Offshore Trust

An offshore trust is one of the best ways to protect assets from aggressive creditors. When a person creates an offshore trust, they give ownership of the assets to a foreign trustee outside the jurisdiction of U.S. courts. An offshore trust (1) provides the highest level of asset protection, (2) removes assets from oversight of state courts, and (3) allows a person to distribute your assets upon death without probate.

Offshore Trust Definition

An offshore trust is a legal arrangement in which assets are placed under the control of a trustee in a foreign jurisdiction outside the asset owner’s home country. This structure is typically used for asset protection, estate planning, tax planning, and maintaining confidentiality. Offshore trusts can provide several benefits:

1. Asset Protection: Offshore trusts can protect assets from creditors, litigation, or other claims in the asset owner’s home country.
2. Tax Planning: Depending on the jurisdiction and the home country’s tax laws, an offshore trust might offer certain tax advantages.
3. Confidentiality: Many offshore jurisdictions have strong privacy laws, ensuring the details of the trust and its beneficiaries remain confidential.
4. Estate Planning: Offshore trusts can serve as vehicles to pass on wealth to future generations, often with reduced exposure to inheritance or estate taxes.
5. Diversification: Holding assets in a foreign jurisdiction provides diversification and reduces political and economic risks associated with a single country.

An offshore trust may have additional people serving as trust advisers or trust protectors. Advisors and protectors help administer and protect the offshore trust and its assets while having no beneficial interest in trust property. A protector can be given the power to change trustees, reallocate beneficial interests, or direct the investment of trust assets.

An offshore trust protects assets from U.S. civil judgments primarily because its assets and trustee are situated beyond the legal reach of U.S. state and federal civil courts. U.S. judges have no authority to compel an offshore trustee to take any action with trust assets. Creditors do not have legal means to levy upon or interfere with the administration of an offshore trust’s assets.

In other words, even if a U.S. court ordered a foreign trustee to turn over assets, the offshore trustee could ignore the order. To levy or garnish offshore trust assets, a U.S. judgment creditor would have to file and re-litigate the underlying U.S. lawsuit in the foreign courts and obtain a new foreign judgment. This is difficult, expensive, and rarely done.

What is the Best Type of Offshore Trust?

An offshore trust should have the following characteristics to work best for asset protection:

• The offshore trust should be irrevocable.
• The offshore trust should give the trustee the discretion to withhold payment.
• The grantor should not be the trustee.
• The trust should allow the trustee to withhold payment from the beneficiary.
• The trustee should be a foreign trust company or financial institution.
• Sometimes, a friend or advisory can serve as trust protector, so long as the trust protector is not located in the United States.
• The trust should expressly state that the location of the trust (called the situs) governs trust provisions.
• In some cases, the trust’s sole asset should be a 100% ownership position in a foreign LLC or other entity that can be controlled by the debtor when not under creditor duress.

How to Create an Offshore Trust

To create an offshore trust, a person must (1) select an appropriate jurisdiction, (2) hire a trustee company, (3) complete due diligence with the trustee, (4) draft the trust document, and (5) transfer assets to the trust. An attorney can help with each step of the offshore trust process. Once the trust is established, any assets transferred to the trust will be protected from almost all creditors.

1. Select a Jurisdiction.

The first step to forming an offshore trust is selecting a trust jurisdiction. For most people the Cook Islands currently offers the best combination of trustee regulation, favorable debtor laws, and positive litigation outcomes compared to other jurisdictions. Nevis, W.I., Bahamas, Belize, and some countries in Eastern Europe are also good options in some situations.

2. Pick a Trustee

A U.S. citizen must hire a person or company based in a foreign trust jurisdiction to serve as a trustee. Many people do not know which offshore trust trustees are reputable. U.S. citizens typically hire a domestic trust company, or a U.S. asset protection attorney to help them find an offshore trustee in a suitable jurisdiction.

