Offshore asset protection trust planning is one of the strongest and most effective tools to protecting assets from potential future creditors, frivolous lawsuits, predatory attorneys, etc. In a nutshell, an offshore asset protection trust allows you to utilize the laws of another country. You can remove your assets from a U.S. court system that has been abused by people looking to make a quick buck with baseless lawsuits.
What is an offshore asset protection trust?
An offshore asset protection trust is a trust governed by the laws of a foreign country. Select foreign jurisdictions have vastly different rules and regulations regarding liability, lawsuits, creditor/debtor rights, available damages, etc. Think of it this way: if you are concerned about U.S. lawyers and courts taking away your assets, why would you utilize U.S. laws and courts to govern or protect your assets?
Utilizing the laws of a foreign country can give you greater protection of your assets.
What an offshore asset protection trust is not
There are many misconceptions about offshore asset protection trusts. The most common I hear from people is that offshore trust planning is about hiding assets to dodge taxes. While offshore trusts are private from the public eye, this does not mean that NOBOBY knows about the trust. Anti-Money Laundering rules and Common Reporting Standard laws work to identify who benefits from offshore trusts. Regulating bodies receive this information to prevent criminal money laundering and prevent terrorist financing.
Furthermore, U.S. citizens who are the beneficiaries of an offshore trust, must report the trust to the IRS. The IRS will know about your offshore trust and the assets it holds. Failing to report these trusts can have steep financial consequences. Therefore, offshore asset protection trusts are not for tax evasion.
The benefits of offshore trust planning
Offshore trusts have the ability to force a final legal battle to a foreign jurisdiction. The courts in certain foreign jurisdictions are more favorable to defendants, or put another way, much less favorable to plaintiffs as compared to U.S. courts. A plaintiff’s attorney in U.S. courts can win a six-figure judgment without cause just because the case is cheaper to settle than for the defendant to fight the case.
Generally speaking, foreign jurisdictions will not honor a judgment from a U.S. court. If a plaintiff wins a judgment in a U.S. court, the plaintiff will have to go to the foreign jurisdiction court if it wants to get at the assets held in an offshore trust. Since the foreign court will not automatically recognize a U.S. judgment, the plaintiff would have to re-try the lawsuit in the foreign court. Foreign courts have different standards of proof and it is much more difficult to prove wrong doing in a offshore jurisdiction than it is in the U.S. Furthermore, if the plaintiff were to win a case for damages, select foreign jurisdictions again have very different rules. If you’re in the right jurisdiction, a plaintiff can only win actual damages. There are no “treble” damages, punitive damages, or hundreds of millions of dollars for “emotional distress.”
Other highlights of select offshore trust laws include “loser pays,” no contingency fees, and required court bonds to file a lawsuit.
“Loser pays” means that whoever loses the case, pays the winning side’s court and legal fees. This serves as a good deterrent for frivolous lawsuits. Plaintiffs will pay for wasting the other side’s time and money.
No contingency fees means lawyers can’t play the lawsuit lottery. U.S. lawyers can take a case in exchange for 33-40% of the settlement or court judgment. Lawyers choose cases based on potential payout rather than merit. Lawyers may not work on a contingency fee in many offshore trust jurisdictions. Plaintiffs have to put skin in the game by paying their attorney an hourly fee. Again, this is another deterrent to frivolous lawsuits.
Finally, courts in certain offshore jurisdictions require a plaintiff to put down a bond before filing a claim in court. This bond is there to guarantee payment for the defendant’s legal and court fees if the plaintiff loses. Again, this deters frivolous lawsuits and helps protect the assets held within the trust.
These are some of the main benefits that make offshore asset protection trust planning such a valuable and effective tool to preserving your assets and defending against potential future litigation.
The drawbacks of offshore trust planning
Offshore trust planning does have perceived drawbacks. Also, what one person sees as a drawback may not be an issue for another person. For example, someone new to offshore trust planning may be apprehensive for working with an offshore trustee. Any uneasiness of working with a foreign trustee goes away with time. This highlights the need to work with a trusted advisor and utilize the services of established foreign companies with a long track record of providing trustee services.
One of the main drawbacks of offshore trust planning is the step up in planning fees. Offshore asset protection trusts have increased advisor fees and ongoing maintenance fees. You don’t create an offshore trusts then put it on the shelf. They require ongoing maintenance from the foreign trustee, which incur annual fees (although these annual fees can be reduced, for example, with the PREP Trust).
Offshore asset protection trusts also have annual reporting requirements as I mentioned earlier. This is less of a drawback when you have an experienced advisor or CPA working with you, but it will increase the complexity of your annual income tax return (something that can also be avoided with a PREP Trust).
Want to learn more about Offshore Asset Protection Trusts and whether it would be a good tool for you? Schedule an Initial Consult now and find out.