Trusts 101 part 12 – More on offshore trusts

Offshore asset protection trusts are well proven and predictable if done the right way, at the right time. Here are the fact patterns to avoid and what you should know about when they won’t work.

The last installment in our ongoing series “Trusts 101 for Physicians” introduced offshore or international trusts, some of the basics that make them so effective, and some of the myths and mistakes to avoid. We have previously covered a variety of truss basics like trust vocabulary, trust taxation and the use of a variety of special purpose trusts.

Many successful American doctors and business owners seeking predictability for their futures set up offshore planning because of the often inconsistent and subjective nature of the American court system which my leave their life’s works exposed to any personal or professional liability that may come along, regardless of its reasonableness or factual basis.

Despite the use of these structures by hundreds of thousands of successful Americans in a legal and predictable way for decades, a great deal of myth and legend surrounds asset protection strategies for high-net-worth clients like business owners and physicians, most of it secondhand, outdated and lacking any basis of experience. The trusts in the most cited cases share bad facts and were often drafted by crooked lawyers (or worse non-lawyers, or disbarred lawyer “promoters’) who rolled the dice on a fraudulent conveyance claim. The idea that any individual that uses offshore trusts is subject to harm or that the funds are regularly disgorged by force is frankly ludicrous and ignores the facts, it rarely happens if done right.

The "myth" is essentially this: "I heard those trusts can get you in trouble, they aren’t secret, and they get audited and some people who refuse to make payments from the trust get put in jail."

That sentence has a number of mistakes I specifically addressed last time, including the myth that any asset protection system can rely on "secrecy" or is tax free. Interestingly, I most often see this criticism levied by those who rarely or never actually use the tools, and don’t have a base of actual experience on which their comments are based. These are often criticisms based on on the "impossibility defense" or someone reading a very fact-specific article that leads them to believe the sky is falling on all offshore trusts.

Of course there are bad cases out there, but nearly all share some combination of the following "bad facts." That said, absent some combination of these facts, I’ve yet to see a properly drafted and funded one defeated and only a handful of the thousands I have personally helped put in place even effectively challenged in the foreign jurisdictions that are the best.

When offshore planning actually fails

  1. They were set up too late, after an exposure (fraudulent conveyance).
  2. They were set up early enough but never funded.
  3. They involved acts/crimes of fraud or dishonesty (e.g., theft, conversion of marital assets, fruits of a criminal enterprise, etc.).
  4. They allowed a defendant grantor or beneficiary to be a trustee beyond the time of formation.
  5. They were poorly drafted by a lawyer or promoter as to the rights of the trustee to make distributions in an event of duress or to a judgment creditor.
  6. They have issues with the IRS based on tax compliance or failure to report (doing it right means full disclosure and reporting).
  7. They are in jurisdiction that is not defensive enough.
  8. They use banks with a U.S. presence that are reachable by domestic creditor and courts.
  9. The defendant grantor or beneficiary has unlimited access to funds on demand in a demonstrable pattern.
  10. Over-funding, when the planning and its funding has made the client insolvent, and the client has no assets or income outside the trust.

I cannot strongly enough stress one key issue, even if a particular tool or strategy is objectively "good" that conversation is meaningless if the tool is not a fit for your very specific subjective fact pattern and financial qualifications. Many different forms and levels of asset protection exist, so this tool may or may not apply to your facts and net worth, which should be in the seven figure range, between exposed home equity and liquid assets, to financially qualify and get the best benefit from this particular tool.

Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years.