3. Pass a Background Check

All offshore trustee companies perform a background check (referred to as a “know your customer” inquiry)  on all grantors and beneficiaries of the offshore trust. The trustee company will use software and third-party investigators to verify your identity, investigate your current legal situation, and confirm the source of assets being transferred to the trust. Trustee companies do not want clients who may involve the company in government investigations or litigation, such as disputes involving U.S. government agencies or the Department of Justice.

You must disclose pending litigation and investigations as part of the background check. The trustee company may require that the trust documents carve out an exception for any pending litigation, and the trustee will not defend the trust against the plaintiff’s claims.

Most people pass the background check without issue.

4. Draft Legal Documents

Your domestic asset protection attorney will work with the offshore trustee company to draft the offshore trust agreement. If you include other entities in the structure, such as a Nevis LLC, the attorney will also draft the agreements for those entities.

The trust agreement can be customized based on your asset protection and estate planning goals.

5. Transfer Assets

The final step in offshore trust formation is transferring assets to the trustee of the offshore trust. If the trust owns an offshore LLC, then the trustmaker’s personal assets will be transferred to the LLC rather than the offshore trust.

The offshore trust structure works best when the trust assets are held offshore. The trustee company can assist in opening financial accounts for the trust or its wholly-owned LLC that are located in foreign jurisdictions.

How Does an Offshore Trust Work?

An offshore trust operates as a legal arrangement where assets are transferred from an individual to a trustee in a foreign jurisdiction. Here’s a breakdown of how an offshore trust functions:

1. Establishment: The trust is formed when the settlor transfers assets to the trustee. This is formalized through an offshore trust agreement, a legal document outlining the terms and conditions, the beneficiaries, and the rules the trustee must follow.
2. Role of the Trustee: The trustee holds and manages the trust’s assets. They have a fiduciary duty to act in the best interests of the beneficiaries, as defined by the trust agreement. It’s common to appoint a professional trustee, often a trust company in the chosen jurisdiction.
3. Beneficiaries: These are the individuals or entities that benefit from the assets held in the trust. The trust agreement will specify the beneficiaries and how they receive benefits. For a trust created for asset protection purposes, the trustmaker is often the beneficiary.
4. Trust Protector (Optional): Some trusts have a trust protector, an individual or entity appointed to oversee the trustee’s actions and ensure they adhere to the trust’s purposes. They might have the power to appoint or remove trustees.
5. Jurisdictional Benefits: The chosen jurisdiction typically offers specific advantages, such as strong asset protection against creditors, favorable tax treatment, or confidentiality provisions that shield the identities of the settlor and beneficiaries.
6. Tax Implications: Depending on the settlor’s home country and the trust’s structure, the trust’s income and gains may be subject to different tax treatments.
7. Duration: Some offshore trusts can exist indefinitely, while others have a set expiration, depending on the trust’s purpose and the chosen jurisdiction’s laws.
8. Distribution: Assets or income can be distributed to beneficiaries according to the trust agreement’s terms, which may specify certain conditions, timings, or triggers for distribution.
9. Dissolution: The trust can be dissolved at the end of its term or when its purpose is fulfilled. Any remaining assets are distributed according to the trust agreement.

While offshore trusts can offer significant benefits like asset protection and tax planning, they also come with complexities.

Benefits of an Offshore Trust

An offshore trust provides several advantages to a U.S. judgment debtor. First, Offshore trusts are among the most powerful tools to protect assets from creditors and domestic judgments. U.S. private creditors rarely have the resources or desire to chase a judgment debtor’s assets outside of U.S. jurisdiction. Few collection attorneys know how to initiate collection proceedings against offshore assets.

Secondly, outside of litigation, the public will be unable to determine the beneficiary of the offshore trust. This keeps financial affairs private. Finally, offshore trusts can be used in conjunction with general estate planning to make sure that your assets go to designated beneficiaries upon your death without probate. The offshore trust agreement can accommodate estate tax planning to minimize estate tax liability.

