Domestic vs. Offshore Trust

A Trust is a contract between the person who creates and funds the Trust (the Settlor) and the person who will hold and manage the Trust assets (the Trustee). The Trustee agrees to hold and manage the Trust assets according to the terms of the Trust Agreement, and for the benefit of a third party, aptly known as the Beneficiary.

What is a Self-Settled Trust?

A Trust requires a Settlor, a Trustee, and a Beneficiary. A Self-Settled Trust is one that the Settlor creates for himself and with himself as the Beneficiary, and sometimes the Trustee as well. Virtually every revocable Living Trust can be considered a Self-Settled Trust.

What is a Spendthrift Trust?

A special kind of Trust, known as a Spendthrift Trust, is the ideal asset protection structure. A Spendthrift Trust is one that contains provisions that prevent the creditors of any Beneficiary from accessing the Trust assets, as long as they stay in the Trust. In other words, when a Trust containing Spendthrift provisions is also an irrevocable Trust, it can disenfranchise creditors completely, even in bankruptcy.

What is a Domestic Asset Protection Trust?

In most states, you cannot combine a Self-Settled Trust with the asset protection of a Spendthrift Trust, but in some states you can. This is called an Asset Protection Trust, one of the oldest and strongest forms of asset protection ever created.

When you transfer assets to an Asset Protection Trust, you trigger a great deal of asset protection. This is because, even though you can use the assets in the Asset Protection Trust any way you want (subject to the terms of the Trust agreement), the assets are technically not yours because you have given them to the Trustee.

Thus, the assets are off your balance sheet and not available to your creditors, provided that the transfer of assets to the Trust was not of a fraudulent nature. A variety of states now have laws allowing Asset Protection Trusts. These are referred to as Domestic Asset Protection Trusts.

What is an Offshore Asset Protection Trust?

Simply put, an Offshore Asset Protection Trust is one that is set up in a country other than the United States i.e., an offshore jurisdiction. Since the laws of several U.S. jurisdictions are creditor-friendly, Offshore Trusts have evolved to become a popular instrument for asset protection.

If you are willing to move ownership of your assets to an offshore jurisdiction, you can take advantage of even stronger asset protection. This is because no offshore jurisdiction automatically enforces U.S. judgments, and some never do.

Placing your assets in the right Offshore Asset Protection Trust can effectively remove those assets from the reach of U.S. courts. Thus, your assets are even more protected from U.S. creditors and litigants.

Is a Domestic or Offshore Asset Protection Trust Right for You?

In the United States, we still have the 14th amendment to the U.S. Constitution, which says that each state shall give full faith and credit to each other's judgments and courts. This means that a lawsuit or judgment against you in one state will follow you to whichever state you go.

It also means that a Domestic Asset Protection Trust will never be as strong as an Offshore Asset Protection Trust. This is because only an Offshore Asset Protection Trust will put your asset out of the reach of U.S. courts and judgments.

Nevertheless, whether a Domestic or Offshore Trust is best for you depends more on the type of asset you own, how you own them, and your asset protection goals. When choosing between the two, you should weigh the following factors:

For Domestic Asset Protection Trusts

  • How much control you can exercise over the Trust assets and still enjoy asset protection.
  • How much due diligence you need to do before transferring assets to the Trust
  • The availability of fail-safe provisions and liability protections for Trustees and attorneys
  • Whether the jurisdiction’s asset protection laws are more settlor-friendly or creditor-friendly
  • The various types of claims from which your assets will be protected.

For Offshore Asset Protection Trusts

  • The political and economic stability of the jurisdiction
  • Jurisdictional reputation
  • The Jurisdiction’s suitability for asset protection given your asset structure
  • The jurisdiction’s tax rate
  • The ease of offshore administration
  • The cost to set up and administer the Trust

Domestic Trusts are typically cheaper to set up and maintain. On the other hand, you can never be completely certain if a state that recognizes Asset Protection Trusts will enforce a judgment from a state that does not, and vice versa.

An Offshore Trust acts as a physical and psychological deterrent for creditors, who may think twice before pursuing a claim against you in a foreign jurisdiction, not the least because it can be very costly to do so. However, Offshore Trusts can be expensive and complicated to set up, and are not as effective for protecting real estate located in the U.S.

A knowledgeable estate planning attorney can assist you with choosing the right jurisdiction for your Asset Protection Trust, as well as assist you with determining whether a particular state or offshore jurisdiction is more suitable for you than others. Contact an experienced estate planning attorney for help making an informed decision.