Today we are going to talk about Offshore Trust Formation Fundamentals. A trust is a contract that covers three parties. The first party is the Grantor who is also known as the Trustor or Settlor. This is the person who gifts assets into the trust. By contributing assets to the trust, they are actually giving legal title of those assets to the second party, the Trustee. The Trustee holds legal title in a fiduciary capacity for benefit of the third party, the beneficiaries.
There are several reasons why someone would undertake the formation of an asset protection trust offshore instead of using a trust based in the U.S. First, most states do not allow "self-settled" trusts to protect assets. A "self-settled" trust is a trust where the Grantor is also a Beneficiary of the Trust. A few states have "Domestic Asset Protection Trust" (DAPT) statutes (Alaska, Nevada, and Delaware are the best known pro-DAPT states), which allow self-settled trusts to protect assets. However, DAPTs have not been tested in court, nor are they looked upon favorably for a number of other reasons. For example, depending on what state you are in, you are looking at two to four years of the asset being in the trust before it's protected by law. Up until that point, trust assets are vulnerable to creditors. Furthermore, it is unlikely a court in a state that does not respect DAPT legislation will respect a DAPT set up in a state with DAPT laws. Accordingly, most people form their Asset Protection Trust offshore. And when they go offshore, they go to a jurisdiction that allows very complete and substantial protection for their trust.
So what are the best offshore jurisdictions for the formation of a trust? The jurisdiction with the best track record is the Cook Islands. It has a record of twice flaunting a U.S. federal judge’s attempts to seize trust assets. No other jurisdiction has that track record. There are a couple of jurisdictions that have bowed to U.S. courts demand, one being the Isle of Man. Some other good jurisdictions are Nevis, Belize, and the Cayman Islands. That has caused challenges in my experience. Western Samoa isn't bad but their Trust Statues are not nearly as well developed as the Cook Islands. It is not a bad idea to use a lower profile offshore jurisdiction initially, however, while the creditor seas are calm. In the event of a creditor attack, the trustee can move the trust to a strong jurisdiction such as the Cook Islands. Since this is the trustee’s decision and not the grantor’s, it makes the trust look less suspicious or anti-creditor to a judge, and it makes the grantor seem less likely to have set up the trust only for asset protection.
There are a few things to avoid when undertaking the formation of an offshore trust. Retaining too much control, making yourself a co-trustee, or giving yourself the power to replace a trustee can actually weaken your trust. If you retain these powers, then a judge can force you to use those powers to your detriment and a creditor’s benefit. Also, in most cases I don’t recommend you set up an offshore trust right before you get sued. Doing so is very risky. In 1998 a husband and wife, Mr. and Mrs. Anderson, did just this. They were actually incarcerated for six months because the judge knew they were blatantly attempting to dodge a multi-million dollar federal judgment. The best offshore trusts are "old and cold" i.e. set up before a creditor threat materializes.
During the formation process, you’ll need to choose a foreign trustee, and you don't want to use just anyone. Trustees have control over your assets, so they need to be someone you can trust. I recommend using a very established trust company. The companies I use usually have 20 years or more experience. They should have a very strong track record and be well-regulated. Furthermore, in most situations while creditor seas are calm, you should not have to pay an offshore Trustee more than $2,000 annually. Of course, trustee fees will be higher if you are under duress and the Trustee has to do a lot of work for you, like paying your bills because you don't have available funds onshore.
There is also sometimes a 4th party to an offshore trust: the Protector. The Protector’s job is to make sure the Trustee does his job and does not act in bad faith or misappropriate trust property. The Protector does not actually control or manage trust assets, but he can veto Trustee actions and he can fire and replace the Trustee if necessary. Usually it’s best to use a Protector that is offshore as well because you will want them outside of the reach of a U.S. judge. Annual Protector fees should be no more than $750. It used to be in the 90's that some people would charge $25,000 per year to be a Trustee. Those days are for the most part gone, but there are still people out there that charge too much. The key is to have a good asset protection planner who knows who the reasonably priced and reputable Trustees and Protectors are.
While the seas are calm, you can keep assets onshore if you do things right. What I like to do is have a foreign trading account that buys U.S. stocks and bonds. You can also have U.S.-based investments (real estate, etc.) owned by a limited liability company (LLC) or a limited partnership (LP), which is in turn owned by the offshore trust. You may control the LLC / LP until threats arise. Under U.S. law, those entities will actually protect assets from creditors if someone sues you personally. The reason we go offshore is a judge can always decide to disregard the protection LLCs and LPs normally provide and try and seize those assets anyways (there are various arguments a creditor’s attorney could use to convince a judge to hand over LLC or LP assets, such as a fraudulent transfer, alter-ego, or reverse-piercing argument). Accordingly, if you find yourself in a ‘storm of the century’ lawsuit, The offshore trust will liquidate the LLCs/LPs it owns, and move LLC/LP assets offshore. Of course some assets can’t be moved offshore. For example, in the case of rental properties the rent checks will go to an offshore bank account so that money is outside of creditor reach, even though the property itself cannot be moved. The absolute best case scenario is to move all assets offshore from the start, but we realize this is often not possible. The aforementioned strategy is, fortunately, still very strong. Also, you can control the trust’s LLCs and LPs while creditor seas are calm, which means you don't have to give too much control to your offshore Trustee until absolutely necessary.
Some assets should not be held in an offshore trust; neither should they be held in an LLC or LP owned by the trust. Case in point: don’t put your home in any of these entities. Keep in mind that LLCs and LPs are business entities. There are court cases (for example, In re: Turner, 2005 N. Distr. Calif.), where the judge ruled that business entities should not own strictly personal assets. If you do, the formation and use of an offshore trust will do little to no good as a judge will just ignore the business entities and seize the assets. In regards to having a foreign trust own a home directly, the case Higashi v. Brown (Fed. B. Alaska, 2006), a person used a trust to own a home in the U.S. Remember earlier where we said most states do not allow self-settled trusts to provide asset protection? The judge in this case ruled that, since the lawsuit originated in Alaska, the asset was in Alaska, and the defendant was in Alaska, that foreign law was irrelevant and only Alaska law would apply. Alaska law in this instance did not allow a self-settled trust to protect assets, and since the asset was in a judge’s reach, he had power over the asset and turned it over to creditors.
Instead of using an LLC, LP, or foreign trust to own a home, I instead use the Non-Qualified Personal Residence Trust (NQPRT). It is a domestic trust that protects your home as it is not a self-settled trust. I discuss the NQPRT in one of my videos as well as my book, Asset Protection in Financially Unsafe Times.
That's all for this article. I hope this information on offshore trust formation has been helpful.