Foreign (offshore) asset-protection trusts: considerations for the entrepreneurial executive.

Author:Pullis, Robert M.
 
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INTRODUCTION AND OVERVIEW OF FOREIGN (OFFSHORE) ASSET PROTECTION TRUSTS

The use of offshore trusts to legitimately maximize the protection of an entrepreneurial executive's personal wealth has gained new recognition and acceptance in today's litigious society. Now, more than ever, any business or estate plan requires an examination of the risks associated with the executive's activities and business holdings. Attorneys and other professionals must consider the benefits, goals, issues, and risks involved in establishing an offshore trust as part of a comprehensive asset-preservation plan for the affluent client, business owner, or executive with significant business holdings, liquid assets, or investments. The benefits of the offshore trust are all too obvious in those situations when an executive without an offshore trust who has substantial assets at risk becomes a defendant in a lawsuit. If the affluent executive has not already protected his or her assets with an offshore trust, then he/she could face financial ruin while making a plaintiff and the plaintiff's attorney happy and wealthy because of the executive's lack of asset-protection planning.

Unfortunately, many executives and their attorneys never consider the benefits of an offshore asset-protection trust until it is too late. Attorneys should be prepared to adequately advise the at-risk executive about the benefits of an offshore trust. The entrepreneurial executive turned defendant by a major lawsuit is unlikely to question the wisdom, merits, or moral significance of legally protecting one's assets (assets that are oftentimes irreplaceable by any amount of liability insurance) with an offshore trust when those assets represent one's life's savings that were intended to be relied upon for providing for the executive and the executive's family for the remainder of their lives.

This article focuses primarily on the proper use of a foreign offshore trust for legitimate asset-protection purposes.

VALID REASONS FOR ESTABLISHING AN OFFSHORE ASSET-PROTECTION TRUST

Professional advisors such as attorneys, CPAs, financial advisors, and others should be aware of the ethical standards their profession has established with regard to how to advise a client concerning issues of asset-protection planning.

Reasonable and lawful reasons to establish an offshore asset-protection trust might include:

  1. economic diversification;

  2. presentation of a low profile to disguise great wealth;

  3. tax planning, including general estate planning;

  4. avoidance of forced-heirship laws;

  5. planned expatriation;

  6. marital planning (in lieu of or in conjunction with a pre-nuptial or ante-nuptial agreement concerning assets and the potential disposition of assets if a divorce were to occur in the future);

  7. asset protection from potential future creditors;

  8. privacy and confidentiality (e.g., avoiding laws requiring disclosure of trust/estate assets, who the beneficiaries are, who receives what from the trust upon the death of the settlor(s), and when such assets are to be transferred).

    Care should be taken by the professional to not aid or abet any unlawful, fraudulent, or unethical activity or actions while assisting a client in protecting his/her assets.

    Why should an executive consider a trust with a foreign situs (location) outside the United States?

    Assume that a person worth S3 million has been successfully sued and the plaintiff (judgment creditor) has obtained a judgment for S5 million. The defendant (judgment debtor) will have some marginal protections from being homeless under state laws that provide that certain types of property are exempt from creditor seizure and/or a certain dollar amount of property is exempt. As an example, in the state of Texas a married couple can exempt up to $60,000 worth of property, can exempt certain retirement accounts (including certain "qualified" retirement plans under the ERISA [Employee Retirement Income Security Act] federal law), and can exempt their home via a generous homestead exemption not limited to any specific dollar amount. Note, however, that $60,000 is not going to "go very far" and that the homestead exemption may last only as long as the judgment debtor (and/or surviving spouse) is alive. The million-dollar home may become subject to seizure when the property no longer qualifies as a homestead (e.g., when it is left to a grandchild or to a charity in a Last Will and Testament, etc.). Additionally, assets held in a self-settled domestic trust (a trust created in the United States that a person, referred to as the settlor, establishes for him/herself and for his/her own benefit) are generally not exempt from creditor seizure. Remember, the judge who will determine if the defendant is entitled to keep his/her assets away from the plaintiff will probably be the same judge who signed the court order awarding the plaintiff millions of dollars--and judges detest seeing their own judgments ignored!

    The simplest answer to the question of why one should use a foreign asset-protection trust (versus domestic asset-protection measures) can be stated in one word--jurisdiction. First, remember that a judgment can only be executed upon the property a_person owns. Only property that you own may be used to satisfy a judgment rendered against you. Technically, since the offshore trust (and not you) owns the property held in the trust, such property cannot be seized to satisfy a judgment against you. Property held in trust is not owned by the person who settles (establishes) the trust, but rather is controlled by the trustee of the trust (who must act as a fiduciary in managing the trust assets for the benefit of the beneficiary(ies) of the trust in accordance with the terms of the trust). In most states, one cannot achieve asset protection from one's own creditors in a self-settled domestic trust as a matter of state law. Even in states that do provide asset protection from creditors in self-settled domestic trusts, such states are subject to the U.S. Constitution and its "full faith and credit" clause [the clause in the U.S. Constitution (Article IV, Section 1) which provides that the various states must recognize legislative acts, public records, and judicial decisions of the other states within the United States], which may serve to preempt and defeat the asset-protection provisions provided under any state law that would otherwise apply to an out-of-state judgment creditor.

    Many foreign countries, however, do allow assets to be protected in self-settled trusts. In fact, many countries have strict secrecy and asset-protection laws that serve to encourage wealthy individuals to choose their financial institutions for self-settled trusts for the express purposes of asset protection. The property held in a properly drafted offshore trust is not owned by the client (settlor) and, therefore, is not subject to creditor seizure. Secondly, a court in the United States (state or federal) has no jurisdiction outside the United States; and, moreover, the judgments rendered by courts in the U.S. are not honored or considered valid in most foreign countries. The concept of jurisdiction is analogous to receiving a speeding ticket in Houston, Texas, written by an Alabama State Trooper--the ticket is unenforceable in Texas because Texas does not recognize or give any authority to Alabama police officers in Texas. A civil judgment signed by a judge in the U.S. is "not worth the paper it is written on" in the Cook Islands. Therefore, neither the foreign trustee nor the courts in the foreign country will honor any civil judgment or other court order rendered in the United States. An individual's money and other property stay in the foreign trust, and both the principal and the interest will be available to support the trust beneficiaries notwithstanding any judgments rendered by any courts "outside" the jurisdiction where the trust is located. Many offshore jurisdictions have adopted legislation that is specifically designed to offer the maximum amount of protection to the settlor and the assets transferred to a trust by the settlor. Such asset protection occurs even when the settlor is the primary (even only) beneficiary of the trust, which is an option that is generally not available within the United States. Once the assets are offshore, they are available to the settlor (and any other beneficiaries) regardless of any U.S. court order or judgment to the contrary. This concept may be especially valuable if, for example, an executive establishes and funds an offshore trust in 2011; and later, in 2014, this executive, who was a partner in a large accounting firm, is charged with a crime (e.g., vehicular homicide DWI), and the government (and/or civil litigants via a pre-judgment sequestration order in a related civil suit) seizes all the executive's domestic assets pending the outcome of the trial. In such an instance, the executive would have access to the offshore trust funds with which to pay for a top-dollar criminal defense team to fight the charges levied against him/her (and with which to keep the family in a comfortable lifestyle regardless of the outcome of the criminal case). Except for the existence of the offshore trust, the executive may...

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