Going offshore involves asset protection and financial planning outside the jurisdiction of US courts. Notably, there are many advantages, the most popular being that offshore jurisdictions do not enforce US judgments. This is certainly a feature that one should look for when engaging in pre-offshore asset protection due diligence. However, it would not be wise to base your decision solely on the lure of a jurisdiction that routinely ignores US judgments.
That said, proper offshore planning requires an analysis of the asset protection legislation, experience and debtor-friendly case law originating from that jurisdiction. Ideally, the following is a non-inclusive list of the factors most beneficial to debtors in select offshore jurisdictions:
- US judgments not easily enforced;
- US discovery orders routinely ignored;
- Efforts to recover assets must be started, again, in the offshore jurisdiction;
- Local lawyers must be retained and must be paid by the hour;
- Higher burden of proof in proving a fraudulent transfer;
- Shortened statute of limitations for bringing suit;
- Creditors must post bonds — in the thousands of dollars — to even proceed with the lawsuit; and
- Confidentiality laws that make it a crime for someone to disclose your personal information.
Offshore jurisdictions are usually small, island nations, such as Nevis or the Cook Islands, that have built their economy on attracting the business of those wanting to protect their assets. Therefore, these countries have a personal stake in ensuring that your assets are safe from the grasp of creditors, and routinely strengthen their laws and pass legislation most favorable to debtors.
Offshore Legal Entities
The offshore limited liability company, or LLC, is particularly drafted with asset protection in mind. Located outside the US jurisdiction, foreign LLCs are used to strengthen an asset protection plan by adding another barrier creditors would have to confront when trying to collect on the client’s assets. They are also not subject to the jurisdiction of the US court system and can even serve as a low cost alternative to an offshore trust. However, these entities work best when combined with other aspects of an asset protection plan.
The charging order exclusive remedy stands as a bulwark against external creditor attack. Charging orders are essentially a lien on the member’s LLC interest that allow a creditor to receive distributions that would otherwise go to a member. Note, the charging order only entitles the creditor to an economic interest in the distributions and not in the management and voting rights of the LLC members. Thus, simply voting to forgo distributions will keep the money out of the creditor’s hands.
Moreover, the charging order is also the exclusive remedy. Thus, foreclosing on a debtor’s interest or having the assets directly seized is prohibited by law. Even assuming a creditor succeeds in getting a charging order (and almost certainly when they foreclose on it, if possible), the creditor may suffer adverse tax consequences, and ultimately end up paying taxes on distributions that were never distributed.
Of course, enforcing the charging order on an offshore business entity with an offshore manager is daunting for a creditor and difficult to do. Foreign LLC statutes also restrict the time frame from which to bring a lawsuit and limit the statue of limitations on fraudulent transfer claims. All in all, the charging order exclusive remedy is a valuable tool that favorable LLC jurisdictions, such as Nevis, ensure is available to debtors.
Offshore trusts are the bastion of asset protection planning. As with foreign LLCs, they are not subject to the strong-arm of the US court system and remain, if properly structured, inherently more protective than any other asset protection vehicle. Of course, an offshore trust that is used in combination with limited partnerships, LLCs, and other foreign and domestic structures is recommended.
The concept of using trusts to protect your assets has been around for hundreds of years. It is well settled in Common Law jurisdictions that trusts are used to defeat the claims of creditors, or better said, used a mechanism to preserve your financial future. Modern trust law, notably from the Cook Islands, has taken it a step further to allow for the concept of self settled spendthrift trusts.
In other words, a person settling a trust for their own benefit is also allowed to use the trust to protect their assets. Note, this principle is contrary to the public policy of many US states and is subject to a great deal of criticism by the US court system. Either way, creditor’s balk at the mention of a self settled spendthrift trust and know full well that chances of recovering trust assets are near impossible.
First, the foreign trustee, as with the foreign LLC’s business manager, is not subject to US jurisdiction. Thus, any attempt at judicially dissolving the trust or ordering the trustee to turn over assets must originate in the offshore jurisdiction. In addition, offshore trust documents, if drafted properly, should include both duress and flight clauses.
The trustee is in charge of administering the trust. The settlor, however, can be given the power to advise such trustee on how the trust is administered. Thus, if the settlor is ordered by a court to repatriate trust assets, and the settlor subsequently gives that instruction to the trustee, a duress provision will allow the trustee to ignore the settlor, as his recommendation was given under duress.
The flight clause is not dissimilar in principle. It allows the trustee to change the situs jurisdiction of the trust, i.e. change its location, to further preserve trust assets. For example, if a creditor brought an action to recover assets in the offshore jurisdiction, the trustee, in efforts to preserve the integrity of the trust, could transfer it to another country. The creditor would then have to bring another lawsuit and expend more money in its pursuit of trusts assets. Thus, your chances at settling (and maybe even the creditor walking way) increase substantially.
The advantages of offshore trusts are unmatched in the asset protection world. However, the settlor does have to cede significant control over the assets and put their faith in an offshore trust company; this can be uncomfortable for some. Lastly, creditors will use the US court system — as pursuing assets directly against the trust is near fruitless — to coerce compliance by asking the judge to hold you in contempt of court; this also, is uncomfortable for some. A properly structured offshore trust, though, will provide you with defenses should a creditor get creative in his arguments for contempt, most notably, the impossibility defense.
Offshore Bank Accounts
Lets start by taking the elephant out of the room: as long as you remain compliant with the IRS, holding funds in an offshore bank account is completely legal. In fact, due to recent changes in US tax law, opening an offshore bank account can be quite difficult. Thus, it is worth using an attorney with knowledge on the matter to apply for the account on your behalf.
First, offshore banks conduct a rigorous interview process that can take a few weeks. Some require personal interviews while for others, a video conference would suffice. Offshore banks have reputations to keep, and avoiding potential “red flag” clients involves extensive due diligence on their part.
Indeed, your asset protection entities and trusts can use offshore bank accounts just as a natural person could. It is imperative, then, that the financial institution you choose does not have any US branches. This is because a US court could exert pressure on the bank’s US branch and compel it to turn over debtor documents or money. For example, the US branch of a Canadian bank was fined $25,000.00 a day until it turned over documents, pursuant to a subpoena, from other branches of the bank located outside the United States. In acquiesced after $1.8 million in fines accrued.
In sum, it would not be wise to have your Nevis LLC, Cook Islands trust, or other offshore structure hold funds in a US bank account or offshore, in a foreign bank with a US branch.