The Benefit of Establishing an Offshore Asset Protection Trust While the Coast is Clear

Offshore asset protection trusts avoid or diminish a number of creditor exposures that apply to such trusts organized in the U.S. High net worth individuals and persons involved in high liability exposure businesses and professions should consider establishing a “nest egg” offshore trust to provide a protected fund that is exempt from creditor claims but which can still be expended for the benefit of the grantor/settlor and his or her family.

Offshore trusts, in the right jurisdiction, have a benefit of a short statute of limitations for creditors to bring an action to reach the trust assets on a fraudulent conveyance theory (the usual mechanism under which trust assets are reached). However, if the trust is established before there is a creditor on the horizon, there are even more advantages in certain jurisdictions.

First, by establishing the trust while the grantor is solvent, this will usually insulate the trust from a fraudulent conveyance trust completely in the favored jurisdictions. That is, if a later creditor claim arises, since the trust was funded while the grantor was solvent and the funding did not render the grantor insolvent, the later creditor is out of luck.

Second, even if there is an existing creditor at the time the trust is established, and if that existing creditor perhaps can get into the trust on a fraudulent conveyance theory, in the proper jurisdiction creditors that arise after the funding of the trust cannot piggy-back on the claim of the first creditor to reach trust assets. Again, these later-acquired creditors are out of luck. In many U.S. jurisdictions, this protection is not available.

Human nature being what it is, calls to our office for creditor protection planning usually arise AFTER a potential claim arises. This is problematic both for domestic and offshore planning, and we usually decline to participate in post-claim planning..

The ideal planning should occur before there is a claim. This is helpful for both domestic and offshore planning, but debtor-friendly asset protection trust provisions in some foreign jurisdictions provide even greater benefits for such early planning than if the trust is established in the U.S.