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Estate Planning for Offshore Assets

Dated conventional thinking attaches a stigma to "offshore assets" undeservedly and unnecessarily. It is almost as if there is a presumption of unethical or illegal conduct on the part of one who invests offshore or in foreign markets overseas, as if there is an attempt to hide assets or secret funds from taxing, government, creditor, and other authorities within this country.

Our increasingly global economy and shrinking world in the face of modern technology is somewhat changing these assumptions and turning them on their head. Smart investors, no matter their level of wealth, are investing at least a small percentage of their portfolios overseas to diversify prudently. In fact, some financial professionals and planners advise their clients to invest approximately 10 to 20 percent of their total portfolio values overseas and/or offshore for diversification purposes.

What Is an Offshore Asset Protection Trust?

Offshore asset protection trusts are a type of asset protection that allows the owner to maintain a measure of control. They are put in place pursuant to the laws of a foreign country. That foreign country is chosen because it does not legally enforce the judgments that are awarded or won in other countries under reciprocity. Frequently, the favored foreign jurisdictions for the venue of offshore asset protection trusts are Isle of Man, Cayman Islands, and the Cook Islands.

How Is an Offshore Asset Protection Trust Created?

One of the more prevalent ways to create an offshore asset protection trust is for the owner to transfer his or her assets to a limited partnership entity. The owner is named the general partner of that partnership is permitted to retain control of the entity even if he or she only maintains a small percentage of the partnership's shares (such as 1 percent). The remainder of the partnership shares—the majority of them—are transferred to a foreign trust. The owner's assets are not required to leave the United States by virtue of creating and utilizing this device. The only time the assets leave the country is when there is an actual and immediate threat. An alternative approach may be to transfer the assets of the owner immediately, upon creation of the trust, to a named offshore trustee.

Why Are Offshore Asset Protection Trusts Created?

They are increasingly popular in today's marketplace and society, as malpractice and other liability insurance prices have soared and the costs of litigation have risen exponentially. Parties who face levels of higher risk, such as doctors, lawyers, architects, contractors, property developers, accountants, and small business owners or entrepreneurs, might seek out this type of asset protection device to help buffer their increased exposure levels.

How Do Offshore Asset Protection Trusts Work?

If an owner is sued in the United States and an adverse judgment is awarded against that party, the judgment has absolutely no impact or effect in the foreign country where the owner's assets are held in a foreign trust if this type of device is appropriately used and the proper venue is selected. The only way to jeopardize the assets held in the foreign trust is to have a new trial conducted within that foreign country. This is a huge hurdle, as jurisdiction over the case may be questionable and there may be added political concerns that dissuade the foreign government and its court system from getting involved. A foreign trust is usually a successful and effective deterring device for these reasons.

An offshore asset protection trust must be created before someone has filed suit against an owner or a lawsuit appears to be pressing on the immediate horizon. Otherwise, the owner subjects herself to allegations of making a fraudulent transfer on the eve of litigation being filed against her or an adverse judgment being obtained.