Offshore Trusts

Offshore Asset Protection Trusts in Brief

Highlights:

  • Assets held in the Offshore Asset Protection Trust may not be reached by your creditors -even if you are a beneficiary
  • No negative (or positive) U.S. Income Tax implications -assets are still treated as yours for US Income Tax purposes
  • “Constructive” fraud statutes do not apply -creditor must establish that you created the trust for the specific purpose of defrauding that creditor
  • You may retain management of the assets, subject to Trustee and Protector approval, but you may retain a system of checks against the
  • Trustee’s powers
  • You may structure the trust so as to provide estate tax benefits

How it Works:

  • You transfer property to an offshore company, then transfer the stock to the Trustee, without any restrictions on his ability to sell the stock or dissolve the company
  • You name a group of trusted friends/advisors to supervise and if needed replace the Trustee
  • If you exclude yourself as a potential beneficiary, the assets transferred will not be part of your estate
  • Suitable for offshore investments (not for US investments)

Asset Protection Trusts: In More Depth:

A. Asset Protection Generally

Asset Protection is the practice of structuring one’s assets in a manner that makes them unavailable to creditors. However, Asset Protection may not be used to defraud specific creditors. As such, any transfer made with fraudulent intent, which is made without receiving an adequate trade in return, may be set aside by a court. For example, if you are sued today, and transfer substantially all of your assets to your kids tomorrow, a court may allow your creditor to collect the funds from your kids.

To the extent, however, that you structure your assets in a prudent manner, without the intent to defraud any specific creditor, and before any anticipated legal claim on the assets is known, you will be allowed to protect yourself. In fact, in today’s litigious environment, asset protection planning is essential for any person of high net worth, or for persons engaged in “high litigation risk” professions and/or businesses.

Asset Protection may be achieved automatically by statute or it may be developed through legal strategies and entities. For example, some countries, including many states in the U.S., may by statute, provide that retirement income is exempt from your creditor’s claims. Likewise, many states provide an exemption for one’s main residence. In Florida, for instance, a person’s home is protected from the claims of their creditors (except from claims of the mortgage holder, the IRS, and the family) regardless of the value of the home. In other states/countries, the amount of your homestead exemption is limited by a dollar value. In addition to these asset protection strategies, one may develop certain legal entities/structures, which provide Asset Protection, such as trusts, limited partnerships and foundations. These strategies must be structured with the guidance of qualified counsel.

Regardless of which strategies are used, Asset Protection planning should always include an understanding of its limitations. For example, most jurisdictions have a standard “window of opportunity” period during which a court may invalidate the transfer to the trust and allow the creditors to reach the trust’s assets.

For example, in the U.S., most states follow the Uniform Fraudulent Conveyance Act (UFCA), and/or Uniform Fraudulent Transfers Act (UFTA). Under these statutes, a court may, within a number of years (i.e. within four (4) years of a transfer or (1) one year from the claim), disallow the transfer and allow the creditor to reach the assets, provided that the court finds that:

  1. The defendant/ debtor effected a transfer of:
    • An interest in debtor’s property
    • Within the applicable statute of limitations
    • For less than reasonably equivalent value in exchange for the transfer
  2. Where the debtor was either:
    • Left insolvent after the transfer
    • Left with an unreasonably small amount of capital, or
    • Intentionally left unable to pay debts as they matured

These factors are generally present in the fraudulent conveyance laws of all common-law jurisdictions, even outside the U.S. Nonetheless, certain countries have developed variations of these provisions, which are more favorable to the transferor. For example, under Belize’s law, there is no window of opportunity for creditors to bring claims, once a transfer to a trust is made. Under Belize’s law, a creditor must be able to prove actual fraud, which is extremely difficult to prove in most cases. It is therefore imperative, that Asset Protection strategies be implemented keeping in mind the limits imposed by the law of the country where the assets will be held or by the law of the country where the trustee resides, as it is the case of trusts.

B. The Use of Offshore Trusts in Asset Protection Planning

We should begin the discussion of this section with a background and introduction to the concept of the trust and then explain the uses and benefits of a trust as well as the most desired trust locations.

