How an Offshore Trust Works

An offshore trust is a legal arrangement that allows an individual to transfer assets to a foreign country to protect them from creditors.

This type of trust is a popular protection tool because the assets and trustee are situated beyond the legal reach of U.S. state and federal civil courts.

U.S. creditors do not have a way to levy on the offshore trust assets.

What Is an Offshore Trust?

An offshore trust uses a foreign trustee company to hold legal title to the property for your benefit. It has a settlor, a trustee, and a beneficiary.

A settlor establishes and transfers assets into the trust and determines the terms and conditions under which the trust will operate.

The trustee is the person appointed by the settlor to manage and administer the trust’s assets. 

An offshore trust beneficiary is an individual designated to benefit from the assets held in the trust. In most cases, the settlor is the primary beneficiary.

Requirements for Offshore Trusts

To be a valid asset protection trust, an offshore trust must comply with the laws of the foreign country. Here is a summary of the requirements:

1. The trust must be irrevocable.
2. It must have a foreign trustee.
3. The trust must own the assets either directly or through a foreign entity
4. The trust must provide the trustee the discretion to withhold payment from the beneficiary.
5. The trust protector cannot be located in the United States.

Benefits of an Offshore Trust

One of the primary reasons people establish offshore trusts is for asset protection. When assets are transferred to an offshore trust, they are legally owned by the trustee rather than the settlor. Since the assets are no longer owned by the settlor, they are generally protected from claims by the settlor’s creditors.

Another benefit is that offshore trusts include anti-duress clauses. These clauses prevent trustees from making distributions to beneficiaries if the beneficiary is under duress, such as being subject to a court order.

How Do You Set Up an Offshore Trust?

Here are the steps to form an offshore trust:

1. Choose a jurisdiction. The Cook Islands is the best offshore trust jurisdiction for most people.
2. Select a trustee. A U.S. citizen must select a person or company based in a foreign trust jurisdiction to serve as a trustee of their offshore trust.
3. Fill out the Know Your Customer documents. All offshore trustee companies perform a background check (a “know your customer” inquiry) on settlors and beneficiaries of the offshore trust. 
4. Draft and sign the trust document. It be customized based on your asset protection and estate planning goals.
5. Open a bank or brokerage account. An offshore trust should have financial accounts at foreign banks.
6. Transfer assets to the trust. This is called funding the trust.

How Are Offshore Trusts Taxed?

An offshore trust will not reduce or avoid U.S. income taxation. he grantor must pay the tax on offshore tax income.

What’s the Best Place to Form an Offshore Trust?

The Cook Islands is the best place to form an offshore trust. Other offshore trust jurisdictions include Nevis, the West Indies, and Hungary. Each of these countries has trust laws favorable for offshore asset protection.

Can an Offshore Trust Protect Real Estate?

An offshore trust can protect real estate by using equity stripping. Equity stripping is a financial arrangement that “strips” the equity from the property. In an equity stripping plan, the property’s net value, or equity, is encumbered by a foreign lender that acquires rights in the property that are superior to the interest of subsequent judgment creditors.

How Much Does It Cost to Set Up an Offshore Trust?

An offshore trust costs between $15,000 and $30,000. The fee includes the first year of trustee expenses.

What If You Already Have a Judgment?

You can still set up an offshore trust if you already have a judgment. The trust will include something called a Jones clause, which means that the trustee will not defend against a claim by the creditor against the offshore trustee. But that claim must still be brought in the Cook Islands, which is financially prohibitive for most creditors.

How Long Does It Take to Start an Offshore Trust?

About 1-2 months from start to finish. You must file an application with the offshore trustee and pass a background check. Then, you’ll sign the trust agreement and transfer assets to the trust.