A foreign trust is a legal entity that allows a beneficial owner of assets distance himself or herself from legal ownership of assets while retaining their beneficial enjoyment and a limited degree of control. When structured properly and created in the right jurisdiction, creditors can be impeded and deterred from gaining control of the assets by expensive and sometimes insurmountable obstacles. Although a foreign trust can hold any type of property, even real property in the U.S., the asset protection afforded by a foreign trust is only truly effective for liquid assets which are held offshore. As a U.S. court can exercise power over U.S. assets, foreign trusts will not afford asset protection to assets such as real property located on American shores. One of the greatest deterrents to a creditor seeking assets held in an offshore trust is the cost of having to go to court in a foreign jurisdiction, with foreign lawyers, within a limited amount of time, and then to pursue collection in that foreign jurisdiction or another jurisdiction if the trust flees to another offshore location. A creditor who may first think it won't be difficult to go after a foreign trust will find in the most protective foreign jurisdictions that their U.S. judgment isn't recognized by the courts in the foreign jurisdiction, that there is a surprisingly short statute of limitations, and that they must prove to the foreign court that the debtor intended to hinder, delay or defraud the creditor beyond a reasonable doubt. Some foreign jurisdictions do not recognize judgments obtained in United States federal or state courts. In jurisdictions in which this is the case, creditors must retry their claim in the foreign jurisdiction. With the daunting prospect of having to start over and hire local attorneys to retry the claim, who may not even be hired on a contingency basis, the costs of pursuing such an action can deter all but the most determined creditor and prompt a settlement for pennies on the dollar. Some jurisdictions even require the losing party to pay the attorney's fees of the prevailing party, and when the odds are stacked against a creditor, this alone can be a daunting prospect. U.S. taxpayers and their asset protection attorneys often utilize foreign trusts to accomplish their asset protection. The taxpayer typically chooses a jurisdiction favorable to judgment debtors in which there is a very short (one or two year) statute of limitations for lawsuits for fraudulent conveyances and a high burden of proof required of creditors. The value of such a short statute of limitations becomes apparent when one considers that most states have four year statutes of limitations for fraudulent transfers. Valid reasons for creating an offshore trust include avoiding certain laws regarding heirs, protecting separate pre-marital property, estate planning, business planning, asset protection, and tax planning. Spouses can establish separate trusts or combine their wealth into one trust for their mutual benefit. With such long statutes of limitations domestically for fraudulent transfers of assets, domestic asset protection is often vulnerable to a creditor's claim that a debtor has recently transferred assets in an effort to defraud a creditor's attempt to collect on a claim or judgment. Some of the most important aspects of foreign jurisdictions which people look for in an offshore jurisdiction are thus strong asset protection laws that are pro-debtor and anti-creditor, a history of a strong and sound political, legal, social and economic history, no taxes on foreign capital, no exchange controls and financial privacy, even while being completely U.S. tax compliant. It is not enough to choose a jurisdiction that has a short statute of limitations, one should ideally choose a jurisdiction that also won't recognize or enforce a foreign civil judgment, and thus which requires a litigant to retry the case. The foreign jurisdiction should also have a high burden of proof, a rigid standard of proof, and not allow assets to be frozen prior to a creditor obtaining a judgment. Foreign trusts today also utilize a "duress" clause making the trust irrevocable or the trustee able to reject the request of the beneficiary to repatriate the assets to the U.S. during times of duress (e.g. U.S. litigation). A further clause is inserted in such trusts today allowing the trustee to move the trust to yet another offshore jurisdiction with similar asset protection statutes during times of duress, thus making it even more difficult for the judgment creditor. A Choice of law clause, common to foreign trusts, provides that the trust is to be governed by the law of the jurisdiction in which it was set up and is situated. Offshore trusts require their establishment in favorable foreign jurisdictions under the control of a non-U.S. citizen trustee without any presence in the U.S. Often an offshore trust has a trust protector with powers over the protection of the trust and the assets but with no beneficial interest in the trust property. In compliance with IRS requirements, we must advise you that any U.S. federal tax advice and foreign trust advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.