most expensive asset protection tools available. The legal fee for an offshore trust will be $15,000 to $20,000. The trustee company will charge a base fee of $3,000 to $5,000 per year, depending on the type of trust. The trustee company may charge additional amounts for specific tasks related to the trust, such as opening certain financial accounts.

Because of the high initial and ongoing costs, offshore trusts are usually not worth it unless you plan to transfer at least $1,000,000 into the trust.

Limited Control

With an offshore trust, you give up some direct control in exchange for better asset protection. Once a legal issue arises, you will not be able to control the assets and investments in the trust structure directly. You will need to instruct the offshore trustee company to make any transfers, purchases, sales, and wire transfers.

The lack of control is necessary for the offshore trust to function effectively. Without direct control, you do not have the legal ability to withdraw assets from the trust and pay the creditors. A court cannot force you to do something you do not have the legal power to do.

Low Protection in Bankruptcy

Bankruptcy law is hostile to self-settled offshore trusts.

Bankruptcy courts have worldwide jurisdiction over all a debtor’s assets, and a bankruptcy trustee may compel debtors to repatriate offshore trust assets in some cases.

Although no offshore trust settlor would voluntarily file for bankruptcy, a creditor may seek an involuntary bankruptcy petition. Fortunately, there are ways for an experienced bankruptcy attorney to prevent such involuntary petitions.

Bankruptcy trustees can order you to repatriate offshore trust assets in some cases. Creditors can force you into involuntary bankruptcy unless you make your trust bankruptcy-proof.

Our firm has over 30 years of experience in bankruptcy, and we have successfully helped our clients defeat involuntary bankruptcy petitions.