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Best Locations for Offshore Trusts for Asset Protection Clients in the U.S.

Posted by attorney R. Gibson

Some of the most popular jurisdictions for foreign trusts are, in alphabetical order, and not in order of preference, Anguilla, Antigua, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Gibralter, Guernsey, Isle of Mann, Jersey, Liechtenstein, Malta, the Marianas, Marshall Islands, Mauritius, Montserrat, Nevis, Seychelles, Trinidad, and Turks & Caicos Islands. The Cook Islands has a long history providing for offshore trusts. One key feature of the Cook Islands Trusts Act is that it allows for spendthrift trusts. Similar trust laws have been implemented in other jurisdictions, but not all provide the same protections, such as a shortened statute of limitations and raising the burden of proof in the Cook Islands courts. A creditor must also prove any fraudulent transfer was made with the specific intent to avoid a creditor's claim. While the Cook Islands have a long history of providing a friendly jurisdiction to offshore trusts, a British common law tradition, English as their primary language and a modern banking industry, other jurisdictions with a shorter history of protecting offshore trusts, and a smaller banking industry such as Nevis, have still become popular jurisdictions for offshore trusts. With LLC legislation modeled after Delaware, Nevis has become a popular offshore jurisdiction for the formation of LLC's. In Nevis, a creditor must even post a $25,000 bond to cover the defendant's legal fees before a creditor can commence litigation. Most creditors who choose to attack a foreign trust do so on the basis that the transfer of assets to them were fraudulent transfers or conveyances. The statutes of limitations in foreign jurisdictions are thus extremely important. In the Cook Islands, the statute is at most, two years after the creditor's cause of action accrued. The Bahamas, Cyprus and Nevis as well also require that the action in their jurisdiction must be commenced within two years of the transfer of assets to the trust. The Cayman Islands and Bermuda on the other hand have a six-year statute of limitations from the date of the transfer of assets. Other jurisdictions such as Belize, Gibralter and the Turks and Caicos Islands don't stipulate any limitations period. Another important factor is the burden of proof required in a foreign jurisdiction a creditor must meet in order to prevail. In the Cook Islands and Nevis, a creditor must prove their case beyond a reasonable doubt (the criminal standard of proof in the U.S.) that the trust was set up with the specific intent to defraud the creditor bringing the action. Many offshore trusts are formed in jurisdictions such as the Cook Islands but deposit their trust assets in countries such as Switzerland and Liechtenstein where the banking industry is larger and more established. It is thought to be safest though if the jurisdiction in which the foreign trust is set up actually holds the physical assets of the trust. To qualify as an international trust in the Cook Islands, the trust must be registered and have a trustee that is a Cook Islands trustee company, a Cook Islands international company or a Cook Islands foreign company. While the Cook Islands are politically stable, English speaking and associated with New Zealand, not all jurisdictions are equally stable politically, economically or socially. While Nevis, for instance, along with Saint Kitts forms the Federation of Saint Kitts and Nevis, a major issue in the elections are whether Nevis should undergo constitutional reform or whether the population will prefer secession when a choice is presented to the electorate. Nevis is thus currently undergoing somewhat of a constitutional re-evaluation by the legislature and will eventually be determined by the voters. A foreign trustee should have no contacts with the U.S., with the settlor of the trust, directly or through agents so as not to have even minimum contacts with the U.S. and be subject to a U.S. court's jurisdiction. However, when setting up a trust, it can be done so with a letter of wishes of the settlor, which though non-binding, contains the desires of the settlor for distribution of the trust assets. The settlor of a trust may also appoint a trust protector, who should also not be in the U.S., who nevertheless can watch over the actions of the trustee and even remove the trustee if the protector feels it is necessary to do so. For those who feel uneasy about placing complete authority over distributions in a trustee, some jurisdictions allow the use of an individual or a committee of individuals who have the power over the directions of distributions of trust funds or who can change the trustee. This Protector or Protectorate must not be or contain any U.S. residents or U.S. persons and essentially oversees the trustee. Some individuals find it impossible to delegate complete control of their assets to trustees and protectors they previously never met, and choose to designate themselves as the Protector and remove themselves only in the event of duress or litigation. This strategy can be dangerous and can defeat the protection offered by a foreign trust if a court deems the individual-protector as having the ability to remove the trustee and veto any trustee actions. Some courts have held that it is a U.S. citizen's former position (as protector or trustee) that determines if a U.S. person has the ability to control a trust. A foreign trust should not own any assets located in the U.S. Ownership of stock in U.S. companies may even present a problem. However, with the availability of owning stock in companies anywhere else in the world, this can be a minor inconvenience to the savvy investor. A protector is in essence, the grantor's alter ego. The protector is in place to follow the wishes of the grantor and to watch over the trustee. Generally, attorneys will choose only the largest and longest established trustee firms with trustees who are generally lawyers or accountants. Some strategies call for assets to be held by a foreign limited liability with all of the membership interest in the LLC given to the foreign trust. Often the two are in different jurisdictions. The manager of the LLC thus has all of the control over the bank accounts or brokerage accounts. In this strategy, it is thus possible for a U.S. person to control the assets yet have ownership of none of them. Should there be a risk developed against this manager, or should his independence be jeopardized, the manager can be removed and a foreign trustee step in to manage the LLC's assets. Once the risk has been eliminated, the original manager can be placed back in control. A grantor who cannot part with control and chooses to retain too much can lose the protection a foreign trust is designed to offer. An attorney can advise a client as to how much control can likely be retained without affecting the trust's protection. Foreign trusts often contain a duress clause which directs the foreign trustee to ignore any instructions to repatriate trust assets or any other instructions made while under duress, such as during any litigation against the settlor. Another common clause in foreign trusts is a flee clause, also known as a Cuba clause, which provides not only for the removal and replacement of the trustee, but a change in the jurisdiction of the trust and/or the governing law in the event of duress (litigation). With the new jurisdiction being just as unfavorable toward creditors, this type of clause makes it even more difficult for a creditor to get to the assets of the trust. Offshore trusts should only be set up in jurisdictions that are politically, socially and economically stable. They must be set up in such a manner that the settlor cannot demand that they be unwound or the assets repatriated to the U.S. In other words, the settlor must part with all legal control over the trust assets and all trustees. The individual setting up the trust must not have any right to trust assets. Distributions must be at the discretion of the trustee, who should be licensed, bonded, qualified, reputable and, however, still sympathetic to the individual's wishes, needs and desires, understand the individual's interests, and respond to communications. And, perhaps most importantly of all, a foreign trust must be set up and maintained in a tax-compliant manner. It is in the difficulty and obstacles a creditor encounters in attempting to collect a U.S. judgment against an offshore trust that is the foreign trust's attractiveness. While the cost to set up a foreign trust and to maintain it are substantial, their costs should not be weighed against any tax savings to determine their usefulness. A foreign trust's value is not in any tax savings or any misconceived perceptions that it will afford secrecy. The protection they afford is determined by their usefulness in a comprehensive estate plan which includes protection against the claims of future creditors. A foreign trust can always be attacked by a creditor with the money to do so. They are not ironclad and will not protect a settlor's assets in every instance due to all the variables in each situation. However, they provide one of the best asset protection devices and with proper planning and correct decisions such as what foreign jurisdiction to utilize, they can be extremely effective as a deterrent to creditors the vast majority of the time.

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