Asset Protection

Offshore trusts are a component of offshore asset protection planning. Offshore asset protection is an asset protection tool that involves forming a trust or business entity in a favorable legal jurisdiction outside of the United States. Offshore assets and business entities are placed under the control of trustees or managers who are not United States citizens and do not have a business presence in the United States.

People with significant assets and higher risks of legal liability can use offshore trusts to move legal battles with creditors to jurisdictions beyond the reach of United States courts.

Offshore trusts are most effective when protecting movable intangible assets such as bank deposits, marketable securities, small business stock, limited partnership interests, and LLC interests. These assets may be effectively moved beyond U.S. court jurisdiction by changing ownership to the foreign trustee of a foreign trust.

Protecting Real Estate

Offshore trusts are not as effective in protecting real estate located in the U.S. In general, real estate is subject to the powers of the courts of the jurisdiction where the property is located. Even if a debtor titles U.S. real estate in the name of an offshore trust or an offshore LLC, a U.S. court will still have jurisdiction over the debtor’s equity and the property title because the property remains within the U.S. court’s geographical jurisdiction.

Offshore planning may protect U.S. property if the property is encumbered by a mortgage to an offshore bank. Offshore banks typically pay higher CD rates than U.S. banks. A prospective debtor can borrow funds from an offshore bank, hold the funds offshore in a CD, and secure the loan with a lien on the property. The CD interest would cover most of the loan expense. Alternatively, the loan proceeds may be held at a U.S. bank that is immune from garnishment, albeit earning lower interest rates but with more convenient access to the money.

Offshore Trust Structure

Many offshore asset protection plans involve more than one legal entity. For example, a U.S. resident can combine an offshore trust and a U.S. limited partnership or an offshore limited liability company.

Most offshore LLCs are formed in Nevis, which for some time has been a favored LLC jurisdiction. However, recent changes to Nevis tax and filing requirements have led to some LLCs to be organized in the Cook Islands.

For example, a U.S. person could form a Nevis LLC and transfer their business interests and liquid assets to the LLC. The person could next establish a Cook Islands trust using an offshore trust company as a trustee. The LLC issues membership interests to the trustee of the Cook Islands trust. The Cook Islands trust would own 100% of the Nevis LLC. The U.S. resident could serve as the initial manager of the Nevis LLC with the option of appointing an offshore manager should the person ever become under legal duress.

With this type of offshore trust structure, the Nevis LLC is managed by the U.S. individual when there are no anticipated lawsuits. If a legal issue arises, the trustee of the offshore trust should remove the U.S. individual as manager of the Nevis LLC and then appoint a successor manager that is also offshore.

The plan diversifies control over two separate jurisdictions instead of putting all the assets in either the LLC or the trust.

Requirements for Offshore Trusts

The most important requirements for an offshore trust include:

1. The trust must be irrevocable.
2. The U.S. debtor cannot be the trustee.
3. The trust must provide the trustee the discretion to withhold payment from the beneficiary.
4. The trustee must be a foreign trust company or financial institution rather than an individual.
5. If using a trust protector, the trust protector cannot be located in the United States.
6. The trust must state that the location of the trust (called the situs) governs trust provisions.
7. The trust must own the assets either directly or through a foreign entity, such as an LLC, that the debtor can control when not under legal duress.

Disadvantages of an Offshore Trust

Offshore trusts do have several disadvantages, including:

