Offshore trust example

An offshore trust is a legal tool that allows an individual to protect assets in a foreign jurisdiction. It is usually set up in the Cook Islands, a country with favorable asset protection laws. An offshore trust holds assets outside your home country, removes assets from U.S. court jurisdiction, and limits creditors’ ability to act against the trust property.

How Does an Offshore Trust Work?

An offshore trust protects assets from U.S. civil judgments because its assets and trustee are situated beyond the legal reach of U.S. state and federal civil courts. U.S. judges cannot compel an offshore trustee to take any action with the trust assets, and creditors do not have legal means to levy upon or interfere with administering an offshore trust’s assets.

Key Facts

  • An offshore trust uses a foreign trustee company to hold legal title to property for your benefit.
  • Assets placed in an offshore trust may be shielded from creditors, legal judgments, and civil litigation.
  • An offshore trust must comply with the laws in the country where the trust is established.

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Requirements for Offshore Trusts

Here are the most important requirements for an offshore trust:

  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.

Offshore Trust Roles

An offshore trust has a settlor, a trustee, and a beneficiary.

A settlor establishes and transfers assets into the trust and determines the terms and conditions under which the trust will operate.

The trustee is the person appointed by the settlor to manage and administer the trust’s assets. The trustee has a fiduciary duty to act in the best interests of the beneficiary and according to the trust agreement. The trustee can be an individual or corporate entity, but most people use a trustee company in the Cook Islands.

An offshore trust beneficiary is an individual designated to benefit from the assets held in the trust. In most cases, the settlor is the primary beneficiary. The trustee must manage the trust’s assets in the beneficiaries’ best interest.

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.

Example offshore trust setup

Benefits of an Offshore Trust

Here are the three key benefits of an offshore trust:

  • Protects against creditors and legal judgments.
  • Ensures high levels of privacy and confidentiality for trust assets.
  • Facilitates smooth estate planning across generations.

Protection from Judgments

An offshore trust protects against judgments by placing assets under the control of trustees outside the United States. Offshore trusts protect intangible assets such as bank deposits, marketable securities, small businesses, limited partnerships, and LLCs. These assets may be effectively moved beyond U.S. court jurisdiction by changing ownership to the foreign trustee of a foreign trust.

An offshore trust is one of the most powerful ways to protect assets from creditors and domestic judgments. U.S. 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.


Offshore trusts keep your assets private by placing assets in jurisdictions that have stringent privacy laws. The laws ensure that the trust details, beneficiaries, and assets remain confidential.

Other than post-judgment discovery, the general public cannot determine the beneficiary of your offshore trust. The public has no access to assets owned by your offshore trust. The offshore trust keeps financial affairs private. This discretion can be a decisive factor for those seeking to maintain a low profile regarding their financial affairs.

Estate Planning

Offshore can be used with general estate planning to ensure that your assets go to designated beneficiaries upon your death without probate. The offshore trust agreement can accommodate estate tax planning to minimize liability. These trusts can be tailored to meet specific estate planning objectives, allowing for the seamless transfer of wealth across generations, often with minimized tax implications.


Offshore jurisdictions often have stringent privacy laws, ensuring that the trust details, beneficiaries, and assets remain confidential. This discretion can be a decisive factor for those seeking to maintain a low profile regarding their financial affairs.

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Disadvantages of Offshore Trusts

Offshore trusts do have some disadvantages. Here are the main ones:

Not Good for Real Estate

Offshore trusts are generally less effective in protecting real estate in the U.S. Real estate is generally subject to the powers of the courts of the jurisdiction where it is located.

Even if you title U.S. real estate in the name of an offshore trust or LLC, a U.S. court will still have jurisdiction over your equity and property title because your property remains within the court’s geographical jurisdiction.

Advanced offshore planning may protect U.S. property by encumbering it with a mortgage to an offshore bank. Offshore banks typically pay higher CD rates than U.S. banks. Some real estate owners borrow funds from an offshore bank, hold them in a CD, and secure the loan with a lien on their U.S. property. The CD interest usually covers most of the loan expense.

Alternatively, the loan proceeds may be held at a U.S. bank immune from garnishment, albeit earning lower interest rates but with more convenient access to the money.


Establishing and maintaining an offshore trust is more expensive than setting up and maintaining a domestic trust. These expenses include trustee fees, legal advisory costs, annual reporting expenses, and other administrative charges.

