Spendthrift Provision in an Offshore Trust

A “Spendthrift Provision” in an offshore trust prohibits a beneficiary from selling, transferring or pledging her interest in the trust. The purpose of a spendthrift provision is to protect the beneficiary from creditors and to ensure the settlor’s original intent of asset protection.

A spendthrift provision can also be used in an offshore trust to protect trust distributions after the settlor has passed. For example, you might choose to convert required monthly distributions into discretionary distributions if a creditor sues a beneficiary, or he is otherwise under duress.

When applied to distributions, the discretionary component of a spendthrift provision rests with the trustee. For this reason, the trustee must be a licensed professional outside of the United States and outside the reach of U.S. courts. He should be independent, acting on the behalf of the settlor and in the best interest of the trust.

Most spendthrift clauses in offshore trusts are meant to protect the beneficiary’s interest from creditors. To make it impossible for a creditor to force the beneficiary to assign her share of trust distributions to pay a debt.

These provisions can also be used to protect the trust from the beneficiary. While rare, a spendthrift clause can stipulate that the beneficiary’s interest is void and terminated if he attempts to transfer it for enters bankruptcy. The beneficiary would lose all rights to the assets and future distributions if he were to sell or otherwise transfer the interest or declares bankruptcy.

This type of hardcore spendthrift clause can be helpful if the beneficiary is forced into bankruptcy. Any interest he has in an offshore trust will be included in his assets in a U.S. bankruptcy proceeding.

If a spendthrift clause terminates his interest when he enters bankruptcy, and passes it to his children (for example), the assets of the trust will be preserved.

For these, and many other reasons, an offshore trust is the most powerful asset protection tool available. A properly structured trust will protect your assets during your lifetime and the lifetimes of your heirs.

When drafted as a dynasty trust holding a single pay premium life insurance policy, the offshore trust can provide both asset protection and tax free growth, much like a massive offshore retirement plan. For more, see Offshore Dynasty Trusts Explained.

I hope you’ve found this article on spendthrift clauses in offshore trusts to be helpful. For more information on how to build a solid and compliant offshore structure, please contact our experts for more information. 

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