Foreign trusts might conjure up thoughts of tax evasion and money laundering, but in reality, when created and maintained legally, they can be powerful and completely legitimate asset protection tools for clients against creditors.
Like ordinary trusts, foreign trusts transfer control of one person’s assets to someone else, which can help keep the money out of creditors’ hands. But because the trusts are outside the United States and the jurisdiction of American courts, anyone wishing to get at the money will likely have to go to greater lengths to navigate other countries’ legal and banking systems, creating a powerful incentive to settle.
“Once creditors realize the huge Mount Everests they would have to climb, and there are multiple Mount Everests, it’s just easier to settle for some miniscule amount,” says financial planner and certified public accountant Selwyn Gerber, principal at Gerber & Co. of Los Angeles, who explains that “miniscule” has meant “pennies on the dollar” for some of his clients.
BEFORE A HINT OF TROUBLE
The key to setting up any trust, foreign or domestic, for protection from creditors is that it has to be established well before a specific creditor or lawsuit enters the picture. Otherwise, it is a fraudulent transfer.
So it is crucial that planners discuss asset protection issues with clients at the same time as they discuss estate planning or insurance, says trusts and estates lawyer and CPA Gideon Rothschild, who is chairman of the trusts and estates and asset protection practices at Moses & Singer in New York.
If there is even any hint of trouble, it is already too late, he says.
“Clients don’t think about this on their own,” says Rothschild, who adds that planners, “need to raise awareness that there are strategies for clients to insulate themselves from risk.”
Foreign trusts could be a good choice for high- or ultrahigh-net-worth individuals who are likely to be sued in the normal course of business such as those in the construction industry, nursing home operators, or professionals such as doctors, lawyers, and, yes, even financial planners.
There are domestic trusts in just over a dozen states that offer enhanced protection from creditors, but many foreign countries offer more. It is possible to find countries that offer much shorter periods between when the trust is created and when it becomes immune from creditors.
Declaring bankruptcy in the United States often voids the shield of protection that a domestic trust offers from creditors, but, Rothschild says: “With an offshore trust the foreign court is not going to care what a U.S. court says because they’re not bound by the full faith and credit of the U.S. Constitution.”
CHECKS & BALANCES
But foreign trusts aren’t for everyone.
They won’t work to protect assets such as property or business equity, Rothschild says
“You really have to have cash,” he says.
The burden of tax and other regulatory disclosures is onerous, says Gerber, who warns that penalties for errors are enormous.
And because of increased U.S. reporting requirements, it is becoming more difficult to find foreign banks and firms that will take American cash.
But the biggest concern among clients is whether their money will be safe overseas, Gerber and Rothschild say.
Clients wonder whether there is a greater chance that a foreign trustee will invest it poorly or even steal it.
There are ways to set up checks and balances, such as requiring double signatures, Rothschild says.
Gerber suggests other, more complex approaches as well such as convertible or “morphing” trusts that begin as domestic trusts and can be changed into foreign ones.
If that sounds overly complicated, Gerber says that it is just a rational response to an environment where anyone can be sued at the drop of a hat.
“The reaction to an excessively litigious society is to create excessively protective devices to make sure that your assets are safeguarded,” he says.
Paul Hechinger is a New York-based freelance writer.