ASSET PROTECTION: Offshore vs. Domestic Trust (Int’l Persons)

by Jeff Harrington on Aug. 31, 2016

Estate Estate Planning Business  Business Organization Tax 

Summary: This is a continuation of the discussion in Part I of this series regarding the advantages and disadvantages of two common asset protection techniques: offshore entities/accounts, and the US asset protection trust.

ASSET PROTECTION: Offshore vs. Domestic Trust (Int’l Persons)

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This is a continuation of the discussion in Part I of this series regarding the advantages and disadvantages of two common asset protection techniques: offshore entities/accounts, and the US asset protection trust.

 

Because the laws and regulatory schemes affecting US persons are a major factor, the analysis has been divided into two parts.  In Part I, we did the comparison from the point of view of a client who is either a citizen or resident of the United States, ultimately recommending a domestic trust over offshore unless (i) there is a clear threat from creditors, and (ii) you have reason to believe only the most iron-clad protection will be sufficient to deter them.

By and large, for a US person, it is just not worth the risks and complications of going offshore when one can enjoy very good protection under a well-drafted asset protection trust.

Because our international clients may not have the same concerns regarding US laws, we will sometimes recommend offshore over a trust . . . though probably not for the reasons you would expect.

I.  Advantages of Offshore for International Clients

A. Creditor Protection

This part of the analysis is very similar to that in Part I, so we will not repeat everything here.  People of all countries go offshore in order to put their assets out of reach of potential creditors.

Simply put, if you open a company (or trust) and a bank account in an offshore jurisdiction that has laws designed to shelter assets, that is probably the very best protection you can get.

If you are concerned some party might obtain a judgment against you in your home country and then try to liquidate your assets in order to collect on the judgment, then you would prefer to have your assets in a country with a court system designed to discourage judgment-creditors.  The US courts of any state–including Delaware, Nevada, and Alaska–do not fit that description.

As you may know, getting a judgment is just the first step.  A judgment is just a piece of paper unless the plaintiff is able to actually get money for it.  So, once the plaintiff has the judgment in hand, he will set about trying to locate and garnish your assets.  If the plaintiff’s lawyer is clever and asks the right questions, he may discover you have assets in an offshore country.

If that offshore country is the United States, it will be somewhat troublesome and expensive for the plaintiff to domesticate the foreign judgment and use the US court to enforce it against your assets . . . but it will not be that hard.  And, if the judgment allows the creditor to be reimbursed for costs associated with enforcing the judgment, then you can probably expect the plaintiff will chase the assets.

Given that the court systems of most foreign countries do not work very well, the plaintiff may even prefer to go through the US court.  He might actually  be delighted you have chosen the US for your offshore asset protection, which is not the result we are after here.

By contrast, if you go to a country well-known for its debtor-friendly laws–such as Nevis, Cook Islands, St. Vincent and the Grenadines, etc.–the plaintiff will have a wildly different experience.  In some such jurisdictions, the plaintiff will have to post a bond of $25,000 to even initiate a lawsuit.  Then, the case will move very slowly, probably stalling out at some point because the expense and trouble are just not worth it.

It would take a very, very determined plaintiff to recover assets protected in a safe-haven offshore jurisdiction.

B. Privacy

For many of our international clients, confidentiality is particularly important.  If you are from Venezuela, Argentina, China or, even, Brazil, you want to know your assets are hidden from authoritarian eyes and that your name cannot be easily found in the public record.  An offshore company/account can accomplish that for you, assuming you go to the right jurisdiction.

Be aware one needs to research the existing treaties between countries in order to determine the level of information sharing.

As discussed further below, when it comes to privacy, offshore is good, but it is not better than a US asset protection trust . . . not if the trust is set up correctly.

C. Familiarity

As I have griped in previous articles (see Real Estate Investment: LLC vs. Land Trust), one of the challenges we face as international attorneys is helping clients understand concepts that are uncommon–or non-existent–in their legal system.