1. Legal complications: Offshore trust laws can be complex and vary significantly by jurisdiction. This complexity can make it challenging to ensure that the trust is properly established and managed.
2. Regulatory scrutiny: Offshore trusts have become a target for regulatory scrutiny in recent years due to their association with tax evasion, money laundering, and other illegal activities. This can increase reporting requirements and the risk of sanctions or penalties if the debtor and trustee fail to follow U.S. regulations.
3. Reputation risks: Due to their association with tax evasion and other illicit activities, offshore trusts can carry a stigma that could harm your reputation and credibility in a courtroom.
4. Cost: Establishing and maintaining an offshore trust can be expensive.
5. Limited control: When assets are placed in an offshore trust, control over those assets is generally handed over to the trustee. This can be a disadvantage if you need to access or control those assets. how to manage those assets. However, a customized offshore trust can grant the beneficiary investment discretion and control.
6. Potential for fraud: Offshore jurisdictions are often less regulated than domestic ones, increasing the risk of fraud or mismanagement by a trustee that is not insured or well-known.
7. Changes in legislation: Offshore jurisdictions are subject to changes in their tax and legal regulations. There is always a risk that changes in legislation could make offshore trusts less attractive or even unfeasible.
8. Access to funds: Depending on the terms of the trust and the laws of the jurisdiction in which it is established, it may not be easy to access funds in an offshore trust. This could be an issue if you need to access those funds quickly.
9. Unfamiliar Financial Institutions. Offshore trust jurisdictions do not have financial institutions with regulation and capitalization comparable to the United States or the European Union.

What Is the Best Offshore Trust Jurisdiction?

The Cook Islands is generally regarded as the best offshore trust jurisdiction for most people. That being said, it is more important to select the best trustee than the best offshore trust jurisdiction. In fact, trustee selection is the most important part of offshore trust asset protection. The offshore trustee controls the trustmaker’s assets. The trustee must be competent, responsive, and trustworthy. The offshore trustee can be a bank, a trustee company, or an individual in another country.

The trust plan works best when the trustee is a professional or a well-established and secure business, and most importantly, is willing to defend the offshore trust against attacks initiated by U.S. creditor collection. A person considering an offshore trust should investigate, and if feasible, personally meet with, a prospective foreign trustee before appointing them as trustee of their offshore trust.

There are reputable and experienced companies serving as trustees of offshore trusts. These companies carry insurance policies issued by well-known insurance companies that insure their customers against loss from negligence and criminal acts of the trustee’s agents and employees. Some trust companies are also audited by national U.S. accounting firms, and they offer the audit results and their insurance certificates to prospective offshore trust clients.

Most people would like to retain control of their own assets held in their offshore trust by having the power to remove and replace the trustee. Retaining the power to change an offshore trustee creates legal risks. A U.S court may not have direct authority over assets held offshore, but the court does retain personal jurisdiction over the trustmaker who resides in the United States. A judge could order the debtor to exercise their retained rights to substitute a creditor agent for the current offshore trustee. Therefore, offshore trust asset protection works best if the trustmaker has no control over trust assets or other parties to the trust. The trustmaker should not retain any powers that they could be forced to exercise by a U.S. court order.

Some trustee companies permit the trustmaker to reserve primary discretion over trust investments and account management in the position of trust advisor. This arrangement gives the trustmaker some control over assets conveyed to the trust, and the trustmaker can give up rights if they are threatened with legal action, leaving the offshore trustee in sole control. Another option is for the trustmaker to name a trust protector who is not subject to U.S. court jurisdiction. The trust protector can remove a trustee who is not responsive or who is not taking good care of trust assets.

Cook Islands Trust

A Cook Islands trust is a type of asset protection trust established under the laws of the Cook Islands. It is designed to provide individuals and families with advanced asset protection and privacy. Cook Islands trusts have gained popularity among individuals seeking to safeguard their wealth from potential creditors and legal claims.

Assets placed into a Cook Islands trust are almost completely shielded from creditors, lawsuits, and judgments. Cook Islands trust laws impose significant obstacles for creditors attempting to access trust assets. The Cook Islands has a statute of limitations on fraudulent transfer claims against the trust, making it difficult for creditors to go after trust assets. The Cook Islands does not recognize foreign judgments, meaning a creditor may have to relitigate the underlying dispute to take action against assets placed in a Cook Islands trust.

Trustee companies located in the Cook Islands are subject to significant regulations and oversight. U.S. clients transferring assets to a Cook Islands trust do not generally need to worry about the safety of their assets as much as with other jurisdictions.

