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PrintThe Offshore Asset Protection Trust
An offshore asset protection trust represents an alternative to a domestic asset protection trust formed in Delaware or Alaska. Prior to 1997 and the enactment of new trust legislation in Delaware and Alaska, the offshore asset protection trust was the only real way to create an effective self-settled spendthrift trust.
Popular offshore jurisdictions for these trusts include Nevis, St. Kitts, the Cook Islands and the Bahamas. These jurisdictions have long recognized the validity of self-settled asset protection trusts.
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As with their domestic counterparts, self-settled offshore asset protection trusts must:
- be irrevocable
- have an independent trustee
- provide only for distributions that are subject to the discretion of the trustee
- have a spendthrift clause
However, offshore asset protection trusts can offer significant advantages over domestic asset protection trusts established in Delaware or Alaska. While the laws differ in each offshore jurisdiction, the Nevis trust statute is illustrative of these advantages.
Nevis law provides that an asset transfer can be challenged only by factually proving actual fraud. The broader grounds available to attack a transfer to a trust in Delaware are not available in Nevis. In this respect, the law in Nevis is similar to that found in the Alaska trust statute. However, Nevis places significant restrictions on the rights of a creditor that do not exist in Alaska or Delaware.
The general statute of limitations in Nevis for challenging transfers to the trust is two years, rather than the four years available in Alaska and Delaware.
Nevis will not recognize a foreign judgment. Instead, the creditor must file a new lawsuit in Nevis and prove actual fraud in the new case there. Further, the creditor must hire a Nevis-licensed attorney, and post a $25,000 bond to bring the suit. In contrast, in the United States, every state is compelled by the U.S. Constitution to recognize a sister state's judgment under the Full Faith and Credit Clause.
The fact that no international law compels a sovereign nation to accept the laws of a foreign government really represents the essence of an offshore asset protection trust: The offshore jurisdiction is simply immune from U.S. laws. While the trustor/beneficiary will be a resident of a U.S. state, and thus subject to U.S. court jurisdiction, the trustor/beneficiary cannot compel the offshore trustee to make a distribution, because all distributions are subject to the trustee's discretion. Thus, when a U.S. court orders the trustor/beneficiary to compel a distribution, the trustor/beneficiary can invoke what is termed the "impossibility" defense because of certain clauses contained in the trust. Until recently, this defense has been successful.
Moreover, once the new required lawsuit is filed in Nevis, the creditor must prove actual fraud by a "beyond a reasonable doubt" standard. In the United States, this standard applies only in criminal cases. It equates to the creditor establishing there is a more than 90 percent probability that his or her allegations are true. By contrast, in the U.S., the standard to win in a civil case by a creditor challenging an asset transfer is proof by a "preponderance of the evidence." This standard is much lower; the creditor needs only to establish that there is a more than a 50 percent probability that the allegations are true.
The intent of the U.S. criminal standard is to prevent, to the greatest extent possible, innocent people from being convicted of crimes they did not commit. The standard is based on the theory that it's better to let nine guilty people go free, than to convict one innocent person. To achieve that effect, it is acknowledged that the use of such a high standard also may serve to protect guilty persons. This is perceived as the cost of protecting the rights and liberty of innocent persons. The use of this standard in a Nevis offshore trust case will make it extremely difficult for a creditor to prevail in a claim.
Foreign jurisdictions do not require that any of the trust's assets be located there. This is in contrast to the Delaware and Alaska trust laws, which require that at least some assets (perhaps a bank account) be located there.
These issues should be examined when considering an offshore trust:
