When an affluent individual or family has very high potential for liability and lawsuits (such as a physician), domestic asset protection strategies might not be enough. It sometimes makes sense to use international offshore planning strategies.
Offshore entities have the reputation of “hiding” assets or of being used to evade taxes. However, asset protection trusts have nothing to do with taxes, and nothing is really hidden. You will report the existence of your trust on your tax return and if you lose a liability-related lawsuit, you will be asked to declare under oath the extent of your assets. Therefore, the goal is to create a private trust in a jurisdiction, and in such a way, that even though the creditor knows of the existence of the trust, he cannot reach the assets.
Maintaining control of your assets is a cornerstone of any offshore planning. The assets can still he held in a U.S. financial institution, probably with the same financial advisor you are currently working with. The key is that ownership of those assets resides in a foreign country, one with more favorable asset protection laws.
Typically, a trust is established for the benefit of the client, along with a limited liability company (“LLC”). The trust’s situs (similar to domicile) is in a country with favorable asset protection laws, so that the assets in the trust are governed by that country’s laws. A trust needs a trustee, so the trustee must be located in that country. However, the trustee does not have actual possession of the underlying financial assets.
The underlying financial assets are owned by an LLC. The LLC is owned by the trust. The LLC is managed by its Manager, who has control over the LLC assets. Generally, the manager is the client, so the client retains control over the assets. In this manner, we can separate control over the assets in the hands of the manager, (the client), from ownership in the trustee who is domiciled in a country with favorable asset protection laws. Therefore, the client can continue to manage and invest the assets, but actual ownership of the LLC belongs to the offshore trustee.
Each foreign (offshore) jurisdiction has its own statutes that regulate how it will handle assets under its jurisdiction. There are several elements in asset protection statutes, and each of them impacts how effective planning will be in that specific jurisdiction. Here are some key considerations:
- Statutory Certainty Regarding Non-recognition of Foreign Judgments. This would include specific language that judgments from other countries will not be recognized.
- Statute of Limitations for Challenging Asset Protection Trust. Statute of limitations is the time in which a claim must be brought in order for the court to rule on the claim. The shorter this period is, the more advantageous that country’s legislation is from a protection standpoint.
- Burden of Proving Fraudulent Intent is Always on Creditor. Certain bodies of law require the creditor to prove that assets were moved improperly. This is a very difficult burden to meet, and therefore very effective for asset protection planning purposes.
- “Beyond a Reasonable Doubt” Standard of Proof Required in Establishing Fraudulent Intent. This is the highest standard of proof in the judicial system, and very difficult to meet.
- Statutory Certainty That the Asset Protection Trust Remains Valid if Fraudulent Transfers Took Place. Even if certain transfers to the trust are later found to be improper, the assets which were transferred properly remain protected.
- Statutory Presumption against Fraudulent Intent. Some countries include this presumption in their law, which helps from a protection standpoint.
- Statutory Certainty That a Trustmaker Can Be a Beneficiary. This allows the trustmaker to benefit from the assets in the trust without affecting the asset-protection qualities of the trust.
- Statutory Certainty That a Trustmaker Can Retain Some Degree of Control. This allows the trustmaker to continue to make investment and management choices for the assets in the trust.
- Statutory Posting of Bond before Litigation. Some legislation includes a requirement that a plaintiff must post a bond with the court system before filing a lawsuit. This is a further barrier to many creditors.
Other qualities to look for in an offshore jurisdiction include: the economic and political stability of the Jurisdiction; costs associated with the asset protection planning; ease of travel and communication; availability of banks and investment advisors; crime rates in the jurisdiction; whether English is spoken; and the influence of other countries.