Experience has taught me . . . clients who are unfamiliar with trusts will almost invariably decide in favor of an LLC no matter how hard I try to explain the advantages.  When it comes down to it, clients would rather go with an inferior solution they can understand than something that sounds exotic or too good to be true. ~ J. Harrington.

That can be a bit frustrating at times, but it is certainly understandable.  The assets are significant to the client, and the client wants to be very sure the plan for protecting them is comprehensible.

The use of trusts of all kinds is rather common in the United States.  Our US clients do not blink when we start talking about creating a trust to hold their assets, even those who have no experience with trusts.  That is not the case with our international clients.

Even our sophisticated international clients are generally unfamiliar with the use of trusts and uncomfortable with the concept.  On the other hand, international clients do tend to be well-aware of offshore banking and asset protection.

So, in this regard, offshore is clearly has the advantage.  Why fight it?

II.  Advantages of a US Asset Protection Trust

A. Desirable Location

As the realtors say, “location, location, location.”  Our firm has offices in Florida, California and New York.  Those are places international clients want to be.  In most cases, our clients already have business concerns, family, friends, etc. in the US, so moving assets here makes a lot of sense to them.

Often, the clients have or want immigration status that allows extended stays in the US.  [ As a side note, be aware that staying the US more than 180 days in any one year can subject a foreign person to the very laws discussed in Part I. ]  Investor visas are excellent for purposes of obtaining status, so the client may be obliged to move money to the US.

The offshore island countries are very beautiful places indeed, but there are many practical reason to keep your money in the US.

Besides the client’s personal circumstances, the US is developed, safe country with a stable government.  Those are things people look for when choosing a place to keep their assets.

B. Privacy

Like offshore, a trust can provide a great deal of privacy.  Unlike a company, which has to be registered with the Department of State, there is no requirement to register a trust anywhere.

The trust exists completely outside the public record.  You will be the only one who knows about it.

So, when it comes to confidentiality, going offshore and establishing a trust are equally good.

C. Creditor Protection  

I have already confessed that offshore provides the best creditor protection.  However, please do not take that as dismissive of the very good protection one receives from a well-constructed asset protection trust.

As discussed above, even if the plaintiff finds out about your trust assets, he will still have to take extra measures in order to get to the assets.  The plaintiff will have to accomplish something referred to as “piercing the corporate veil.”  That is not so easy to do.  Judges have generally been very reluctant to pierce through asset protection trusts.

If your asset protection trust is set up correctly, it will not be easy for creditors to pierce.  They have the burden of proving your intent, and one’s state of mind is a difficult thing indeed to prove.

More than likely, the plaintiff will tire of trying to get to the trust assets.  And, even if the plaintiff does stay in it to the bitter end, the chances are pretty good that he will lose.

What gives offshore an edge over asset protection trusts is the efficiency of the courts.  The US judicial system is far from perfect, but one can actually get something done here.  That is not the case in many foreign jurisdictions . . . which is actually to the benefit of the person looking to protect assets.

D. Estate Planning; Double-Benefit  

Trusts are typically used as vehicles for succession planning, so you can get a double-benefit from your asset protection trust.  In reality, estate planning and asset protection are so closely related that you will almost certainly end up accomplishing both at the same time.

E. Cost  

The cost analysis actually goes in favor of the trust because:

  • there are no fees for registration or renewal of a trust; and
  • you save on legal fees by accomplishing both estate planning and asset protection at the same time,

So, there it is: a side-by-side comparision of going offshore versus establishing a US trust.  Naturally, which approach is better will depend upon your particular circumstances.

If you ask me, there probably is no compelling reason to go offshore.  In most cases, I think clients are better served with a US asset protection trust.  If you are reading this article, then you are someone who researches and makes informed decisions.  I would encourage you to read some of the other articles linked herein for your convenience, as well as this one: Real Estate Investment: Florida Land Trust.  I think you will be pleasantly surprised by all that can be accomplished through trusts.

On the other hand, if the concept of a trust is just to strange for you, then don’t fight it.  Set up an LLC in Nevis.  Our firm can help you either way you go.  

 

~ Jeff Harrington, Esq.

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