Can Someone Set Up an Offshore Trust If They Already Have a Judgment?

Most Cook Islands trustee companies will not accept new offshore trust clients who are already subject to a civil judgment. On the other hand, if a person is a defendant in a lawsuit, but not yet subject to a judgment, the trustee will “carve out” or make an exception to their trust protection for any future judgments related to existing litigation.

People with existing civil judgments may find protection through trusts based in the European Union or elsewhere. For example, Hungary has trust laws designed with asset protection benefits, and Hungarian trustee companies do not typically refuse or make exceptions for clients with current civil judgments. The Hungarian Civil Code and trustees provide their own advantages, such as:

• Trustees deposit client funds in E.U. banks covered by the E.U’s deposit guaranty policy.
• The Hungarian offshore trust includes direct client control of trust investments.
• Creditor challenges to the trust or fraudulent transfer allegations must be prosecuted in the Hungarian language.

For these reasons, people with judgments may find that Hungary and other lesser-used jurisdictions are a better fit than the Cook Islands.

Offshore Trust Bank Accounts

Many people believe they can protect cash deposits from creditors by opening an offshore trust bank account. People assume that a judgment creditor cannot garnish their accounts at a bank with no U.S. branches or offices.

However, it has become difficult for a U.S. citizen to open a foreign bank account in their own name. Most reputable foreign banks do not accept U.S. citizens as individual bank customers. Secret bank accounts do not exist because of treaties between the U.S. and most countries following 9/11.

The way to deposit money in a foreign bank is to first establish an offshore LLC or offshore trust. Then, the debtor requests the foreign LLC manager or offshore trustee to open the account in the name of the foreign entity.

Foreign managers and trustees have relationships with banks that enable them to open accounts on behalf of their U.S. clients. Offshore trustees usually maintain their client’s financial accounts at E.U. institutions that have no U.S. branches. E.U. financial institutions can purchase U.S. marketable securities and maintain bank accounts in U.S. dollars. The trustmaker does not have direct access to offshore trust financial accounts, but they can request distributions from the offshore trustee

Turnover and Contempt Orders with Offshore Trusts

The possibility of turnover orders and civil contempt charges is a significant risk in offshore asset protection. Debtors relying on offshore trusts should consider the possibility of a domestic court order to bring back assets transferred to a debtor’s offshore trust.

The impossibility of compliance is a defense to civil contempt. A court will not imprison someone for failure to do something that can’t be done. In instances when a court orders a debtor to unwind an offshore trust plan, the debtor can claim that compliance is impossible because the trust is under the control of an offshore trustee.

But it’s not as simple as invoking an impossibility defense and saying, “I can’t.” Some recent court decisions treat a transfer of assets to an offshore trust as an intentional act of creating an impossibility. The courts then disallow the impossibility defense to the contempt order because the impossibility is of the debtor’s own making.

Offshore Trust Taxation

Offshore asset protection trusts will not reduce or avoid U.S. income taxation. This is a common misconception. Offshore trusts are not an effective income tax planning vehicle.

Generally, a foreign irrevocable trust will be treated as a “grantor trust” for taxation purposes regardless of whether the trustmaker reserved any powers associated with domestic grantor trusts. A grantor trust is a trust whose taxable income is reported by the grantor so that the trust is disregarded for U.S. tax purposes. The trustmaker of an offshore trust must report all trust income, including capital gains, on their personal tax return as ordinary income. This taxation treatment applies regardless of whether the assets themselves are in the United States or offshore.

In addition, there are IRS reporting requirements for trustees and beneficiaries of offshore trusts. In 1996, Congress imposed substantial penalties for failure to report offshore trust financial information. A trustmaker must work with a CPA experienced with foreign trust reporting and taxation.

Are Offshore Trusts Worth It?

