Offshore Trust Comparison
|Wealth Protection Features||Bahamas||Belize||Bermuda||Cayman Islands||Cook Islands|
|Settlor can be a Beneficiary||Yes||Yes||Yes||Yes|
|Retention of control by Settlor||Yes|
|Protection from subsequent bankruptcy||Yes|
|Spendthrift Beneficiary provisions||Yes||Yes|
|Avoidance of forced hardship||Yes||Yes||Yes||Yes|
|Protection from Foreign Judgements|
|Specific non-recognition provisions||Yes|
|Hague Convention applicable||No||Yes||Yes|
|Protection from Creditors|
|Exclusion of Statute of Elizabeth laws||Yes||Yes||Yes|
|Trust invalid if transfer fraudulent||No|
|Creditors must prove fraudulent transfer||Yes||Yes||Yes|
|Clear definition of fraudulent transfer||Yes|
|Separation of creditor claims||Yes||Yes||Yes|
|Statutory limitation on fraudulent transfer||Yes (2yr)||Yes (6yr)||Yes (6yr)||Yes (1yr)|
|Retroactive protection for immigrant trust||Yes|
|Community property provisions||Yes|
|Specific exclusion of foreign law||Yes||Yes||Yes||Yes|
|Choice of law is binding||Yes||Yes||Yes||Yes|
|Custodian trustee permitted||Yes|
International Trust and Asset Protection Trust Structures
An offshore asset protection trust or international trust one of the strongest asset protection vehicles available when done right. Like the Panama Foundation, the international trust allows you to legally transfer your assets out of the reach of future creditors and place them behind a protective barrier that no one can pierce.
The basis of the asset protection trust is simple enough: assets are conveyed out of your name and into the international trust. You designate the trustee, settlors and beneficiaries and you control the assets in the international trust for the benefit of those beneficiaries.
Only a few jurisdictions have laws that were written to support this level of international protection. They are the Cook Islands, the Isle of Man, Nevis and Belize. All four countries have international trust laws that provide maximum asset protection and are politically and economically stable.
Legal experts agree that the Cook Islands has the most tested case law history, and thus is my country of choice. A very close second is Belize, where privacy is maximized and costs are lower than the Cook Islands. Both of these countries are leaders in the creation and management of the asset protection trust.
Note that this post is about international trusts. A Panama Foundation is a hybrid between a trust and a corporation… the modern cousin of the international trust. For more information on this structure, see my post: The Panama Foundation for Asset Protection.
Advantages of an International Trust
The two major advantages of an international trust are 1) asset protection 2) while maintaining control over your assets. Investments are kept out of the reach of civil creditors because U.S. judges do not have jurisdiction over foreign citizens (your trustees or protectors), nor do they have jurisdiction over an international trust. Local judges cannot legally compel the foreign trustee or asset protection trust to release funds to someone who claims you owe them money (ie. a civil creditor). The Cook Islands, Belize, and Nevis do not recognize judgments that originate in a foreign country. Any of these options can be combined with an offshore LLC for maximum flexibility.
Note: This article refers to civil creditors only and does not contemplate government claims by the the IRS or SEC.
This means that a creditor would be forced to sue you in the country where you maintain your Trust in order to reach the assets. However, Nevis, Cook Islands, and Belize put up significant barriers to initiating or proving such a case and are “defendant friendly,” a state of mind that has not existed in the United States for MANY years.
For example, in Nevis, a creditor must post a $25,000 cash deposit to bring the suit against a Nevis Trust or Limited Liability Company. In the Cook Islands, the suit must prove beyond any reasonable doubt that assets were transferred into the trust in order to defraud the creditor in question (also called a fraudulent conveyance). If the assets were transferred to the trust prior to the debt being created, or before the problem arose, it will be nearly impossible to prove intent to defraud.
In another example, the Cook Islands statute of limitations holds that the time limit for your opponent to claim fraudulent transfer is one or two years after the underlying cause of action, depending on a number of factors. Therefore, when the lawsuit is completed in the U.S., the Cook Islands statute of limitations will usually have expired. Even if the creditor succeeded in the U.S., it is likely their claim will be barred in the Cook Islands.
- See, there is a benefit to our inefficient U.S. legal system. It allowed the clock to run out of the plaintiff while your assets are safe behind an asset protection trust.
In a final example, a plaintiff in the Cook Islands must prove that your intent in creating the asset protection trust was to defraud that particular creditor – and they must prove this beyond the shadow of a doubt. This means that the issue in question is so obvious, or has been so thoroughly proven, that there can exist no doubt. “Beyond a shadow” might refer to the fact that doubt could be nowhere in the vicinity (completely expelled from the issue), or to the thoroughness of the argument (a shadow being even less substantial than a doubt itself). This is a very tough burden on the plaintiff indeed…one reserved for criminal trials in the United States.
Jurisdiction Diversity – Asset Protection Trust Planning
I believe both the Cook Island Trust and Belize Trust provide the strongest and most tested foundation for an offshore asset protection strategy. The preeminent structure combines the Cook Island Trust or Belize Trust with a Limited Liability Company from Nevis, which allows you to maximize the benefits of both Cook Islands or Belize and Nevis, and further diversifies your international trust structure.