Background on the Use of Trusts
The trust concept has been developed over the centuries, and has now become one of the most effective tax and estate planning techniques available today. The essential parties in all trusts include:
• The Settlor
• The Trustee
• The Beneficiary(ies)

A trust may also include one or more Protectors.

A person (known as the Settlor) creates a trust by transferring assets to an independent third party (known as the Trustee). The trustee then administers and manages the assets on behalf of other individuals (known as the Beneficiaries). The trust will normally be evidenced by a written document called a Settlement Deed, Trust Deed, Declaration of Trust or Trust Instrument. This document lays down the foundation of how the trustees should administer and manage the trust assets and how they should distribute and dispose of trust assets during the lifetime of the trust. Basically, a Trust exists where a person (trustee) holds or has vested in him property, that is not a part of his own assets/estate.

Typically, the assets of a trust will comprise money, real property and shares in companies, but could be extended to include ownership of any movable or immovable asset and intellectual property. Trustees have a fiduciary duty to act in accordance with a trust deed and for the benefit of the beneficiaries. It is important to understand that trustees are obliged to manage and control the trust property independently and in accordance with the trust deed, for the benefit of the beneficiaries. If a settlor retains control of the assets, or issues instructions to the trustees and such instructions are accepted by the trustees, a court may deem the trust improperly settled and render the trust invalid.

The most important motivations for transferring assets in to a trust are:

  • Inability to hold property personally. Typically, this would involve planning for children and future generations
  • Preserving family wealth. Controlling succession of ownership for family businesses and wealth
  • Fear that children or others may dispose of assets or manage them unwisely.
  • Tax planning
  • Flexible estate planning
  • Avoiding disruption on death
  • A settlor wishing to protect himself and his heirs from unrest, political and country risks, and future frivolous legal claims

The trust can either designate the names of the beneficiaries in the trust deed, or it can designate a class of beneficiaries, without designating particular names (i.e., “all my heirs”). It can also be established in the Trust instrument that the trustee is responsible to designate the beneficiaries. In most cases, Settlors/Grantors who have living children/ beneficiaries usually designate the beneficiaries in the trust instrument. Many trusts also provide that beneficiaries take only an income interest during their life, with their children receiving a lifetime interest after the parents’ lives. Another common provision found in many trusts allows the trustees to “cut-off” a beneficiary temporarily, if the beneficiary’s interest is in danger of being reached by a creditor.

It is common for the trust deed to be accompanied by a document known as a “Letter of Wishes”. This letter is written by the settlor and whilst it is not legally binding, it can act as a guide to the trustees when deciding upon distributions to beneficiaries. Such a letter of wishes may be altered and updated to meet changing circumstances. A letter of wishes, however, does not bind the trustee to perform any specific acts.

Even though all trusts are established to include specific exclusion clauses that would normally exclude any trustee from benefiting from the trust assets, other than their normal fee for performing such duties, it is also possible to appoint an individual who is known as the “Protector”. The protector’s main function is to ensure that the trustees administer and manage the trust assets in accordance with the trust deed. The protector is also often vested with the power to appoint and remove trustees.

The protector is usually a friend of the family, a lawyer, an accountant or any other professional advisor that the family / settlor can further rely on. The protector works independently from the trustees. It is highly recommended that the protector reside in a different country form the settlor or the beneficiaries, on in a different country where a legal claim is likely to be brought, so that there is less likely that a claim of jurisdiction over the trust can be made in those countries.

Further protection can be achieved by appointing a protector that resides in a different jurisdiction from the trustees and who has the power to change the applicable law or situs of the trust in an emergency.

In addition, certain trust deeds require prior approval from the protector before the trustees may exercise major powers; such as the distribution of capital. This arrangement may act as a device to reduce pressure on trustees in their own jurisdiction.

It is important to note that care must be taken in drafting a trust deed to ensure that the protector’s role is primarily advisory otherwise the protector may be viewed as an agent of the settlor and his actions could render a trust invalid. In summary, protectors provide additional safeguards and should be independent of the trustees, of the settlor and of the beneficiaries.

