Using Offshore Trusts to Protect Assets from Litigation

An offshore asset protection trust is a financial tool that can be used to hold the property of U.S. citizens overseas. These types of trusts typically offer greater protection than domestic asset protection trusts since they are much more difficult for creditors to reach and are set up in debtor-friendly jurisdictions. While the assets in an offshore asset protection trust must still be disclosed to the United States Internal Revenue Service for tax purposes, they can be extremely beneficial to keeping assets out of the reach of creditors and safeguarding them from potential litigation.

What is an Offshore Asset Protection Trust?

An offshore asset protection trust is a vehicle that can be set up to hold an individual’s assets in an offshore jurisdiction, such as the Cook Islands, Nevis, or the Cayman Islands. Usually, the primary purpose in setting up such a trust is to protect assets from being reached by creditors. Like any other type of trust, there are three parties who play a role: the trustor (also referred to as a settlor or grantor), the trustee, and the beneficiary. The trustor is the creator of the trust and contributes assets to it, while it is managed by the trustee on behalf of the beneficiary who receives trust distributions.

While certain types of trusts can be revocable and changed at any time, offshore asset protection trusts must be irrevocable. This means that after the trust has been created, it cannot be easily modified or amended.

Who Can Benefit from an Offshore Asset Protection Trust?

Anyone who wishes to take measures to safeguard their assets from potential creditors or litigation may set up an offshore asset protection trust. However, these types of trusts are particularly advantageous for high net-worth individuals and those who regularly face a risk of litigation. Those who can significantly benefit from having an offshore asset protection trust in place can include the following:

• High-risk professionals — Doctors, attorneys, contractors, real estate developers, and others in professions where the risk of litigation or malpractice lawsuits is high should consider setting up an offshore asset protection trust.
• Business owners — Entrepreneurs and corporate owners who have significant business assets and wish to safeguard them from potential liability can benefit from putting their assets in an offshore trust.
• Individuals with significant estates — High net-worth individuals or those with significant estates can use offshore asset protection trusts to guard their wealth from possible creditors and disputes that could arise concerning inheritances.
• Individuals with substantial assets who are divorcing — Offshore asset protection trusts can often be used to shield assets during divorce proceedings.

Before setting up an offshore asset protection trust, it’s essential to speak with an experienced attorney. There can be many tax implications when using these tools that are important to understand. It’s also necessary to choose a jurisdiction that has favorable asset protection laws in order to maximize the benefit.

How Can an Offshore Trust Protect Assets from Litigation?

Although setting up an offshore asset protection trust can be costly, the benefits are substantial in the long run. Critically, if your objective is to shield your assets from being seized in litigation, it could also be the least expensive option. Offshore trust jurisdictions are typically friendly to debtors — foreign trustees are not subject to the laws of the United States and they are not required to comply with any orders issued by domestic courts. In other words, an offshore asset protection trust prevents a judge in your jurisdiction from ordering that the trustee release funds within the trust to a creditor.

In the event a creditor wanted to pursue the assets contained within the trust to satisfy a judgment, they would have to commence a legal action in the jurisdiction where the offshore trust is located. Commencing an action to obtain assets that are protected by an offshore trust can be costly and inconvenient for creditors, and generally serves as a deterrent to litigation. There is also a higher burden of proof to establish a fraudulent transfer of the assets placed in the trust in most offshore jurisdictions than imposed by U.S. courts.

Not only would a creditor need to obtain counsel in the offshore jurisdiction, but they could incur substantial travel costs as they would need to appear at various hearings overseas. In addition, many foreign jurisdictions have much shorter statutes of limitation for claims brought by creditors, further reducing the potential for litigation. Once the statute of limitations expires, a creditor would be forever barred from commencing a legal claim to seize the assets in the trust, regardless of whether it was valid.

Crucially, asset protection trusts must be set up and funded before litigation is on the horizon. It is unlawful to move assets in order to hide them from a known creditor; however, while you have no pending legal claims, you are permitted to set up your estate in any manner you wish.

Contact an Experienced Offshore Asset Protection Trust Attorney

If you are considering an offshore asset protection trust, it’s crucial to have a skillful offshore trust attorney by your side. At White & Bright, LLP, our attorneys provide trusted advice and high-quality representation to clients in California who wish to set up offshore asset protection trusts in various foreign jurisdictions. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.