A recent legal invention in asset protection planning is a relocating trust that proponents claim can provide the same level of protection as an offshore trust while providing more flexibility in managing those assets. These trusts are generally offered as an alternative to offshore trusts that are supposed to be less costly, easier to set up and administer, and without the regulatory and compliance burdens of offshore trusts. As we have often heard before, if something sounds too good to be true, it probably is.
The truth is relying on one of these relocating trusts for your asset protection could end up costing you dearly. The merit of asset protection solutions is measured under the pressure of a legal threat. These relocating asset protection trusts might sound dependable in theory, but what happens when they fail to safeguard your wealth right when you need them most? This article will discuss the risks and downsides of a “relocating” asset protection trust and why a fully-fledged offshore trust is a superior legal solution.
What is a “Relocating” Asset Protection Trust?
This type of relocating trust is advertised as being governed by the laws of the Cook Islands or other foreign jurisdiction for purposes of determining the liability of the trust or trust assets. The truth is they are first established as a Nevada or domestic asset protection trust but with the added element that an offshore trustee has approved the trust for management from the beginning. This is supposed to facilitate the conversion from a domestic to an offshore trust later on, since an offshore trustee is essentially already hired to take over.
During this time, the trust is little more than a domestic trust relying on a Nevada or other U.S. based trustee for its routine administration. In the event of a legal threat, the domestic trustee is meant to resign, or be removed, from its position and replaced by an offshore trustee. At which point the trust is supposed to turn into an actual offshore trust and benefit from the higher level of legal protection. This transition is often described as simply signing a piece of paper, but this transfer process does not always go smoothly.
What can go Wrong When Relocating an Asset Protection Trust Offshore?
In reality, converting a domestic trust into an operational offshore asset protection trust is not always so simple, particularly when a legal threat has already materialized or is quickly approaching. There are a variety of things that can prevent this supposedly easy process of turning a domestic trust into an offshore one. For one, there are legal methods that a well-advised plaintiff can use stop the defendant from moving his trust and assets abroad.
These types of requests are known as temporary injunctions that a party to a lawsuit can request from the court if they believe the defendant is trying to maneuver assets in a way that could prevent collection efforts down the line. Since these orders are by their nature temporary, the court often has little reason not to grant them. After all, the defendant will be free to dispose of his assets again once the lawsuit is resolved. By then of course, it will be too late to protect against the ongoing legal proceedings.
We have seen this happen before in cases against these relocating trusts. In Indiana Investors, LLC v. Hammon-Whiting Medical Center, LLC No. 45D02-0807-CT-201 (Lake Superior Court, Lake County, Indiana); Indiana Investors v. Victor Fink, No. 12-CH-02253 (Circuit Court of Cook County, Illinois, Chancery Division), the defendant had transferred assets to a trust formed by an asset protection provider who claimed that the trust could be transferred offshore in the event of a legal threat. Before this maneuver could take place however, the plaintiffs were able to obtain temporary restraining orders which prevented the trustee and trust protectors from changing the control to the offshore trustee and the bank accounts were all frozen.
The fact that the initial control of the trust is in Nevada or elsewhere in the U.S. means that unless and until the trust management is effectively moved outside of the country the trust is vulnerable to U.S. court orders. A domestic trustee has no option but to comply with a court order because doing otherwise would expose him to civil and criminal liability. If an injunction is issued by a U.S. court ordering the domestic trustee not to give up control of the trust, then the entire model of the relocating trust is halted in its tracks.
That is why a key element of an offshore asset protection trust is ensuring that the trust management has no ties or business presence in the U.S. Relocating trusts try to break with this fundamental rule of asset protection in the name of convenience and cost cutting. In doing so they are putting their clients’ wealth on the line and providing a false sense of security.
Contempt of Court Issues with a Relocating Trust
Relocating Trusts could result in the client being held in contempt of court due to a “self-created” impossibility. Of course, no party to the case can be ordered to perform something they are unable to carry out, but the “self-created impossibility” is a common and recognized exception to the impossibility defense. The court can declare a “self-created” impossibility if they believe the defendant generated the situation immediately before they were ordered to take an action and they are not able to get funds out of the trust.
Some attorneys who support Relocating Trusts will even go as far as to allow the client to serve as Trustee until the client is about to get sued. By many standards in the asset protection industry, not hiring a professional Trustee at the outset is considered outrageous. Not to mention, the client is often still required to pay an annual fee without having any of the protections or services offered by a professional trustee.
Relocating an Asset Protection Trusts: What They Don’t Want You to Know
So far, we have exposed the biggest and most significant drawback about these relocating trust: the run the risk that they cannot be relied upon to work as intended when they are needed the most. This alone should be enough to put into serious question the usefulness and value of these trusts. However, there are other supposed benefits of these trusts that do not seem to hold up on closer examination.
Even if the trust successfully converts to an offshore trust for its management, it is a universally understood and accepted fact that an offshore trust is not effective at protecting onshore assets. Proponents of these relocating trusts often fail to fully explain how assets are supposed to be transferred offshore in such a short time. In order to move funds abroad, foreign bank accounts need to be established in Switzerland or elsewhere, a process that tends to take time due to compliance requirements and regulation.
As for the purported cost effectiveness of a relocating trust over an actual offshore trust, the truth is the cost difference is probably much less than you think. Even before they are moved abroad, relocating trusts come with yearly fees just to have an offshore trustee on standby in case they are ever needed. Not to mention, all the legal costs and fees could end up going to waste if the trust fails to work as advertised once it is needed.
Offshore Asset Protection Trusts: The Real Deal
A fully funded foreign or offshore protection trust provides all the purported benefits of these relocating trusts without the significant problems. With a true offshore trust, you get very significant asset protection for assets such as cash, stocks, cryptocurrencies, and other forms of property. Since an offshore trust is administered from a foreign jurisdiction such as the Cook Islands from the very first day, there is virtually no chance a U.S. court order can be used to reach the trust. Your assets are also moved abroad and beyond the reach of a U.S. court order.
First, the jurisdiction of the Cook Islands does not recognize foreign court orders such as those issued in the U.S. and requires litigation to be conducted in the Cook Islands. Clearly, this can represent a significant challenge to a plaintiff due to the added costs and legal complexity. Second, the burden of proof for a civil claim in the Cook Islands is “beyond a reasonable doubt” which is higher than in the “preponderance of the evidence” standard used in the United States. This higher requirement makes the probability of the success of a lawsuit in the Cook Islands much less likely to succeed.
Contact an Experienced Asset Protection Attorney
Unfortunately, there is a lot of unclear information regarding asset protection planning. These relocating trusts are often marketed as better than true offshore trusts, all the while being more economical and easier to manage. As we have seen, their risks and drawbacks make them very problematic. The costs of setting up one of these trusts are comparable to an offshore trust while the level of protection is more equivalent to a domestic asset protection trust. In this sense they offer the worst of both worlds.
At the end of the day, there is no substitute for the real thing: a true offshore asset protection trust. There are legal gimmicks that may look good in their marketing materials, but a U.S. court may not be so easily convinced. A true offshore asset protection trust offers the best level of defense against potential future legal claims and creditors. If you have more questions about relocating asset protection trusts and how they compare against offshore trusts, contact Blake Harris Law today. At Blake Harris Law, we focus exclusively on asset protection to provide real solutions and reliable advice.