Offshore Trusts and U.S. Bankruptcy

Offshore trusts are vulnerable in bankruptcy. An offshore asset protection trust will protect your assets from a civil creditor, but not from the bankruptcy court. An offshore trust is disregarded by the U.S. bankruptcy court and its assets are included in the settlor’s / debtor’s net worth.

When a debtor files for bankruptcy, he or she is responsible to surrender assets wherever held. U.S. judge.

One reason for this is that the bankruptcy court is a federal court rather than a state court. In other words, a bankruptcy court has unlimited nationwide and international jurisdiction over assets under federal law. State courts have limited jurisdiction over assets outside of their borders.

Another reason is that the debtor typically chooses to avail himself of the bankruptcy court. He is rarely forced into bankruptcy, but rather seeks the protection of the court. Allowing him to benefit from both the offshore trust and the U.S. bankruptcy laws would be akin to double dipping and would thwart the purpose of the bankruptcy proceeding.

As to the impossibility defense, the bankruptcy court will disregard any self-created impossibility. The settlor chose to send their assets out of the United States and thus created the alleged impossibility.

To put this another way, by funding an offshore asset protection trust, you’re moving assets out of the reach of future civil creditors, but not the bankruptcy court. If you’re using an offshore trust to protect your assets, you may not combine this with the benefits of the U.S. bankruptcy court.

The bottom line is that a bankruptcy court will compel the debtor to turn over all of his or her assets wherever located throughout the world. Assets held in an asset protection trust belong to the settlor for the purpose of bankruptcy.

I should point out that the same goes for the Internal Revenue Service. If the settlor is a U.S. person, an offshore trust will not reduce her taxes. All income earned in the offshore trust is reported on the settlor’s U.S. tax return and taxable. Likewise, assets held in an asset protection trust belong to the settlor for the purpose of paying tax debts.

This article is focused on offshore trusts in bankruptcy. For a more general posts on the limitations of international trusts, see:

• The Law of Fraudulent Transfer in Offshore Trusts
• Don’t Believe the Media Hype Around Offshore Asset Protection Trusts

For these reasons, you should hire a professional from your home country to plan your offshore strategy and manage any risks that arise thereafter. Only an expert in U.S. law can properly build an offshore asset protection structure to protect you from U.S. creditors.

I hope this article on offshore asset protection trusts in bankruptcy was helpful. Please contact me at info@premieroffshore.com for assistance in forming an offshore trust or for a referral to an attorney who can assist you defend your existing international structure.

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