Domestic Asset Protection Trusts vs. Offshore Asset Protection Trusts

The Pros and Cons of Domestic and Offshore Asset Protection Trusts

The main advantage of an “offshore” or foreign trust is that it removes you from the U.S. court system. Just as you diversify investments, you can diversify jurisdictions for your asset protection plan. I don’t think you can rely on the same court that can take away your assets, to also protect your assets. With a domestic asset protection trust, you’re stuck in the terrible U.S. court system where any knucklehead can file a lawsuit with or without good cause.

Let’s compare and contrast the domestic trust approach vs. the offshore, or foreign, trust approach.

Domestic asset protection trusts:

Here are the pros:

• No IRS reporting requirements (easy maintenance)
• You don’t have to disclose your trust, transfers to trust, assets within the trust, etc. whereas you do have to do that with a foreign trust.
• Can be cheaper (no fees to CPAs for foreign reporting)
• Clients feel more comfortable dealing with US laws and US based trustees/service providers

Here are the cons:

• Has not proven effective for non-residents (Washington resident using a Nevada asset protection trust for example)
• Article IV, Section 1 of the US Constitution – “Full Faith and Credit Clause” – A judgment from Washington is honored in every state (even domestic asset protection trust states)
• One of the first cases of a failed domestic asset protection trust was from Washington state. A real estate investor transferred his assets into a trust in anticipation of a lawsuit. He argued that Alaska law should apply, but the Washington court refused to do so. Under a choice of law analysis, they applied Washington law. Creditor can then take the judgment to any other state to pursue the assets.
• Current trend is to recommend a domestic asset protection trust if the trustor is a resident of the state and only has assets within the state. (i.e. a Nevada resident uses a Nevada domestic asset protection trust and has assets, like homes and investment accounts within the state)

Offshore Asset Protection Trusts:

Here are the pros:

• Higher burden to prove fraudulent transfer – fraudulent transfer is a transfer of an asset with the actual intent to hinder, or defraud any creditor. Burden in the US is clear and convincing evidence. The standard in the Cook Islands is beyond a reasonable doubt.
• Shorter statute of limitations to bring fraudulent transfer claim 1-2 years vs. 2-4 years domestically
• No contingency fee attorneys allowed in the popular foreign jurisdictions

Many Foreign jurisdiction only allows actual damages. No exemplary or punitive damages. No $67 million dollar pants or “emotional distress” for a barking dog. Frivolous lawsuits are discouraged by requiring a bond to cover costs and attorney fees if you lose your case. The Cook Islands has updated it’s laws to require a $100,000 bond to file a case against a Cook Islands Trust. The island of Nevis requires a $250,000 bond to bring an attack against an LLC or trust. Furthermore, lawyers are not allowed to work on a contingency fee basis. You’ve got to pay to play in these jurisdictions.

The idea of suing people for massive damages just doesn’t exist in other countries. I visited New Zealand to work with a trust company there and I was trying to load up on car insurance for my rental. I was having so much trouble finding a policy until I realized that you didn’t need insurance. You can’t sue people in New Zealand for a car accident. Drivers pay into a fund there and if you’re injured in a wreck, the fund pays your bills.

Here are the cons:

• IRS reporting requirements – reporting transfers, assets within trust, account balances and locations
  • Heavy fines for failure to report
• Trust issues – clients worry about foreign trustees being involved in trust.
  • Worried that trustee will “run off” with their money
    • A domestic trustee could do the exact same thing so it balances out