Less Control

Once you transfer your assets to an offshore trust, you relinquish direct control over the assets in most trust structures. While relinquishing control aids trust protection, parting with control over your assets can be discomforting.

Offshore trust summary

How to Set Up an Offshore Trust

Here are the steps to form an offshore trust:

  1. Choose a jurisdiction.
  2. Select a trustee.
  3. Fill out the Know Your Customer documents.
  4. Draft and sign the trust documents.
  5. Open a bank or brokerage account in the trust.
  6. Transfer assets to the trust. This is called funding the trust.

1. Choose a Jurisdiction

For most people, the Cook Islands is the best offshore trust jurisdiction. It 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 Eastern European countries are good options in some situations.

2. Select a Trustee

A U.S. citizen must select a person or company based in a foreign trust jurisdiction to serve as a trustee of their offshore trust. Most offshore trust trustees are reputable, but there are some disreputable offshore trustee services that solicit U.S. customers.

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 the Background Check

All offshore trustee companies perform a background check (a “know your customer” inquiry) on settlors 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, public litigation, or disputes between you and the U.S. government agencies or the Department of Justice.

You must disclose any 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 the Trust Agreement

Your asset protection attorney will work with the offshore trustee company to draft the offshore trust agreement, which can be customized based on your asset protection and estate planning goals.

If you include other entities in the structure, such as a Nevis LLC, the attorney will also draft the agreements for those entities.

5. Open a Bank Account

An offshore trust typically has financial accounts opened at foreign banks. These accounts are necessary to hold financial assets owned by the offshore trust. The offshore trustee will open the trust’s financial accounts. Offshore trust accounts are typically located at well-established financial institutions in the European Union. In some cases, the accounts will be titled in the name of an LLC owned by the trust.

6. Transfer the Assets

The final step in an offshore trust plan is transferring your assets to the trustee of the offshore trust. The transfers involve wiring money and transferring securities from your U.S. financial accounts to the foreign accounts opened by the trustee. If the trust owns an offshore LLC, then your assets will be transferred to the LLC rather than directly to the offshore trust.

Offshore Trust Taxation

Offshore trusts typically do not influence your U.S. income tax. An offshore trust will not reduce or avoid U.S. income taxation. This is a common misconception. Offshore trusts are not an effective income tax planning vehicle.

Who Pays The Tax on Offshore Tax Income?

The grantor must pay the tax on offshore tax income. The IRS treats foreign trusts as a “grantor trust.” If a trust is a grantor trust, the person who established the trust (the settlor or grantor) is taxed directly on the trust’s worldwide income, irrespective of whether the income is distributed to beneficiaries. The trust’s income is treated as the grantor’s income for tax purposes.

How Does the IRS Tax Beneficiaries of Offshore Trusts?

Beneficiaries of an offshore trust generally are taxed on distributions of income they receive, and their tax liability depends on the nature and source of the distribution. However, the rules determining the amount and type of taxable distribution are complex. Additionally, U.S. beneficiaries must report their involvement with foreign trusts on their tax returns.

IRS Reporting Requirements

Aside from the direct tax implications, U.S. residents must adhere to a layer of reporting requirements if they have connections to foreign trusts. You must file with the I.R.S. a Report of Foreign Bank and Financial Accounts (FBAR) if you have a financial interest in or signatory authority over foreign financial accounts, including foreign trusts.

Real Estate Protection

An advanced offshore trust plan can offer asset protection for real estate. 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 the real estate 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 the property lies.

Equity Stripping To Protect Real Estate

An offshore trust can protect real estate by using equity stripping. Equity stripping is a financial arrangement that “strips” the equity from the 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 interest 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, the Cook Islands, has laws that allow you to use equity stripping to protect your domestic real property.

We help protect your assets from creditors.

We offer customized offshore asset protection planning for clients nationwide. Get answers for your specific situation by phone or Zoom.

Alper Law attorneys

Equity Stripping in an Offshore Trust Plan

Here are the steps to use equity stripping with an offshore trust:

  1. You establish the offshore trust.
  2. An offshore bank agrees to loan money to you.
  3. Loan proceeds are placed in the offshore trust’s account.
  4. You give a mortgage on your U.S. real estate in favor of the offshore bank.