In this structure, assets, such as offshore bank accounts, can be held by the Nevis LLC, and the LLC can be held by the Trust. A U.S. resident (you, the Settlor) can be the manager of the Nevis LLC, while the Trustee of the Trust is an international person. The LLC manager has all legal control over the LLC and signature authority over the bank accounts. Thus, a U.S. resident settlor has control of the assets, has full access to them, and yet owns none of them.
If you, your Nevis LLC, or your Belize Trust or Cook Island Trust, come under attack, you temporarily transfer management duties of the LLC to the licensed and bonded trustee. This trustee will administer your trust and bank accounts per your wishes, which you have provided to him or her well in advance of the problem arising.
When you diversify your structure, a creditor may need to maintain a legal case in both Nevis and Cook Islands or Belize, which will prove extremely difficult and costly, and you are making the most of the benefits of both defendant friendly jurisdictions.
All of these benefits also apply to the Panama Foundation.
Why not avoid the battle?
The benefits described above are meant to protect you against a very motivated creditor who is willing to go to the expense of pursuing your assets into multiple international jurisdictions. These barriers to attack also mean that a more reasonable creditor plaintiff is likely to assess the costs and probability of success against your international trust and either drop the matter or settle for pennies on the dollar.
In other words, these barriers to litigation created by the asset protection trust act as deterrents to lawsuits and creditor collection action, motivate the creditor to settle, and exhaust your opponent’s determination and resources – pursuing a well-constructed asset protection trust is expensive and disheartening for the creditor. Then, if that fails, the offshore trust or Foundation will provide an impenetrable barrier through which no civil creditor or frivolous lawsuit may pass.
What Asset Protection IS and IS NOT
Now that you have an idea of what an international trust can do for you, let’s talk about what offshore asset protection is and is not.
A properly constructed asset protection plan places a portion of your net worth behind multiple barriers…the more barriers, the greater the protection. It allows you to level the litigation playing field and move out of the creditor friendly United States and into a defendant friendly jurisdiction such as Belize or Cook Islands. An asset protection trust makes you a hard target, which may eliminate the case altogether or put you in a better bargaining position.
Asset protection does not:
- help you escape your current or reasonably foreseeable creditors. You should not transfer assets out of the United States into an international trust to avoid a current creditor as this may be a fraudulent conveyance.
- reduce or eliminate your U.S. tax obligations. You (the U.S. citizen and settlor of the trust) must report your international trust, your international bank accounts, and pay taxes on the gains in your asset protection trust, to the U.S. IRS. U.S. citizens are taxed on their worldwide income, including income earned inside an international trusts and Panama Foundations.
- allow you to hide assets. Asset protection is not based on secrecy; it is focused on putting up barriers to collection. Even if your creditor had a detailed road map of your structure, they should not be able to reach the underlying assets.
- work well with U.S. real estate. The international trust is best suited for offshore bank and brokerage accounts and other assets outside of the United States. U.S. courts have jurisdiction over U.S. real estate, can simply ignore the asset protection trust and demand seizure the property. While it is possible to hold titles to domestic real estate in an offshore trust or offshore LLC, it’s not recommended because it provides limited asset protection and has significant tax consequences.
- a total solution to estate planning. An international trust will facilitate transfer of international assets upon death, but should be used with a complete estate plan that is compliant with your home countries estate and tax codes.
Investments Held by an International Trust
Diversification into international investments, which are held in an international trust, can reduce portfolio volatility while maintaining returns. Effective diversification requires investing in non-correlated assets.
At any given time, various regions of the world are experiencing unique economic, political, and environmental events. Accordingly, markets in those countries will reflect local conditions and will not be highly correlated with the markets in your home country. In other words, just because times are tough in the U.S., and banks are paying minimal interest, does not mean there are no deals to be found in other countries. This important concept is essential to international estate planning and wealth management.
In addition to providing portfolio diversification, offshore investments held in an international trust provide a high degree of choice and flexibility. A large percentage of the over 80,000 funds traded worldwide are located offshore. Investing in these funds often requires an offshore entity. Operating offshore, and accepting only international structures, allows fund managers avoid US registration and regulation, operate more efficiently, and offering substantially higher returns to investors. Moreover, international funds may be denominated in any major currency providing a hedge or currency diversification.
Not only does international investing provide choice and flexibility, it provides an excellent level of privacy, thus reducing an investor’s potential exposure to frivolous litigation. Investment accounts in the U.S. can be seized by creditors. That is much more difficult offshore… and near impossible if they are behind the protective barrier of an international trust or Foundation.
Offshore investments are efficient not only because of the asset protection and privacy they offer, but also because fund managers can use risk hedging techniques which are not available in some domestic markets.
With this in mind, an international trust may be the only vehicle that a non-U.S. investment manager or brokerage will accept when dealing with a U.S. citizen. The advisor will want to be representing an entity, such as a trust, Foundation, or LLC, rather than directly working for a U.S. citizen or resident.
