An offshore asset protection trust is an effective legal solution for protecting wealth from future lawsuits and potential creditors. With an offshore asset protection plan, a trust is established under the laws of a foreign country and managed by a professional trustee not subject to the jurisdiction of the settlor’s home country. In the event of a lawsuit, assets placed in an offshore asset protection trust will be extremely difficult to reach, even if the plaintiff wins a judgment in a U.S. court. The most reputable offshore jurisdictions are the Cooks Islands, Nevis, and Belize which have favorable laws for asset protection trusts.
While offshore asset protection trusts are generally considered the most effective asset protection solution, as with any other legal arrangement, they are not perfect. Fortunately, court cases of offshore trust being defeated are few and far in-between, but they do exist. Anyone considering a sophisticated asset protection plan should be aware of the potential weaknesses that can occur with offshore trusts. This article will discuss how offshore asset protection trusts could be compromised, and what can be done to prevent this.
Perhaps unsurprisingly, most of the cases regarding offshore trust “failures” are not cases where the trust was actually broken, rather the court prefers to pressure the creator of the trust. Since the trust is not subject to the jurisdiction of U.S. courts, there is little a judge in the U.S. can do to reach an offshore trust. The settlor or trust owner, however, usually remains in the country and can still be ordered by the court to perform certain actions.
Failing to disclose the existence of an offshore trust for example, is a very simple way to get the trust owner in hot water. If you are in bankruptcy court or a defendant of a lawsuit, you might have to disclose the entirety of your assets to opposing counsel or the judge. This includes funds held offshore either directly or through a trust. Failure to comply with a court order can result in penalties and jail time as well as potential fraud charges. However, simply disclosing the existence of the trust does not necessarily compromise the protective nature of the trust.
Offshore trusts have a less than perfect record when defending against U.S. government agencies. Needless to say, the U.S. government and its agencies are not your regular, everyday plaintiffs. They have access to some of the nation’s best attorneys as well as an essentially limitless supply of taxpayer funds. Not to mention, judges tend to look favorably towards fellow government workers. For these reasons, the government will go to extremes that even the wealthiest private plaintiffs will not consider. Sometimes it’s not about money… it’s about sending a message.
If you are facing the Securities and Exchange Commission, Federal Trade Commission, Internal Revenue Service, or other state or federal agency, there is a good chance your asset protection plan will be put to the test. It doesn’t help that these agencies generally only get involved in cases where nefarious activities are strongly suspected. In a particularly egregious case out of the Northern District of Illinois (U.S. v. Rogan, 2012), the court held that Illinois law applied instead of the laws of the offshore jurisdiction. The defendant was ordered to turn over the assets because Illinois law does not protect the assets of a self-settled trust.
Finding yourself in bankruptcy court or facing a legal battle against a government behemoth can be clear signs that things are about to get difficult. But there are other things well within your control that can hurt your offshore trust, such as failure to observe formalities. If you are using an offshore trust like a personal piggy bank, do not expect a court to believe that you are not able to receive funds in order to pay a debtor or judgment.
An offshore trustee can only be held liable for his own behavior, and only up to a reasonable standard. For example, if a trustee were to wire funds to a creditor against the terms of the trust and against the wishes of the settlor and beneficiaries, there could be a cause of action against them. As we have seen, the behavior of the offshore trustee is rarely an issue in the case of a compromised trust.
Recall that an offshore trust requires a trustee to be located outside of U.S. jurisdiction. For this reason, even if an offshore trustee was asleep at the wheel, a U.S. court would still not be able to reach them. U.S. courts are generally aware of this fact which is why they often prefer to go directly against the trust maker.
A compromised trust could result in the repatriation of the trust funds and the repayment of any debts or judgments from the proceeds.
The best piece of advice about offshore trusts is to establish them early, i.e., before any lawsuits arise, avoid any unlawful activity, and observe the trust formalities. This may sound like common sense, but many of the cases where offshore trusts fail involve very clear misbehavior by the trust owner.
If you are concerned about a potential bankruptcy situation, you may want to avoid self-settled trusts. A self-settled trust is when a person creates a trust for his own benefit. Instead, you can create a trust with a completed gift to a third-party beneficiary. When completed well ahead of time, that means any gifted funds should not be included in the bankruptcy estate because you have already given that money away to an innocent third party.
As always, remember to observe trust formalities, a completed gift means exactly what it entails, funds that were given away and are no longer your property or under your control. So do not expect your child or other beneficiary to request funds from the trust and used them to cover your living expenses. If you can boss around a beneficiary to receive funds in a roundabout way, do not expect a court to believe you have actually given this money away.
Any offshore trust can potentially be compromised. In reality, it is often the defendant’s own behavior that creates the most negative consequences, either before or during the legal proceedings. At any rate, if you want to help safeguard the protections of your offshore trust, make sure you use an asset protection attorney to help design an asset protection plan around your needs. Only use vetted and respected professional organizations as your offshore trustee.
Perhaps more importantly, if you ever find yourself facing legal action, respect the integrity of the legal proceedings, make sure you retain a legal professional to help you and heed their advice. A competent attorney should never instruct you to try to hide assets from the court or try to trick judges into believing things that simply aren’t true. Relying on a flimsy or gimmicky legal defense could mean facing charges of contempt of court.
Hopefully this article has helped you better understand how asset protection trusts can fare in court. If you have further questions about offshore asset protection, Blake Harris Law can help you design a plan that is right for you. We work with clients across the world to help protect individuals and families from disputes and litigation.
Schedule a consultation online or give us a call at 833-Ask-Blake to learn more about how our asset protection firm can help keep you protected from lawsuits.