If you are considering an offshore asset protection trust, you might have learned that a key component is making sure that management of any trust assets takes place outside the United States. This is achieved by engaging a professional trustee located in an offshore jurisdiction to manage the assets held in the trust. Understandably, handing off control of your trust property to an offshore trustee can potentially raise some concerns.
Every year, wealthy individuals and families fund offshore trusts in jurisdictions such as the Cook Islands or Nevis with millions of dollars, the purpose is obviously to protect the assets, not to create additional risks. Fund misappropriation by professional trustees is definitely not impossible, but it is actually exceedingly rare.
Despite the fact that professional trustees generally have a long track record of faithfully serving their clients for decades, are there any assurances that there will be no wrongdoing in the future? After all, trustee offices are often located in distant, difficult to reach, and difficult to litigate jurisdictions. That is often the whole point of these asset protection structures.
Offshore asset protection trusts can be very effective legal solutions to protect from future legal claims. But are assets held in an offshore trust safe from trustee malfeasance? This question is especially relevant when your trustee is located in a faraway offshore country. This article will explain why having an offshore trustee for your trust is safe and discuss the various systems of checks and balances that make sure your trust funds are protected.
The first point is to consider who really is your trustee. A trustee is the person or entity in charge of managing the trust funds. In the case of a bank account, for example, only the trustee is able to carry out transactions in the account, not the settlor or the beneficiaries. Trustees can write checks, withdraw funds, make electronic transfers and in many cases even buy or sell assets on behalf of the trust. This means they have the right to exercise a high degree of control over the funds.
Naturally, there is a higher degree of risk if a trustee is chosen from among friends, family members, or newly found fly-by-night operators. It almost goes without saying but selecting a properly bonded and regulated professional trustee is the first step towards making sure your trustee is a legitimate company worthy of your trust. But these are only the bare minimum requirements when it comes to considering a trustee company. Many of the best well-known and respected professional trustee companies, certainly all of the ones Blake Harris Law works with, also have long histories of working diligently for their clients.
Blake Harris Law has long standing relationships with trustee companies all over the world and we work only the most reputable firms. In addition, Blake Harris Law has relationships with many of the law firms that send business to these trust companies. If there was ever any inappropriate behavior by a trust company, notice of such an incident would be known in a very short period of time and that trust company would pretty much immediately lose all of their customers.
The offshore trust world is very tight knit, and even a rumor of impropriety would spread very quickly amongst attorneys, bankers, and other industry players.
Trustees have a fiduciary duty to act in the best interest of the trust and only withdraw funds in accordance with the terms of the trust agreement. For example, trustees are allowed to pay for routine transactions and fees as well as distribute funds to the beneficiaries as directed by the trust documents. They do not own any of the trust funds or have free reign to spend trust funds as they see fit. Doing so can be considered misappropriation of the trust assets.
The trust as the entity is the actual owner of the funds. If a trustee fails to follow the terms of the trust document, even due to an innocent mistake or inattention, they can quickly be removed from their position and even face legal consequences if they failed to act up to the standard of their fiduciary duty. A trustee that tries to misappropriate money from a trust they manage will simply not stay in business very long and could face civil and criminal penalties.
In the case of offshore jurisdictions such as the Cook Islands or Nevis, the asset protection industry is extremely important to the national economy. Financial regulators and law enforcement are well aware that issues within the trust industry could result in major consequences for the country as a whole. If offshore clients lose faith in the safety of their trust funds, a major source of revenue could disappear almost overnight.
One important distinction is that the roles of trustee and custodian are very different. A trustee is a manager of the trust funds, but it doesn’t mean they will have physical possession or unrestricted access. The custodian is the institution that is actually holding the trust funds, generally a major bank or financial company. A major obstacle to trustee misappropriation is that they don’t physically hold any funds or trust property, they have to request the bank for any withdrawals. This means there is always an additional pair of eyes on every transaction, as everything would be recorded by the financial institution.
