Legal Comparison of the Best Offshore Trust Jurisdictions

The Cook Islands and Nevis, West Indies are the best offshore trust jurisdictions because they have the most favorable asset protection trust laws in the world. The Cook Islands and Nevis have trust statutes based on the same common law trust law as U.S. trusts. Their laws include spendthrift clauses and protected discretionary distributions that are protected from creditors.

We have also had excellent results with trust formed in Hungary under the 2014 Hungarian Civil Code. Hungary, like common law trust jurisdictions, does not recognize U.S. judgments and court orders. Hungary trusts are particularly effective because (1) any challenge to the trust, (2) attempt to seize trust assets, or (3) fraudulent transfer complaints must be asserted in the native Hungarian language.

Offshore Trusts Provide Asset Protection

An offshore trust is an effective asset protection tool. An offshore trust is an irrevocable trust agreement created under the laws of a foreign jurisdiction with favorable asset protection laws. The offshore trust typically has at least one trustee who is not a U.S. citizen. An offshore trust holds assets at financial institutions located outside the United States with no U.S. branches.

How Do Offshore Trusts Protect Assets?

Offshore trusts protect assets in two ways. First, the offshore trust agreement includes asset protection provisions found in a typical U.S. trust. The offshore trust agreement prohibits the involuntary assignment to creditors of a beneficiary’s equitable interest. In U.S. trust, this provision is known as “spendthrift protection.” The offshore trust agreement also provides that distributions to beneficiaries, if any, are in the sole discretion of the trustee.

Offshore trusts offer more protection than a typical domestic irrevocable trust because the trust assets and the trustee are beyond the jurisdiction of U.S. courts and judges. An offshore trustee can ignore U.S. court orders that give judgment creditors rights in your assets held in your offshore trust. Even a U.S. court finding that you made a fraudulent transfer of your assets to your offshore trust will likely be unenforceable against the foreign trustee situated in a favorable offshore jurisdiction.

Laws in Offshore Trust Jurisdictions

Many foreign countries encourage offshore trusts through statutes that provide creditor protection to U.S. debtors who establish trusts in their countries. These countries compete to attract foreign business and assets to their economy. Most offshore trust jurisdictions have statutes that include the essential elements for offshore trust protection.

The best offshore trust jurisdictions have laws that include:

1. Non-recognition and non-enforceability of U.S. court judgments and orders.
2. Protection of your interest in a self-settled trust where you are both the settlor and the beneficiary.
3. Short statute of limitations on actions for fraudulent transfers.
4. Relatively high standard of proof applicable to fraudulent transfer complaints.
5. Confidentiality laws that protect the privacy of trust parties and trust assets.
6. Ability to open accounts at financial institutions located anywhere in the world.

Where Should You Establish an Offshore Trust?

The best offshore trust jurisdictions are common law jurisdictions such as the Cook Islands or Nevis. The Cook Island and Nevis have similar offshore trust protection laws. There are academic reasons to slightly prefer the Cook Islands over Nevis.

However, a more important decision is choosing your offshore trustee as opposed to choosing a country. Even if you choose “the best” offshore trust jurisdiction, the trust will not effectively protect your assets unless the trust is administered by a competent and responsive trustee.

Why The Offshore Trustee is Your Most Important Decision

Your assets are held and protected by a trustee, not by a country. The trustee holds legal title to your assets. The trustee defends your assets against creditor attack. The trustee handles the management and investment of trust assets, and your request for trust distributions is made to a trustee.

If you do not choose a good trustee, then your offshore trust will not work for you regardless of your chosen offshore trust jurisdiction.  

How To Select An Offshore Trustee

Any person located outside the United States may effectively serve as an offshore trustee. The choice includes individuals, such as family members, accountants, or attorneys. There are also financial companies that specialize as offshore trustees. Here are some factors to consider in choosing the trustee of an offshore trust:

1. Reputation. The offshore trustee industry is based upon mutual trust and reputation. A financial company that mistreats a single customer may destroy its business because U.S. clients will no longer have the confidence to entrust them with their assets.
2. Experience. Select a trustee company that has been in the offshore trust business for many years.  Your trustee should have experience dealing with U.S. creditors and administration of client money.
3. Access. You should be able to contact your trustee quickly and easily with questions and distribution requests. The trustee must offer to meet you in advance via a Zoom call. There should be a clear procedure for withdrawing trust money.
4. Investment control. Reputable trustees offer arrangements where you control decisions about where and how your money is invested within the offshore trust.
5. Insurance. Some financial companies serving as offshore trustees are insured against negligence and theft of funds.
6. Cost. Financial companies have significant initial set-up fees as well as annual fees. Individual persons acting as a trustee are less expensive.

Conclusion

The Cook Islands is currently considered the best choice for offshore trusts. Second best is Nevis, West Indies. These two common law jurisdictions have similar asset protection trust law. Some of our clients have established Hungarian trust because of the client’s unique protection needs. More important than finding the best jurisdiction is the selection of a competent and trustworthy trustee.