To understand why such offshore trusts have become popular, we need only look at the litigious society in which we live and the uncertainties.
Establishing and Drafting Offshore Asset Protection Trusts
to which an individual is subjected by the domestic legal system (with its result-oriented judges). Although asset protection can take different forms (e.g., family partnerships, limited liability companies, or spendthrift trusts), the objective, in all instances, is to create a level playing field for negotiating with a potential future creditor. The ethical planner will not assist a client who intends to engage in a fraudulent conveyance, regardless of the vehicle used. But there is no restriction on a client’s ability to transfer assets to avoid future unknown creditors.
In evaluating the appropriateness of using a foreign trust, the advisor must merely look to other common applications of foreign or nondomiciliary law. The most common analogy may be the use of Delaware law for corporate purposes even though no corporate activity is to be conducted in Delaware. Another example is the increased use of generationskipping trusts established under South Dakota law to avoid state income taxes and the rule against perpetuities.
By using offshore trusts, clients can obtain the necessary leverage to resolve disputes on more favorable terms than otherwise would be available under more traditional forms of planning. The true test of whether creditors can reach the assets of a properly established foreign trust occurs at the negotiating table. When a creditor realizes that the debtor has transferred her assets to an offshore trust, governed under laws that provide, in part, for nonrecognition of U.S. judgments, secrecy, and a set of almost insurmountable roadblocks,the probable result is a quick, cost-effective settlement in the defendant’s favor.
Offshore trusts created by U.S. residents are not intended to avoid income or estate taxes. A U.S. person who establishes a foreign trust is subject to the grantor trust rules if any beneficiary is a U.S. person.