Overview of Domestic and Offshore Asset Protection Trusts

Tax | Ladidas Lumpkins | Oct 31, 2017

Having worked hard to secure a sound financial future for themselves and their loved ones, many individuals are motivated to protect their hard-earned assets from creditors. That’s especially true for high-income professionals and high-net-worth families, who are often targets of so-called “deep pockets” litigation, where the monetary motivations for plaintiffs are routinely stronger than their legal claims.

To safeguard assets for themselves and their intended beneficiaries, these individuals can take advantage of domestic or offshore asset protection trusts, which can shield assets from the reach of future creditors and predatory claims.

Ladidas Lumpkins, Director of Trusts & Estates at Prager Metis, recently delivered a detailed presentation on this topic to The Estate Planning Council of Nassau County. In brief, the following are key elements of these two asset protection vehicles:

Domestic Asset Protection Trusts
First established two decades ago by state lawmakers in Alaska, these “self-settled” trusts allow wealthy individuals and families to designate and protect certain assets from future creditors (in some states, this includes a spouse in the event of a divorce). Unlike partnerships, corporations or other entity structures, this protection device grants legal title of designated assets to a trustee, while ensuring that the assets are protected on behalf of named beneficiaries. While asset protection trusts are now available in 17 states, Alaska, Delaware, Nevada and Rhode Island offer some of the strongest benefits.

A key to the success of a domestic protection trust is clean, verifiable movement of assets. Even if a trust is properly structured, the assets can be at risk if a creditor can demonstrate that transfers into the trust were done to hinder, defraud or delay collection of a just claim. Under those circumstances, assets can be removed from the trust, making them more vulnerable to a creditor’s reach.

Offshore Asset Protection Trusts
While the structural components of offshore protection trusts are similar to their domestic cousins, the key difference is geography. By moving designated assets into an offshore trust location with debtor-friendly laws, individuals and families can shield against domestic creditors and U.S. courts. The Cook Islands (in the South Pacific), Nevis (in the Caribbean), and New Zealand offer exceptional protection to trust grantors and their beneficiaries.

While offshore trusts provide significant asset protection, they are not exempt from domestic taxation. U.S. grantors must report all income, deductions and credits on the owned portion of an offshore asset protection trust on their personal income tax returns, including any capital gains on property transferred into the regime. Further, a U.S. grantor can be subjected to severe and continuing penalties for failing to report to the Internal Revenue Service certain transactions with foreign trusts. This includes the creation of a foreign trust, transfers to a foreign trust, or receipt of distributions from a foreign trust.

For more details on asset protection trust strategies, contact Lumpkins at llumpkins@pragermetis.com or our trusts and estates team.


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