Offshore trusts are expensive. Increasingly invasive “know your customer” (KYC) regulations have made establishing offshore entities more difficult. An offshore trustee usually investigates potential U.S. clients more fully than the U.S. client investigates possible offshore trustees. The increased scrutiny and KYC “red tape” have caused U.S. attorneys to increase their legal fees to establish an offshore trust plan.

After paying to set up the trust and conveying assets to the trustee, the trustmaker will incur annual administration fees. Trustee companies for Cook Islands trusts charge annual fees in the range of $1,000 to $5,000 per year plus hourly rates for extra services.

Offshore trusts are not for everyone. For many people living in Florida, a domestic asset protection plan will be as effective for much less money. But for some people facing difficult creditor problems, the offshore trust is the best option to protect a significant amount of assets.

Offshore Trusts and Bankruptcy

Debtors may have more success with an offshore trust plan in state court than in a bankruptcy court. Judgment creditors in state court litigation may be intimidated by offshore asset protection trusts and may not seek collection of assets in the hands of an offshore trustee. State courts lack jurisdiction over offshore trustees, which means that state courts have limited remedies to order compliance with court orders.

An offshore trust does not work as well if the U.S. debtor files bankruptcy. A bankruptcy debtor must surrender all their assets and legal interests in property wherever held to the bankruptcy trustee. Bankruptcy courts have worldwide 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 do whatever is required to turn over to the bankruptcy trustee all the debtor’s assets throughout the world, including the debtor’s beneficial interest in an offshore trust. Bankruptcy debtors who have refused such orders have been held in contempt and incarcerated.

Key Points About Offshore Trusts

There are important considerations regarding offshore asset protection trusts:

1. Offshore trusts are designed to place the trust assets and trust parties beyond the jurisdiction of U.S. courts enforcing a domestic civil judgment.

2. Offshore trusts are less effective in personal bankruptcy because bankruptcy courts have jurisdiction over a debtor’s assets wherever they are located worldwide.

3. Offshore asset protection trusts are less effective against IRS collection, criminal restitution judgments, and family support obligations.

4. Even if a U.S. court does not have jurisdiction over offshore trust assets, the U.S. court still has personal jurisdiction over the trustmaker. A creditor may ask a court to compel a trustmaker to dissolve a trust or bring back trust assets.

5. The trustmaker must be willing to give up legal rights and control over their trust assets for an offshore trust to effectively protect these assets from U.S. judgments.

6. Selection of a professional and reliable trustee who will defend an offshore trust is more important than selecting an offshore trust jurisdiction. Trustmakers should interview, and if possible, personally meet prospective trustees of their offshore trusts.

7. Offshore trusts are irrevocable. The trustmaker cannot change the beneficiaries, trustees, or terms of an irrevocable offshore trust.

8. Offshore trusts are treated as “grantor trusts” for tax purposes meaning that trust income, including capital gains, is treated as the trustmaker’s ordinary income for U.S. tax purposes.

9. Most internet information about offshore trusts, including most advertising of offshore trusts, is published by document preparation companies that are not attorneys and that do not employ their own attorneys. People who “buy” an offshore trust package from a non-attorney company will likely not have effective asset protection.

10. Offshore trusts are complicated and expensive. Most Florida residents can achieve asset protection with traditional asset protection tools.

Important Court Cases

In re Lawrence, 279 F. 3d. 1274 (11th Cir. 2002): Civil Contempt Can Defeat Offshore Trust Plan

A bankruptcy court may use powers of civil contempt to compel a debtor to repatriate assets from an offshore trust established to defraud creditor collection. Bankruptcy courts have jurisdiction over debtor’s foreign assets. The alleged impossibility of the debtor’s compliance with a court order is not a viable defense when the debtor created the impossibility.

But see a different result with a more favorable outcome of an offshore trust plan:

• In re Rensin, 600 B.R. 870 (Bankr. S.D. Fla. 2019)

Frequently Asked Questions

Below are answers to some commonly asked questions about offshore trusts.