Advantages: Offshore Asset Protection Trust

The Offshore Trust is a trust established under the laws of a country which are more favorable to asset protection and privacy objectives than the laws in the United States. For example, the laws in some countries provide for a statute of limitations on fraudulent conveyances which can be as short as one year and the standard of proof required for a fraudulent conveyance is the difficult “beyond a reasonable doubt” rather than the lesser civil standard of a “preponderance of the evidence.” The courts in these countries will not enforce a judgment rendered in the United States, or an order of a U.S. Bankruptcy Court. To prosecute a claim against the trust, the creditor would have to go to that country and retry the underlying case, an almost impossible requirement.

A further advantage of the Offshore Trust is that a greater degree of flexibility can be achieved in the way in which the trust is established. The settlor of the trust can serve as beneficiary, and the trust will still be valid under local law. This allows the settlor to retain a substantially greater degree of enjoyment over trust assets than would be permitted under U.S. law with a domestic trust.

Of equal importance, an Offshore Trust allows a great deal of practical flexibility because the option is always available to move the assets into an account established in the foreign jurisdiction-subject to the protective features of local law. To reach those funds, the creditor would have to commence an action in the foreign jurisdiction and would have to overcome significant obstacles under the law of that jurisdiction.

The problem for a creditor with a judgment is that a U.S. court has no capacity to exercise its authority over a foreign trustee. Simply stated, a foreign person or company with no presence or assets in the United States cannot be compelled to act by a U.S. court. If a U.S. court ordered a foreign trustee to return assets, the foreign trustee, under a duty to preserve trust property, would refuse to comply with the order.

If a foreign person or entity has assets in the United States, a court can exercise leverage by threatening or attempting to seize those assets for failure to comply with the order of the court. For example, on occasion the U.S. Government seeks information about foreign bank deposits in matters concerning criminal tax evasion, drug charges, or securities law violations. Because of its local secrecy laws, the foreign bank usually fails to comply with the government’s request for information. However, when the foreign bank has assets, such as deposits or branches in the United States, the government may threaten to seize the assets if the bank does not comply with the court order. Generally, this threat is successful and the bank will reveal the sought-after information.

Precisely for this reason, most foreign based trust companies do not conduct business or have assets in the United States. Any foreign trustee which is selected must have no local business activity in order to avoid the financial leverage which might then be applied by a U.S. court.

Since the creditor cannot obtain satisfaction by obtaining a U.S. court order against a foreign trustee, the only method for compelling the trustee to act is to file a lawsuit in the jurisdiction in which the trustee is located. Whether or not the creditor can be successful in this forum will depend upon the particular laws in effect in that country.