One of the many asset protection strategies that is very highly publicized and has gained a lot of popularity is to create an asset protection structure that involves setting up trusts or various corporations/structures offshore. This approach has long been viewed as a beneficial strategy by many generic (cut and paste) asset protection plans. While there are many benefits to this structure, there are many problems as well, so it must be properly analyzed to determine whether it is the right move for you.
The most common offshore structure is an offshore asset protection trust which typically involves setting up a trust in a jurisdiction that is not likely to enforce or give full faith and credit to a US judgment against assets in that country’s jurisdiction. In addition, this jurisdiction may have very loose laws relating to fraudulent transfers of property and assets to avoid paying creditors so that assets can be shifted at the last minute, in some cases even after litigation in the United States has begun.
Typically these types of trusts have an additional component that does not exist in the United States, called a “Trust Protector.” The Protector’s job is an additional level of oversight. As it relates to United States asset protection, it involves rejecting any demands or requests to release money that is deemed to have been made under duress, which includes judgments and court orders issued by a United States court.
Traditionally, the belief was that this would prevent a court from issuing a contempt citation by raising the “impossibility of performance” defence. This defence would prevent the court from taking action against the individual for failing to return funds from another jurisdiction. However, in light of subsequent case law and decisions, judges have taken a position that this is no longer sufficient and that there needs to be a level of believability as to why a United States citizen would suddenly shift their assets and control of their money or property into the hands of a foreign third-party that has no relation to anything that this United States citizen holds or does business with.
Where this structure might fail, it also succeeds in a sense, if set up properly with a proper client. Where a client has assets or overseas business interests, the purpose of setting up an offshore trust could make sense and be justified to a court. This then creates a different situation, making it very beneficial for a client to take advantage of any such outside jurisdiction, that would give rise to a potential international asset protection plan that would pass scrutiny. However, like all asset protection strategies, how, when and why the assets are transferred to the structure, is of paramount importance.
Clients need to be extremely cautious of one-size-fits-all asset protection plans, especially involving overseas transactions which are not justified, because one of the remedies of a contempt of court citation could involve jail time until the citation is complied with.