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  • Overview
  • US Domestic Trusts
  • Offshore Trusts
  • Compare

Making the choice between domestic versus offshore trusts is a difficult one and should be made based on your circumstances. Each has their pros and cons, and neither choice is always better than the other.

Trusts are often the crux of an asset protection plan, and with good reason. They allow the creation of a separate entity with unparalleled flexibility to accomplish the transfer of property and wealth, often with tax advantages to alternative methods like estate probate or outright gifts, as well as creditor protection if properly drafted.

Making the choice between keeping the trust domestic (i.e. subject to the governing law of a state in the USA, although perhaps not your own) or going offshore (i.e. subject to the governing law of a foreign country) is a choice to be made in consultation with your asset protection professional.

Here, we'd like to provide some information to help you have an informed consultation in making your choice.

Pros of a domestic trust:

1. You keep assets and fiduciaries close at hand.

A domestic trustee or other trust fiduciaries are accountable, can be local, and need not be a professional trustee.

2. You can use states with no state income tax on trust income.

Even though you may not live in a state that exempts trust income from taxation, other states do and you can choose to use a state that does for more favorable tax treatment. Granted, most states will require some tie to that state to get that tax treatment.

3. There's no stigma.

Although there shouldn't be a stigma to holding offshore accounts, there certainly is—think of storied Swiss bank accounts and offshore trusts in the Cayman Islands and the field day the press has with these approaches. (Courts look on these approaches with the same disfavor; decisions that torpedo failed asset protection plans are replete with phrases like 'tax haven.') A trust in Nevada or an LLC in Delaware sounds much more innocuous.

 

Cons of a domestic trust:

1. The laws are much less debtor-friendly.

The laws of the states, combined with the recognition of sister-state judgments, mean that creditors will have a more familiar legal system to work in to collect against the domestic trust.

2. Trust fiduciaries located domestically are within the courts' grasp.

A domestic court can exercise control over the people with control or discretion over the trust, and may choose to do so for the benefit of a creditor, including using their contempt powers against persons unwilling to bring money back to the court, if the court believes they have the power to do so.

3. For every state, there will be creditors' counsel.

America's full of lawyers, and the states favorable for domestic trusts are equally favorable for creditors' attorneys trying to break through those trusts.

Pros of an offshore trust:

1. The assets are far from creditors and US courts, geographically and legally.

Offshore jurisdictions used for asset protection havens generally have much more protection for debtors as against creditors than any US jurisdiction.

2. The court likely will not recognize a US judgment.

Virtually any foreign jurisdiction worth considering for an offshore trust would refuse to recognize a US judgment in favor of a creditor.

3. It takes the wind right out of a creditor's sails.

Although the creditor could hop on a boat to the Isle of Man, or Nevis, or the Caymans, or any other offshore jurisdiction to collect against the trust, it sure would take them a long time to get there.

 

Cons of an offshore trust:

1. You rely on foreign fiduciaries at additional expense.

Foreign trustees are generally required by the laws of offshore jurisdictions as a way to ensure employment and provide a cottage industry for the country. As with any monopoly/cartel, expect to pay a sizable premium.

2. A heavy stigma.

The mere fact that a trust is offshore should not be used as a basis for determining whether making such a trust was in an attempt to hinder, delay or defraud creditors and is not a statutory "badge of fraud" as set forth in most of the court decisions, but if you really think any US court would not consider this as a factor, then you have a particularly rosy view of the judicial system.

3. If you refuse to bring money back and the court thinks you can, the court may send you to what is, in essence, debtor's prison based on contempt.

This process is called repatriation, and debtors have languished in prison for refusing to bring the money back.

4. Extensive reporting requirements.

Because you are taxed on your citizenship, you must report all foreign accounts and be taxed on all income they receive. Draconian penalties and criminal prosecution exist for failures to do so.

 

  Domestic
Offshore
Expenses There are few expenses with domestic trusts.
There are many expenses involved with offshore trusts.
No/Little Stigma There is very little stigma for having domestic trusts.
There is strong stigma against offshore trusts.
Debtor-friendly Certain states have debtor-friendly rules for assets held in trusts from particular creditors.
Offshore jurisdictions have debtor-friendly rules for assets held in trusts from creditors.
Does depend on the state and the type of creditor—some US states are very favorable.
Free from US courts Domestic trusts are subject to US courts' reach.
Offshore trusts are usually not subject to US courts' reach.
Most offshore jurisdictions are good on this, but it is not a guarantee.
Few Reporting Requirements Domestic trusts have few reporting requirements.
Offshore trusts have several reporting requirements.
Leverage in Negotiating Settlements with Creditors Maybe
Yes, an offshore trust provides leverage in negotiating settlements with creditors
Some states are better than others.
No Income Tax From Jurisdiction Some states provide for no income tax on their trusts.
Offshore jurisdictions worth considering provide for no income tax to their trusts.
Some states would tax the trust separately, depending on how the trust is written.
Availability of Creditors' Counsel for the Creditor to Press Their Claim Every domestic trust will be in a state with creditors' counsel willing to press their claim.
Many offshore jurisdictions will have creditors' counsel, but it is not a guarantee.