Protecting your assets through offshore trusts

We’ve already talked a lot about how and where to transfer your residence, and the States with the most attractive conditions for setting up companies in (in fact, you can even download our free e-book on the topic). A topic we haven’t discussed so far is offshore trusts and how to use them to protect your assets.

The concept of trusts carries a lot of weight in English culture, but outside the UK, few people know exactly what they refer to or take them into consideration as a possible option. This may be because only people with a lot of resources use them, or simply because the majority don’t understand their utility.

Trusts are extremely important for international politics. According to unconfirmed sources (private contacts in Brussels), Angela Merkel, the German Chancellor, intended to introduce a public register for trusts (which would completely negate their purpose, i.e. their anonymity). The rumour is that for David Cameron, the then British Prime Minister, this was reason enough to trigger Brexit.

British trusts have billions of euros in assets, and eliminating the anonymity of this kind of structure would certainly have severe consequences for a lot of people.

Of course, this is just another reason to dedicate today’s article to trust structures. It’s a very complex topic, so I’ll try to present a general yet practical perspective.

So what actually is a trust?

A trust is a fiduciary relationship where one party, known as the trustor, gives another party, known as the trustee, property rights over a group of assets, to the benefit of a third party, the beneficiary.

A trust is a contract by which a person allocates certain assets to a particular legal end, entrusting the fulfilment of this end to a fiduciary institution at all companies.

What does asset protection consist of?

Asset protection depends on a number of factors. Firstly, there is confidentiality, an essential element to prevent problems. Secondly, you also need the right structure to keep your assets intact.

Depending on your country of residence, a trust can cause you problems with international tax laws. In certain countries, it’s mandatory to inform the tax office of the existence of your trust (especially if it is located in an offshore jurisdiction), and they can also entail problems with respect to tax law (the function of a trust isn’t always recognised by the State, which brings a certain level of legal uncertainty).

Normally, everything that falls under a person’s property is considered to be an asset. This property has a specific value and can be changed into cash. Besides money in the strictest sense, it can also be a question of shares, bonds, or similar financial instruments. Similarly, real estate, vehicles, art, precious metals, and many more objects can be considered as assets.

We can therefore define asset protection as protection against third parties who may have an interest in these assets. For example, a court can seize assets due to unpaid debts, poor legal advice, or divorce cases.

Defining the common roles of asset protectors

You have various structures at your disposal when protecting your assets. The most famous is called a trust. To better understand how trusts work, we’ll try to clarify a few concepts.

With trusts intended for asset protection (which, as we mentioned, are similar to a fiduciary foundation), there are five key figures:

• The founder of the trust (trustor)
• The debtor
• The creditor
• The trustee
• The economic beneficiary

The founder of a trust can establish it using the structure they most prefer. The founder can be one or several people or organisations, but is usually just one person.

This founder is often also the debtor, because they owe money to someone in case of conflict.

The person or entity to whom the debtor owes money is known as the creditor.

The structure or trust itself belongs to a trustee, who is in charge of managing it. This trustee can be a person, several people, a company, or a foundation. Whatever the case may be, they must be licensed and regulated in their country of residence. Trustees are often not only required to reside in the country where they are licensed, but also have to have nationality there.

Finally, trusts have one or several economic beneficiaries that profit from the assets of the trust. For example, parents can create a trust to pay their children specific sums at a pre-determined point. This can happen when they turn 18, or when these children have their own descendants.

In theory, a trust can be funded by someone who will later be its economic beneficiary. However, in many cases, this strategy doesn’t have all the advantages we tend to look for in asset protection.

How to put asset protection into practice

Assets can be protected using different structures. Besides trusts, you can use so-called Limited Liability Companies in various jurisdictions, or often a combination of the two. Here, the most attractive options are the Cook Islands in the Pacific and Nevis in the Caribbean, which thanks to their special legislation, allow for a very advantageous degree of asset protection.

For example, on Nevis, creditors can deposit a guarantee of $200,000 before a court for their lawsuit to be examined, and obviously, very few people are ready to do this if they want to sue a Nevis LLC.

In general, for these structures to be created successfully, it’s necessary for the transfer of assets to be sufficiently distant from any circumstances that could lead to their seizure. An example of this could be an imminent divorce.

In this case, the spouse has to transfer a part of their assets to an irrevocable, well-structured trust, at a point in time well before the divorce. In theory, from then on, the other spouse would be unable to access these assets, because they ultimately belong to another party.

The assets will now belong to a trustee who probably resides in a far-away country. A court decision can have no kind of effect on this trustee. In this way, the debtor has practically no assets at their disposal to pay the creditor.

Fraudulent transfer of assets

The intent to transfer assets can be considered fraudulent if it is attempted after a relevant event has occurred, or when it is about to occur.

Although the laws vary in this regard, it’s generally illegal to consciously evade economic duties through this type of structure, in full knowledge that there are imminent proceedings that could have negative consequences for the trustee.

This means that a certain period of time must elapse before the transfer of wealth to the trustee and the attempted seizure of assets.  In most jurisdictions, this period is between 4 and 10 years. However, it is only 2 years in the Cook Islands and Nevis.

Coercion and countermeasures

In theory, a court could force the founder of a trust (the trustor) to hand over their assets, but this doesn’t work in practice.

Let’s imagine we have a creditor whose debtor is unable to pay them because all their assets belong to a trustee, who in turn operates in a jurisdiction where assets carry strong protection.

The only option for the creditor would be to appeal to the courts, and if everything goes well, obtain an enforcement order that requires the founder of the trust to instruct the fiduciary person or entity to transfer the assets, either to themselves (the founder) or to the economic beneficiaries.

The trustee would then reject this petition, because the trust is irrevocable. The economic beneficiaries would likewise receive no payment, because the founder of the trust is being coerced and the assets would be practically frozen.

However, the creditor would still have two countermeasures at their disposal. They can appeal to the court in the jurisdiction where the trust originated, or let the proceedings go on forever. Appealing to the court in the jurisdiction where the trust is located is generally a waste of time, especially in the case of Nevis. The creditor can make a guarantee deposit of $200,000 there, solely for their appeal to be examined, and they rarely have any chance of success.

If the creditor has sufficient economic means, they can at best permanently attack the trust and take advantage of the coercion clause. In this way, the founder of the trust wouldn’t be able to order the trustee to transfer the assets to the economic beneficiaries.

As long as the founder of the trust isn’t in dire financial straits, they will have no reason to worry about this kind of attack.

It’s important to mention that this practical example is largely theoretical, because there are few cases of this occurring, which makes it difficult to draw any binding conclusions.

Most jurisdictions have no experience with this kind of situation, because so far, nobody has dared to file a lawsuit against their trusts.

It’s also important to know that there is no standard solution. It’s essential that the trust is well-structured, which involves considering the places where the founder of the trust, the trustee, and the economic beneficiaries reside, as well as the choice of offshore bank account and the administration of economic resources. The smallest detail could have huge consequences.

Having the right offshore bank account linked to the trust is vital.

Because your life belongs to you!