Asset Protection Trust Terminology
Contempt of Court:
A U.S. court can exercise jurisdiction and control over people and assets in the United States. When a defendant is in the country, but his or her assets are outside of the reach of the court, the judge may attempt to force the defendant to return those assets to their authority.
If a defendant refuses to return the assets, a judge may hold him or her in contempt of court. This means that the court will impose sanctions for failing to comply with the judge’s order. A defendant might be held in jail, fined, or both, until the assets are returned.
If the transfer of assets to the international trust is deemed to be fraudulent, it is likely a U.S. judge will order those assets returned.The only way an asset protection trust can be breached by a U.S. judge, and contempt of court ordered, is in the case of a fraudulent transfer or conveyance.
Legal Cites: Morris v. Morris, Case No. 502005CA006191XXXMB (Circuit Court, 15th Judicial District, Palm Beach County, Florida, 2006), Bowen v. Bowen, 471 So. 2d 1274, 1277 (Fla. 1985), Federal Trade Commissioner v. Affordable Media, LLC (Anderson), 179 F3d 1228 (9th Cir. 1999), and In re Lawrence, 238 B.R. 498 (Bankr. S.D. Fla. 1998).
A transfer to an asset protection trust will generally be respected if it is done well before a debt is incurred or a creditor files a claim against the settlor (trust founder). If a transfer is made to the international trust after a debt is incurred, or after a creditor’s claim can reasonably anticipated, it may be considered fraudulent.
For example, if you create and fund an international trust on January 15, and on January 20 you injure someone with your car, the transfer of assets to the trust should be respected. This means that it is unlikely the injured party will be able to breach your asset protection trust.
If the dates are reversed, you injure someone on January 15, and fund an asset protection trust on January 20; the transfer is going to be considered fraudulent. A judge will order you to return the assets to pay the claim and, if you refuse, may hold you in contempt of court.
This is a simple example for illustrative purposes. Each State has their own rules, and there are Federal statutes at work. The bottom line is this: Form and fund your asset protection trust as early as possible, well in advance of any claim arising or legal proceedings.
This is a clause placed in the international trust to protect you against Fraudulent Conveyances. It tells the trustee to pay any claim that comes in from a certain creditor.
For example, just about any transfer, regardless of timing, that prevents the IRS (see: United States of America v. Raymond and Arline Grant, Case No. 00-08986-Civ-Jordan (S.D. FL 2005)) or State taxing authority from collecting, is going to be considered fraudulent. Thus, I always include a section instructing the trustee to pay the IRS or State Franchise Tax Board. This protects both the drafter (me) and the settlor (you).
In the car accident example above, you could create and fund an international trust after the accident, so long as you added a Jones Clause instructing the trustee to pay the injured party.
Letter of Wishes:
A Letter of Wishes is an informal and confidential letter from the settlor to the trustee telling him how to administer the international trust. Because a Letter of Wishes is not part of the trust, it is confidential, is revocable (most offshore trusts are irrevocable), and can be easily amended.
An international trust can be formed in a number of jurisdictions. For example, a client may prefer Cayman Islands because of the large number of banks and investment advisors available. However, when that trust is attacked by a creditor, Cayman may no longer look so good.
If the trust has a transfer clause, it may choose to move to a more advantageous jurisdiction when it comes under attack, such as Belize or the Cook Islands. In other words, if a creditor seems to be making headway in Cayman, the trust may move to Belize, and the battle will begin anew.
The transfer may be automatic or conditioned on a certain event (such as a claim being filed in Cayman), or the trustee may be given the power to move the trust.
Reminder of the Benefits of an Asset Protection Trust
I would like to close by reminding you of the benefits of an asset protection trust formed in Nevis, Belize or the Cook Islands.
- It is possible for you to protect your assets and maintain control over bank accounts and investments.
- There are firm time limits for actions against trust assets.
- Intent to defraud must be proven to a criminal standard in allegations of fraud.
- Cook Islands and Belize courts will not recognize or give effect to certain judgments of foreign courts in relation to International Trusts
- There is no bankruptcy law in the Cook Islands or Belize, and therefore no claw back provisions. A creditor must rely on common law fraud to void a disposition to a trust.
- Barriers to claims for fraudulent transfer being brought in a Cook Islands or Belize Is court include strict time limits, requirement of proof of fraud beyond a reasonable doubt (criminal standard), and no bankruptcy law.
- Procedural law prevents ‘fishing expeditions’ by creditors, restricting the use of interrogatories (discovery, etc).
- Impediments to litigation in Nevis: To file a case in Nevis, the plaintiff must put up a $25,000 cash deposit and hire a local attorney.
- Assets may be moved between the international trust (Belize or Cook Islands) and the LLC (Nevis).
A Cook Islands or Belize offshore asset protection trust with a Nevis LLC provides the highest level of security for personal assets. Those who most benefit from these international trust structures are persons in high-risk occupations (such as physicians and lawyers), those looking to diversify their investment portfolios, business vendors (particularly those close to retirement), and almost anyone who has saved a significant nest egg and considering moving themselves and/or their assets outside of the United States.
The bottom line is that a properly drafted and maintained international trust formed in Belize or the Cook Islands will tilt the legal scales in your favor by providing the ultimate in asset protection.