United States: Offshore Asset Protection Trusts: The Cocktail Party Primer

You're at a cocktail party, chatting with a over-tanned, bloated plutocrat who's boasting about his offshore asset protection trust and how he's being sued but "They'll never touch a dime! Ahahahahaha!"

Tiring of his idle prattle, you spy a plastic surgeon whose golf game has developed a bad case of the yips. Hmmm, you think. HE should park his loot offshore.

Offshore asset protection trusts. You don’t want to look dumb at another cocktail party, pretending you know All About It. And maybe you need one. You're richer than B. P. and Dr. Yips combined. If they do it, why don't you?

"Put your money in an asset protection trust. Someone sues you here in the US&A. The judge believes them, the rats, and awards them millions! But they can't collect a dime, because all of your money is socked away in this trust where they can't get at it, but you can! Ahahahahaha!"

You—the "settlor"—create a trust in a "good" country for this kind of thing (see below). Stick a bunch of money in the trust. Give the trustee (not you or anyone you know!) complete discretion over what to do with them money—you have no control anymore.Congratulations. If you write your trust document carefully, fund the trust properly, and maintain it lovingly, all of its assets will be protected from your creditors: an asset protection trust.

An offshore asset protection trust is just a trust. You just set it up outside the U. S. Big deal, sez you. (Umm, what's a trust?)

(Think of a trust like a contract between you (trustor/grantor/settlor/moneybags) and someone who can be trusted (aha! the trustee) to do what you ask. The contract is for the benefit of people you choose—the beneficiaries. You give the loot to the trustee, who holds it, invests it, and distributes it to the beneficiaries. You, theoretically could be all three—the settlor, the trustee, and the beneficiary. A living trust works like that.)

Here are what make an asset protection trust work: (1) everyone who has control over the trust is outside the U. S., so a U. S. judge can’t order them to act under pain of imprisonment; and (2) the assets are outside the U. S. so a U. S. judge can’t seize them.

This translates into four rules of the road: (1) you have NO control over the trust; (2) you've chosen your country carefully; (3) you put the money in the trust "right;" and (4) you run the trust "right" so it isn't a sham.

1: You can’t get the money—but neither can your creditors

Here’s the first key to an asset protection trust: if you aren’t legally entitled to get money from it, neither are your creditors. You do this by giving the trustee complete discretion in deciding who can get money from the trust—including you.

That way, if a U. S. judge orders you to pull money from your trust to pay your creditors, you can honestly say, "Sorry, would love to, but can’t." There’s no one in the U. S. that a judge can threaten with jail.

But who really wants to put a million bucks offshore and walk away from it?

You have a "protector," someone who "advises" the trustee. They have enough clout to make the trustee sit up and take notice, but not enough to give a U. S. judge any leverage over you or the trust. This is a delicate undertaking.

Next you need to avoid the "self-settled trust" rule. In the USA, you can’t stick your own loot into a trust for your own benefit, and stiff your creditors. So by creating your trust in a friendly foreign country, you avoid U. S. law, and this rule.

How you put money in your offshore asset protection trust is critical. There is a set of rules that goes by the generic heading of "fraudulent conveyance laws." Cut through the metaphysics (lawyers and legislators never make things clear) and the idea is that you can’t give away your money if it leaves you insolvent, unable to pay your present (and to a degree) future creditors.

Some countries have better laws than the U. S. For instance, in the Cook Islands, your creditor has two years from the date of transfer to object. After that, the door is closed on them forever. This is much better than the USA, where the time to object and who may object is nebulous. Better to have a bright line and force the creditor to go to the South Pacific to put in a claim.

The great temptation, once your trust is set up, is to call the shots—tell the trustee to send you money, dictate investment strategies, etc. Do this, and a U. S. court will say the trust is a sham.

Offshore asset protection trusts work well only for liquid assets—cash and publicly traded stocks and bonds. Anything that's in the U. S. (land, privately held companies) can be grabbed by a U. S. court.

This gets more complex by the moment. Uncle Sam don't like them dad-blasted furriners meddlin' with what he figgers is his'n. Just know that life as you know it on your easy income tax return is over. And don't ever, ever, believe anyone that says you can put your money overseas and avoid the IRS. Run away. Fast.

Routine upkeep. This is not a one-time deal. You don’t just set it up and walk away. It takes careful monitoring, annual maintenance, and tax compliance.

The Cook Islands is the current premiere jurisdiction for asset protection trusts. Nevis just copied the Cook Islands law, but it has a dodgy reputation. The Bahamas is a good second choice, although the asset protection laws are somewhat weaker than the Cook Islands.

Keep in mind that the Cook Islands government makes perhaps $10 million a year from the asset protection trust business. To say that the local Parliament is interested in continually strengthening the asset protection laws is an understatement.

Alaska and Delaware offer asset protection trusts. But these are still untested. Look at it this way. If you have a Cook Islands trust, your creditor has to go there and start the lawsuit from scratch after they have won in the U. S. But if someone sues you in California and wins, they simply take their California judgment to Delaware or Alaska and the local courts are obliged under the U. S. Constitution to honor that judgment. Of course the two states have tried to limit this, but it hasn't been tested in court yet. You don’t want to be the crash-test dummy.

Keep in mind that this is a substitute for a gigantic liability insurance policy. So you should compare the startup and maintenance costs $15,000-$20,000 to start, $7,000 or so a year to run) against the cost of maintaining zillions of dollars of insurance coverage. Insurance is usually much cheaper.

You might note that nowhere in this discussion have we talked about secrecy. That is not the point of an asset protection trust. You don’t rely on secrecy for asset protection. Complete secrecy is very expensive to establish, inordinately cumbersome to live with, and eventually collapses anyway.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.