Trusts and Estates

Offshore Trusts

A "trust" is a legal entity or creature that is created when the person making the trust (the "settlor" or "grantor"), transfers ownership of certain property or assets to a "trustee." The trustee, in turn, is responsible for using the property or investing it for the benefit of a third party (the "beneficiary"), who was specified by the settlor when he or she made the trust.

There are numerous types of trusts, each designed with different purposes or goals. One type of trust is the "offshore trust," which usually is created by a U.S. citizen in a foreign country. In addition, there is an "asset protection trust," which is designed to protect the trust assets from claims of the settlor's or the beneficiary's creditors. Finally, there is a " self-settled trust," where the settlor retains some type of control or interest in the trust assets or the income that is generated by the trust.

Sometimes, these trusts are used together in an effort to make it nearly impossible for creditors to reach the trust assets to satisfy a debt owed by the settlor or the trust's beneficiary.

Offshore Trusts and Asset Protection

In the U.S., many states will disregard a self-settled trust and allow the creditors of the settlor, or the beneficiary, to attack the trust for payment of the debts owed to the creditors. However, many offshore jurisdictions will protect the assets in self-settled trusts against the creditors' claims.

So, in the typical asset protection trust, a U.S. person will establish a trust in an offshore country that:

  • Imposes little or no taxes on trusts created in that country, and
  • Has no reciprocal judgment recognition agreement with the United States - that is, if the settlor or beneficiary is sued by a creditor in the U.S. and a judgment is entered against the settlor or beneficiary, the foreign country will ignore the judgment, and creditor will usually have to jump considerable hurdles at considerable expense to get at the trust assets as payment on the judgment.

Offshore trusts are used for more than avoiding the typical creditor who is looking to recover on a bad debt or personal injury claim. Many offshore trusts have been established to:

  • Avoid claims of forced heirship by spouses and children - that is, to defeat the settlor's attempt to deny being the parent or spouse or attempt to exclude a child or spouse from his or her will ("disinherit").
  • Protect assets or funds in the event of a divorce.

In general, if, at the time the offshore trust is created, the U.S. settlor had no current creditors, and therefore was not transferring assets to the trust to defraud of creditors, the trust usually will not be disturbed and will protect the assets from creditors.

However, if the settlor had current creditors, and if the creditors can show that the trust was created to avoid or defraud them, the offshore trust might be avoided. How? One way is for the U.S. court to hold the settlor in contempt of court until he or she makes the trust assets available to the creditors. This happens most frequently when the trustee of the foreign trust refuses to recognize the U.S. judgment.

Other courts have enforced the rights of creditors against the assets of offshore trusts by doing things like:

  • Refusing a settlor's discharge in bankruptcy unless and until the settlor brought the assets in his offshore trust into the bankruptcy action so that his creditors could look to the assets for payment.
  • Forcing the beneficiary to exercise her power - a power given by the trust agreement itself - to remove the foreign trustee and to name a U.S. trustee, which has the effect of bringing the trust assets back to the United States ("repatriating") where the creditors could then reach them.

Be Careful

As you can see, there are some legitimate and illegitimate reasons for using an offshore trust. If the trust is intended to defraud creditors, the trust assets still might be attacked. Also, you need to be aware of various schemes or "trust shams" that use offshore or foreign trusts to commit tax fraud and/or tax evasion. The Internal Revenue Service ("IRS") actively investigates these shams and participating in them can lead to civil or criminal penalties.

If you have any questions or concerns about an offshore trust, it is a good idea to seek the advice of an experienced tax attorney or estate planning attorney.

Questions for Your Attorney

  • My wife just told me she wants a divorce. Can I move some of my money to an offshore account where she can't get to it?
  • I want to create an offshore trust to help protect fully some of the assets that I will be leaving to my children when I die. Are some foreign countries better than others when it comes to these trusts?
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