Have you ever wondered what would happen to your wealth if you suddenly fell ill and could no longer work, or if the economy took a downturn and you lost most of your savings?
In such uncertain times, it’s essential to have an action plan ready in case anything unfortunate happens. That’s why many high-net-worth individuals are investing in offshore asset protection.
It may seem like they’re paranoid, but with so much distrust of banks and governments in the world right now, such precautionary measures aren’t as crazy as they sound.
To learn more about offshore trusts and how they can benefit you, read on.
What is an Offshore Trust?
An offshore asset protection trust is an irrevocable trust established outside of your home country and local jurisdiction to protect your assets from lawsuits, creditors, and any other threats.
An offshore trust can help safeguard your assets against potential risks and make it more difficult for outsiders to find out about your wealth.
To effectively protect your assets from creditors, an offshore trust must:
- be irrevocable;
- provide the trustee with the discretion to withhold payments from beneficiaries;
- establish the debtor as the grantor and not the trustee;
- state the location of the trust
Movable assets such as bank deposits, securities, small company stock, and limited partnership interests are most effectively safeguarded through offshore trusts.
Offshore trusts are not as successful at safeguarding real estate located in the U.S.
Since real estate is controlled by the courts of the location in which it lies, even if they have re-titled U.S. real estate in the name of an offshore trust or offshore LLC.
Offshore trusts aren’t effective against IRS tax penalties, certain U.S. governmental agency civil actions, criminal restitution judgments, and family support obligations.
Who Can Benefit from an Offshore Trust?
People from all walks of life and all corners of the globe can benefit from setting up an offshore trust. From wealthy business owners, investors, and high net-worth individuals (HNWIs), an offshore trust can help to protect both current and future assets.
That being said, the best candidates for offshore trusts are those with a large amount of wealth who want to protect their assets from any unexpected risks.
Additionally, those who want to pass on their assets to beneficiaries without triggering gift taxes can also benefit from offshore trusts.
Why Are Offshore Trusts Important?
Offshore asset protection is not an exact science, and it is possible to lose some (or all) of your money to litigation.
However offshore trusts are designed to minimize and potentially even eliminate the possibility of this happening.
An offshore asset protection trust can be used to avoid having any of your assets attached and available to creditors. If a creditor locates your name on a property, you have a problem.
When you have an offshore asset protection trust, it is unlikely that any creditor will be able to attach judgment to any of the trust’s assets.
Civil creditors must spend a lot of time and money pursuing the trust’s trustee, and even then, there is no assurance of success.
Having assets in an offshore trust provides the U.S. debtor with substantial leverage in settling a civil money claim.
Common Offshore Trust Jurisdictions
The Cook Islands asset protection trust is one of the most well-known offshore trusts.
The Cook Islands developed a statutory framework to protect trust assets from creditors in the 1980s and 1990s, after which offshore asset protection trusts became popular.
Other jurisdictions, including Nevis, Belize, and the Bahamas, have since enacted similar statutes.
A Cook Islands trust is created under Cook Islands law and administered by a Cook Islands trustee. The Cook Islands are in the South Pacific (the same time zone as Hawaii).
Cook Islands trust companies are regulated and licensed by the Cook Islands government. Cook Islands law mandates that Cook Islands trust companies follow strict procedures and meet stringent qualifications.
U.S. residents can establish an offshore trust or an offshore limited liability company as part of an asset protection plan.
An offshore LLC has historically been formed in Nevis, which has been a popular LLC jurisdiction for some time.
However, Nevis LLCs have seen a decrease due to recent changes in Nevis tax and filing requirements leading to a surge in LLCs in the Cook Islands.
The most common approach is when a U.S. grantor contributes assets to a Cook Island Trust, with the trust, in turn, owning an LLC, that then houses the assets the grantor contributed.
The trustee subsequently administers the trust, and the U.S. grantor is now an LLC manager and the trust beneficiary.
Limitations of Offshore Asset Protection Trusts
Setting up the trust is one thing and maintaining it is another. You must make sure that all taxes and other fees are paid in a timely manner, and you will have to keep records of all the transactions and withdrawals from the trust.
The best way to do this is to hire a financial advisor or trustee who can help you manage your assets.
If you are trying to protect your assets from a divorce or inheritance tax, you should keep in mind that it will be difficult to hide assets in an offshore trust.
This is because offshore trusts are usually registered in the name of the trustee or the bank where your assets are held, which makes the assets visible in public records.
Need Help Going Offshore? We Can Help!
The best asset protection trusts are complex structures that require significant planning and expertise to set up.
You should be trying to avoid creating or setting up such trusts on your own.
We highly recommend consulting with an experienced asset protection lawyer to help set up the right trust.