First, you establish your offshore trust. Most likely, 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 U.S. real estate. The loan amount and interest rate are based on the real estate equity and the type of real estate asset. Foreign banks 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 on your real estate 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 Offshore 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. The title to the property may then be transferred back to your name or your domestic LLC.

Is Equity Stripping a Fraudulent Transfer?

A U.S. judge may reverse transactions found to be fraudulent transfers. If you had transferred 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 your transfer. A simple example is when you sell an asset and receive reasonable amounts of money in consideration for your transfer of the asset to a buyer.

In offshore equity stripping, you transfer a security interest in your real estate (the mortgage) and receive cash based on the property value. The equity stripping plan should not be unwound as a fraudulent transfer because you are 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 Cost with an Offshore Trust?

Offshore equity stripping first requires an underlying offshore asset protection trust, which requires separate legal and trustee fees. The additional 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) of 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.

Can an Offshore Trust Have a Bank Account?

An offshore trust can have a bank account. It’s common for offshore trusts to have bank accounts in the jurisdiction where the trust is established or in other foreign jurisdictions to hold and manage the trust’s assets.

One of the primary reasons for establishing an offshore trust is to provide asset protection. Holding assets, including cash, in a bank account in the trust’s name can help shield those assets from potential creditors or litigants in the settlor’s home country.

Significant reporting requirements are associated with foreign bank accounts for U.S. persons (and residents of many other countries).

The choice of bank and jurisdiction can affect the trust’s confidentiality, asset protection, and ease of managing the trust’s assets. Selecting a jurisdiction and bank with a strong reputation for stability, confidentiality, and adherence to international financial regulations is essential.

Is an Offshore Trust Worth It?

An offshore trust can be extremely helpful for people seeking a high level of asset protection. An offshore trust can completely safeguard trust assets from domestic creditors and U.S. courts.

Offshore trusts are expensive and not for everyone. For many people, a domestic asset protection plan will be as effective for much less money. However, for some people facing difficult creditor problems, an offshore trust is the best option to protect significant assets.

Frequently Asked Questions

How does an offshore trust work?

An offshore trust allows you to protect your assets by transferring them outside of U.S. jurisdiction. The trust is managed by a trustee company for your benefit. An offshore trust is a private document and is not filed in the state.

How much does it cost to set up an offshore trust?

An offshore trust costs between $15,000 and $30,000, which normally includes the first year of trustee expenses. The trustee will charge annual fees. Customizing the trust, such as having a trust protector or specialized estate planning provisions, will increase the costs.

What’s the Best Place to Form an Offshore Trust?

For most people, the Cook Islands is the best place to form an offshore trust. Other offshore trust jurisdictions include Nevis, the West Indies, and Hungary. Each of these countries has trust statutes favorable for offshore asset protection.

There are subtle legal differences among offshore trust jurisdictions’ laws, but they have more features in common. The trustmaker’s choice of country depends mostly on where the trustmaker feels most comfortable placing assets and the trustmaker’s current legal situation.

How are Offshore Trusts Taxed?

Tax treatment of foreign offshore trusts is very specialized. You should talk to a CPA experienced with offshore trust taxation to better understand the tax consequences of an offshore trust, especially if the offshore trust will generate income or own a business.

How safe is an Offshore Trust?

An offshore trust is a safe asset protection tool when the trust county thoroughly regulates its trustee companies. For example, in the Cook Islands, offshore trust companies must comply with local laws regarding trust management and privacy. Many offshore trust companies are insured by reputable U.K. institutions.

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 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 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.

Can a Judge Order You to Bring Back Offshore Trust Assets?

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. 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 transferring 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.

How long does it take to set up an offshore trust?

About 2-3 months. You must file an application with the offshore trustee and pass a background check. Then, you’ll sign the trust agreement and transfer assets to the trust.

What is the purpose of an offshore trust?

The primary purpose of an offshore trust is to provide asset protection and estate planning benefits by placing assets in a legal structure under the jurisdiction of a country with favorable laws. Offshore trusts are particularly utilized for safeguarding assets against potential claims, creditors, or legal judgments in the settlor’s home country.

Jon Alper

About the Author

I’m a nationally recognized attorney specializing in asset protection planning. I graduated with honors from the University of Florida Law School and have practiced law for almost 50 years.

I have been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal. I have helped thousands of clients protect their assets from creditors.

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