OFFSHORE ASSET PROTECTION TRUST

What is an asset protection trust?

An "Asset Protection Trust" is merely a particular type of trust agreement, designed to accept, manage and finally distribute assets, free from claims of later creditors. For purposes of our brief definition here, we will discuss a "grantor trust." The "Grantor" (also sometimes referred to as the "Settlor") is the individual who transfers ownership of his or her assets to the "Trustee", who thereafter holds legal title for the beneficial interest of the "Beneficiary" or "Beneficiaries." The Grantor puts the assets into this box we refer to as a "trust." The Trustee owns and manages these assets in a fiduciary relationship, taking great care to safeguard the "res" or "corpus" (body) of the trust assets (sometimes called the "trust fund") so as to preserve them for the benefit of the designated beneficiaries. Some trusts, including almost all foreign trusts, include an office of "Protector." The Protector is an individual or company appointed to exercise some level of restraint on the otherwise unrestrained discretion of the Trustee. The Protector can require the Trustee to get permission for any action taken as trustee. The Protector can grant consent in advance for all sorts of decisions to be made by the Trustee, or the Protector can require the Trustee to come hat in hand with each decision. What the Protector can not do is require the Trustee to do anything whatsoever. The Protector may counsel, advise and request, but cannot direct, require or order. Thus the grantor is permitted to be a Protector because he lacks the power to legally compel the Trustee to make any distribution of the trust assets. If the powers of appointment retained by the Grantor in the role of Protector actually made it possible to control the Trustee, then the trust would be a sham and the IRS or other regulatory agency (or the courts) would disregard the trust, declare it to be dissolved and make the assets available to creditors. Many clients prefer to appoint a "Representative Law Firm" to act in the role of Protector for a fee. Their communications with the law firm are protected by the attorney-client privilege and the law firm communicates consent to the Trustee. This provides an additional layer of insulation between the North American client and the structure.

Well drafted trusts include spendthrift clauses, clauses which permit the trust to be redomiciled to another jurisdiction if the legal or political climate of its original domicile should change for the worse. It is also common for a clause that requires a Trustee to disregard a request or consent from a Protector who is making such a request at the insistence of a court or governmental body. Offshore asset protection trusts may range from 40 to over 100 pages, depending on the areas that must be covered.

While it is possible to form a domestic asset protection trust, your domestic trustee will always be subject to the jurisdiction of the domestic courts. With a foreign asset protection trust, the local courts have no power or jurisdiction over the foreign trustee. A further discussion of the advantages of an "offshore" asset protection device follows.

WHY A FOREIGN ASSET PROTECTION TRUST?

There is absolutely nothing wrong with the use of domestic trusts as elements of your domestic estate planning. A "living trust" is a revocable inter vivos trust which can help avoid probate of those assets which remain in the United States, and may assist in the effective use of the Unified Tax Credit. Sometimes a charitable remainder trust on the "domestic" side of your strategy can be effective.

If your primary strategy is asset protection then there are some serious drawbacks to a domestic trust. For one thing, a domestic trust will have a domestic trustee. Because the trustee will reside in the United States, he resides within the jurisdiction of the U.S. courts. These are the same courts that your potential creditors (including the governmental taxing authorities) will have access to when they try to defeat your trust in order to get at your assets. The laws of the various states are not specifically designed to make it difficult for a creditor to collect what you may be found to owe. The Courts may not be sympathetic to your plight where you have in fact (or at least have arguably) incurred a debt or a tax liability.

Additional problems with domestic trusts include longer statutes of limitations on the legitimacy of transfers, and the fact that an American court might elect to simply disregard the trust, declare it dissolved, and order you to turn over the trust fund to your creditors. The concept of "Fraudulent Conveyances" or "Fraudulent Transfers" permits a Court to void a transfer to a trust where it renders the debtor insolvent or is intended to frustrate a creditor.

Many of the offshore "tax haven" jurisdictions have recognized that they are in competition with each other to encourage and incite Americans to expatriate their assets to their little island jurisdictions. One way to encourage that movement of assets is to draft legislation that makes it particularly difficult for a creditor to get satisfaction from the grantor's assets. Some of the provisions that are typically found in foreign asset protection trusts settled in the best jurisdictions include:

1. The Trustee has the right to disregard the consent of a protector that is given because of an order of a court or other governmental body. (This is called an "anti-duress clause.")
2. The Trustee has the power to move the trust to another jurisdiction if the laws of the original jurisdiction should become unfavorable.
3. The Trustee has the right to deny information about the trust fund to inquiring agents from your creditors or taxing authorities.
4. The Trust does not have to be registered with the offshore governments.
5. The Statute of Limitations on declaring the transfer of assets to the trustee as "fraudulent" is much shorter than in the United States. [Several have a two-year statute of limitations compared to a common five year limit in the United States.]
6. The offshore jurisdictions will not recognize a foreign (U.S.) judgment against the grantor.
7. The foreign jurisdiction is likely to require the creditor (including the IRS) to come into their courts and prove their case all over again.
8. The creditor may be required to prove his case "beyond a reasonable doubt" rather than to the American civil standard of "a preponderance of the evidence."
9. The creditor must utilize the services of attorneys from the offshore country (and contingency fees are forbidden.) Up front retainers will be required for the foreign attorneys to bill against.
10. The offshore jurisdiction may require the creditor to post with the Clerk of their court a cost deposit of $25,000.00 or more to protect the trustee in the event that the creditor loses.
11. The Trustee is empowered to take other measures to protect the assets in the trust from any attack whatsoever, including moving the assets from the jurisdiction itself (if they are liquid.)

The effect of these and many other more subtle provisions in a foreign asset protection trust make it a premier device for safeguarding your movable assets so as to preserve them for your intended beneficiaries. As a result of recent case law in the federal courts, we believe that an offshore trust should normally be used in conjunction with limited family partnerships, offshore corporations, limited liability companies, and other entities. While the offshore asset protection trust is no longer the centerpiece for the person serious about protecting and preserving their assets, it remains an important tool and a valuable component in a complete financial strategy.