Asset protection is an important part of any financial plan. This is especially true for high-net-worth individuals and those in professions which bring a high risk of lawsuits. Offshore asset protection trusts (OAPTs) have been a popular tool for protecting one’s wealth for over 40 years. These structures are created in protective offshore jurisdictions, such as the Cook Islands or Nevis, and provide protection against unknown future creditors as well as existing potential creditors who fail to act within strict limitation periods. OAPTs also provide other benefits such as access to more global wealth advisory services and international investments, and are frequently operated in tandem with Â a company owned by the trust which allows for more flexibility in managing the assets within the trust fund. The trust is established and managed by a professional trustee situated in the same jurisdiction as the trust.
The primary benefit of an OAPT lies in the purpose built legislation of the offshore jurisdiction used. For example, Cook Islands and Nevis trust legislation contains a number of highly protective provisions. Foreign judgements aren’t recognized, so any creditor wishing to make a claim against a Cook Islands or Nevis trust must commence proceedings in a local court, pay legal fees up front and prove intent to defraud beyond reasonable doubt. This is a lengthy and costly process for any creditor to pursue, particularly in Nevis where a US$100,000 bond must also be paid into court in order to commence proceedings. Furthermore, any assets placed into a Cook Islands or Nevis trust before a creditor’s cause of action exists cannot be accessed by that creditor in any circumstances.
For US persons seeking asset protection, a domestic asset protection trust (DAPT) is often regarded as a favorable option. DAPTs were first introduced by Alaska in 1997 and are perceived as providing familiarity, convenience and simpler tax reporting at a lower price than OAPTs. DAPTs can be self-settled spendthrift trusts and enjoy certain protections enshrined in state law. However, this convenience comes at a significant cost: DAPTs are often much less effective than their offshore counterparts.
One of the more significant disadvantages of DAPTs is that they are only recognized by just over one third of US states. This obviously limits their usefulness right from the start. Even in states that do recognize them, the level of protection offered can be quite low compared to OAPTs, with longer statutes of limitations in place and more circumstances in which a transfer to a DAPT can be adjudged as fraudulent.
While in theory a non-DAPT state is required to give full faith and credit to the laws of other states and recognize a DAPT, in practice this is often not the case. Courts in non-DAPT states have declined to recognize a DAPT on public policy grounds, for example, or where a settlor/beneficiary does not reside in the DAPT state. In addition, a creditor who obtains a judgment in a non-DAPT state can sometimes successfully enforce that judgment in the DAPT state under the full faith and credit doctrine. If property or other assets are held across several states, this leads to doubts as to which state law is expected to be applied. What happens to your Californian assets ‘protected’ by a Nevada DAPT, for example, if a Californian court decides it can exercise jurisdiction over those assets, the answer is left to the discretion of the court; a pricy gamble to say the least. In addition, DAPTs and their trustees are at all times subject to US federal law and must comply with any federal court order, even if this contravenes the terms of the trust or the DAPT legislation in the state in question.
While most OAPT jurisdictions have a small but important body of case law in which courts have upheld the laws of those jurisdictions, DAPT case law precedent shows the questionable utility of such structures and their asset protection shortcomings under court scrutiny. The cases of Toni I Trust v Wacker, Dahl v Dahl and In re: Huber are prime examples where DAPTs have failed. With such a poorly established case-law history, any form of litigation is likely to entice alternative interpretations which of course is of concern when such interpretations affect your livelihood.
In conclusion, a properly established and managed offshore trust is without a doubt a premium structure, thanks to the almost bulletproof legal framework of jurisdictions such as the Cook Islands or Nevis. An offshore asset protection structure is the most proven strategy to preserve and protect your wealth and allow your assets to benefit what you hold dearest, be it future generations, businesses or philanthropic causes.
Southpac Group offers offshore trusts and associated entities through its affiliated trustee companies in the Cook Islands and Nevis. We work with you to establish a structure that works with you and for you in jurisdictions that built the offshore asset protection industry into what it is today. Contact us today to request an introduction from a member of our team who will walk you through your asset protection journey.
Disclaimer: the above contains the opinion of the author and is for information purposes only. It is not intended to constitute legal or tax advice. If you are considering establishing an offshore structure, please consult with legal and tax professionals in your jurisdictions of residence, domicile and tax residence beforehand.