Offshore Trusts in General
In most cases, tax haven jurisdictions will have laws that allow for trusts created or administered by its licensed trustees to be regulated under the laws of another jurisdiction. The most important part of Asset Protection planning is choosing the right jurisdiction to hold the assets. It must be one which combines favorable asset protection laws, like Belize, with established banking experience, like Switzerland.

The location of a trust can make a dramatic difference. Professionally managed trusts can be established in a wide range of jurisdictions but the most useful jurisdictions for international clients tend to be trust companies located in suitable tax havens, especially Belize, Bermuda, the Bahamas, the Channel Islands, Liechtenstein, the Cayman Islands and the British Virgin Islands. First, they have an extra layer of privacy by the sheer fact that these countries generally have strict privacy laws. More importantly, the trust laws in these jurisdictions are generally designed to attract foreign investors. As a result they are generally very favorable to the settlor and the beneficiaries. Finally, the assets owned by the trust do not have to be located within the trust=s legal jurisdiction. For example, one can have a Belize trust holding assets, which are located in the Cayman Islands or Switzerland.

Belize Trusts
Belize has achieved notoriety because it has taken one of the strongest legislative measures to protect the interests of a trust beneficiary over those of the settlor’s judgment creditor. For example, even in most tax haven jurisdictions, if litigation arises within one year (often longer) of a trust structure being set-up, the courts will “look back” to the trust creation date and disallow the trust, so that the creditors are able to reach the assets.

By contrast, under Belizean law, once the trust is established, even if litigation begins within one week, the trust assets are protected and beyond the reach of any creditors.

Furthermore, a trustee cannot comply with a settler’s demands if those demands are made under duress. Under Belizean law a settlor’s demand is deemed to be made under duress if it is made pursuant to a court order. Thus a settlor can comply with a court order, knowing that his demands will not be met by the trustee.

Finally, Belizean trust law includes asset protection provisions that override Belize’s bankruptcy act and the legislation on the enforcement of foreign judgments. Thus, a Belizean court cannot vary or set aside a trust or recognize the validity of a legal claim against trust property pursuant to the law of another country in respect of marriage, divorce, succession, or claims of creditors.

Other benefits provided by Belizean law include:

  • All trusts other than unit trusts may be created by oral declaration or by written instruments
  • Trusts may be created for a maximum of 120 years and income may be accumulated for a similar period
  • Trust instruments may make provision for the proper law of the trust and may provide for several aspects of the trust to be governed by a different law. The trust may also provide for changing of the proper law or the governing law.
  • Where the proper law of the governing law of a Belize Trust is changed to the law of Belize, any previous law cannot operate to vitiate the trust. Also, if the governing law or proper law is changed from the law of Belize, the law of Belize cannot operate to invalidate the trust
  • Letters or memoranda of wishes may be given to trustees
  • Spendthrift trusts may be created in favor of settlers
  • Charitable and non-charitable purpose trusts may be created
  • Trusts recognized by the law, religion and nationality of different countries may be valid in Belize
  • Simple procedures are given for the appointment and removal of trustees. Only one trustee is required. Corporate trustees may be appointed. Trusts may provide for the remuneration of trustees
  • If neither the Settlor, nor the beneficiaries are resident in Belize and the trust does not own land in Belize the trust is exempt from taxation
  • For a low fee trusts may be registered at the option of the Settlor
  • The Courts have jurisdiction over trusts to enforce them and give relief where necessary

Unfortunately, Belize does not have the most advanced banking and trust management infrastructure. Although there are reasonably good trust management companies in Belize, one can find a better trust management companies in jurisdictions such as the Cayman Islands or the some of the British Isles. But since Belize trusts do not have to be managed in Belize, all assets may be held in a different country. Furthermore, most tax haven jurisdictions will have similar trust laws, and most will recognize the trusts’ selection of Belizean law as the applicable law.

Conclusions
The use of an Irrevocable Offshore Trust is unmatched as an Asset Protection tool. Over the years, Tax Haven jurisdictions have developed very protective laws designed to ensure that any assets transferred to these trusts, other than in cases of actual fraud, will be beyond the reach of any creditors. Additionally, a properly structured Irrevocable Offshore Trust, which holds its assets outside of the jurisdiction where the potential claims are likely to arise, is practicably immune from the risk of having its assets reached by potential creditors.