Creditor. What an ugly word, unless you are a creditor of someone, and in that case it is a fantastic word. Everyone has a creditor, whether it’s the bank or your neighbor who you owe twenty bucks to. Well, what happens when you can’t pay your creditors? With a few exceptions, your creditors, and anyone that has a claim against you, can take your assets and sell them for cash. With a snap of your fingers almost everything you own could be gone.
How do you protect those assets? You could go with a domestic US asset protection trust, but there are certain risks and drawbacks to this strategy. If any of those protected assets are in a state that does not recognize your domestic asset protection trust, there is a risk that the trust laws governing your trust will not be upheld. This recently happened with a Nevada asset protection trust challenged in a Utah court, by the name of Dahl v. Dahl. In that case, the Utah court decided that Utah had a compelling interest in enforcing its state law even though the trust had a Nevada choice of law provision that the plaintiff had agreed to.
There are other risks to domestic asset protection trusts such as seasoning, bankruptcy, and the fraudulent transfer doctrine. In any case, there is a minimum length of time that a trust must be established and assets transferred to be afforded any protection under US state law. This time period is different state by state with the shortest being 3 years and the longest being 6 years. The solution to these issues is an offshore asset protection trust.
If you choose a domestic asset protection trust over an offshore domestic trust, you face the risk of it looking like the trust functions as your “alter ego.” What this means is that you essentially use the trust as something akin to a storage locker or a bank account. You remove and replace money or other assets in the trust on a frequent basis in order to use the money or other assets to do things such as pay for items or use assets as collateral for loans. The primary risk here is the fraudulent conveyance rule, which restarts the statute of limitations each time you add property to the trust.
Why You Should Go Offshore?
Going offshore with your asset protection trust is a smart strategy because of the difficulty any creditor will have, in many jurisdictions, in reaching the assets of your trust. In key asset protection jurisdictions, such as the Cook Islands, the fraudulent conveyance/seasoning time frame is ZERO years. So long as there is not a current creditor seeking collection, the establishment and transfer to a Cook Islands trust will protect assets owned by the trust from all future claims.
Another benefit is requiring your creditors to take their case to a foreign jurisdiction to enforce their claims. This is not an easy goal if the creditor is attempting to collect from a jurisdiction known to support and protect assets.
With the right planning, your offshore asset protection structure can be a bulletproof option for your asset protection goals.
Why Not to Go Offshore
There are two primary reasons to not reposition assets offshore. The primary consideration is the cost to establish and maintain, on an ongoing basis, the offshore structure. There are substantial costs to establishing and maintaining a trustee for the trust, which may cost $5000+ per year after establishment. If you are unable to maintain those expenses on an ongoing basis, the trustee may resign, the trust may go into default status, and your assets may not be protected. However, that may be a de minimis expense incurred in order to protect your family’s fortune.
An additional downside is the IRS. Traditionally, tax havens and offshore shelters have been utilized to evade taxes. There are legitimate reasons to set up offshore structures, including asset protection, however the IRS still views offshore interests as a potential tax evasion scheme. For this reason, having an offshore trust may increase the chances of you having to undergo an IRS tax audit.
Please note that we never advise anyone to seek tax savings through an international platform if the savings cannot be realized through the use of a domestic strategy.
The final roadblock is that your trust is subject to being labeled a fraudulent transfer under state or bankruptcy laws.
In this case, the fraudulent transfer does not necessarily imply an illicit goal. A goal of asset protection is, of course, to PROTECT ASSETS FROM CREDITORS. The fraudulent transfer doctrine states that transfers made for less than fair market value for the purpose of defeating a creditor’s claim is a fraudulent transfer, and a court may unwind any such transfers.
This is a creditor’s primary weapon against an asset protection structure. As earlier noted, every state has a statute of limitations under which any transfer utilized for the purpose of defeating a creditor’s claim may be unwound.
However, in jurisdictions that favor asset protection laws, like the Cook Islands, there is no time frame required for any future creditor’s claims against the asset protection trust, so assets are immediately protected.
An asset protection trust is a great tool for you and the ones you love. It allows you the unique ability to protect your assets from creditors and others that would claim access to your assets. More importantly, it does what no other type of trust does; it protects your assets, as long as you have it created under the right law. If you would like more information about the offshore asset protection trust, don’t hesitate to call our office. We’ll work with you to establish an asset protection plan that meets your budget and protects your assets for not only your future, but also your family’s future.