As preferred custodians for our offshore asset protection trusts, we often use the Swiss Banking system. This is, by many regards, the most reputable and secure banking system in the world. These banks hold the actual funds and are another check on the trustee. If something suspicious happened, your Swiss banker would contact you before releasing the funds or authorizing an unusual transaction. Naturally, these established banks are very familiar with trust accounts and are vigilant of any suspicious activity or requests on the part of trustees.
Trust protectors are also another major factor providing security to your trust funds. Trust protectors exist to monitor and supervise trustee activities in an impartial manner. They can routinely request accounting statements from the trustees, make inquiries on behalf of the settlor, and ultimately remove and replace a trustee if needed. Professional trustee companies know their financial activities regarding an offshore trust can be supervised and examined by trust protectors at a moment’s notice. Obviously, this encourages the trustee to maintain clear and complete records as well as justifications for any transactions with regards to the trust in question.
Selecting the right trust protector who is professional and attentive to detail can give you additional peace of mind. Blake Harris Law works with trust protectors that are professional companies with years of experience in the business and a long track record of diligent work. They are considered a useful resource, but thankfully, relying on a trust protector to remove a trustee due to suspicions of wrongdoing is an extremely rare occurrence.
One common structure that appeals to clients who are looking for a high degree of control is to have the settlor serve as the managers of their own limited liability company. With this structure, the offshore trust invests 100% of its funds in a private LLC, and the settlor acts as manager of the company, that means having authority over the funds and investment decisions. Thanks to this structure, the settlor can immediately control any transactions regarding the funds held in trust without having to request the trustee to take action.
While the offshore trust is technically the owner of 100% of the shares in the LLC, the settlor maintains the ability to manage and control the funds due to their management role. This gives the client a high degree of access and control over the trust funds while the trustee acts as a passive investor in the company. This way, the settlor should actually be the first to see any financial transactions and should be able to quickly raise the alarm in case any suspicious transactions were to arise.
Thanks to the safety mechanisms discussed above, it is very difficult for a trustee to outright remove funds from trust bank accounts without it being discovered. It is more common for trustees to misappropriate funds in way that benefits them in an indirect manner, such as directing trust business to a related firm. Overcharging for their services beyond what is considered a reasonable compensation and carrying out transactions with a related party can also be considered unjust enrichment on the part of a trustee.
No matter how good a reputation a professional trustee has, it never hurts to be familiar with the terms of your trust, and to carefully review financial statements. Doing so can make sure that any questions can be handled promptly before anything becomes concerning.
Trustee embezzlement is a type of theft that can carry heavy legal consequences including civil and criminal charges. If you suspect a trustee is acting improperly, the first thing to do is gather as much evidence as you can and contact an attorney. Professional trustees should at the bare minimum have a complete trust accounting and should be able to provide these documents to the settlor or beneficiaries upon request. Transactions or payments that benefited a trustee but did not benefit the trust beneficiaries could be evidence of a breach of fiduciary duty.
When you establish your offshore asset protection plan, you are aligning yourself with many of the world’s most financially successful and sophisticated individuals and families. Some have funded their offshore trusts in the Cook Islands with sums more than ten billion dollars. Trustee companies risk ruining these prized relationships if they fail to act with the utmost integrity and respect for the law. As in many other professional areas, reputation takes a long time to establish but can be destroyed in an instant.
This is why it is best to work with a licensed and reputable Asset Protection Attorney in the United States who is experienced with establishing offshore trusts. With the right help, risks can be reduced by selecting from amongst the best companies to work with. At Blake Harris Law, we are very familiar with the most prominent offshore trustee companies because we have been working with them for years. We listen to our clients’ experiences over the years and have the utmost confidence in the integrity of the people we work with.
If you would like to learn more about offshore asset protection trusts, please click here to schedule a consult with an asset protection attorney.