The strongest form of international asset protection is the offshore irrevocable trust. An offshore irrevocable trust is set up by you (the settlor) to hold assets for the benefit of your heirs. While you can’t make changes to the offshore irrevocable trust during your lifetime, it is sometimes possible to retain control of the assets as the manager of the trust.
Here’s how to use an offshore irrevocable trust to protect your assets from future civil creditors.
What makes an offshore trust irrevocable is that, once you file it, the terms are set and can’t be changed. You will have great flexibility during the planning stage, but once it’s filed you’re locked in.
All offshore trusts set up as asset protection structures are irrevocable. If you use a revocable trust, a US court can force you to change or dissolve the structure. A revocable trust doesn’t provide any protection because you have the power to change it and thus the power to dissolve it and pay a creditor.
Another way to say this is that the “irrevocable” component of an offshore irrevocable trust makes it impossible for you to change the trust. Therefore, a US court to force you to change the trust and pay a creditor. This impossibility defense is the foundation of the offshore asset protection trust.
Note that the impossibility defense is only available to protect your assets from future civil creditors. An offshore trust is not meant to protect you from government creditors like the IRS and SEC. See The Law of Fraudulent Transfer in Offshore Trusts
Likewise, an offshore irrevocable trust is not meant to protect your assets from existing or reasonably anticipated creditors. If you injure someone with your car today, you can’t form and fund an irrevocable trust tomorrow to protect your money from that creditor. For more, see What assets can I move offshore?
Once the offshore irrevocable trust is set up and funded, there are two ways to manage the assets.
- For maximum protection, hire a professional trustee to manage the assets of the trust.
- For maximum control, set up an offshore LLC. You’re owner of the LLC and the LLC is the manager of your offshore irrevocable trust.
If you hire an independent trustee, you should provide them detailed instructions on how you want the trust managed. The trustee is required to follow the terms of the trust, and your “letter of wishes,” which will govern things like how the assets will be invested and who is entitled to receive distributions from the trust either now or in the future.
If you form an offshore LLC management company you can manage the assets of the trust for the benefit of your heirs. You shouldn’t borrow against the trust and should always do what’s in the best interest of the trust. Make decisions with the heirs in mind.
A letter of wishes is simply a letter you write and lodge with the trustee. It can be changed at any time and works in conjunction with the trust document. The trust handles things like impossibility, Jones clause, flight clause, generation skipping and dynasty trust components (rule against perpetuities), community property issues, etc.
The trust describes the beneficiaries – such as, “the heirs and assigns of Bob Smith.” Then the letter of wishes provides the details of how you would like to distribute your assets – “the house to my daughter Sally and the bank accounts to my son Bob.” The benefit of the letter of wishes is that it can easily be changed.
There are several types of offshore irrevocable trusts used in estate planning.
For example, the offshore irrevocable life insurance trust is a foreign trust designed to hold life insurance policies. By having the policy owned by a trust rather than in your own name, you’ll avoid having the death benefit included in your estate. You can defer tax on investments in the trust, only paying the IRS when you close the trust or take a distribution. If you hold the assets until your death, they pass tax free to your beneficiaries (considering the step up in basis).
Also, an offshore dynasty trust allows you to opt out of the US rule against perpetuities. Designed to last for multiple generations, dynasty trusts minimize estate tax and make it possible to hold and manage wealth for decades or even centuries into the future.
You can also create an offshore irrevocable spendthrift trust to hold property for a loved one who isn’t financially responsible, ensuring that money will be available when needed. In most cases, the trust will distribute a fixed amount of money per month to the beneficiary and prohibit him or his creditors from accessing the principal.
Also, spendthrift trusts can be designed to help those who are eligible for government assistance, providing supplemental financial support without making the beneficiary ineligible to receive badly needed benefits from state or federal government programs.
I hope you’ve found this article on offshore irrevocable trusts to be helpful. For more information, and for a free consultation on setting up an international asset protection structure, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.