Foreign Trusts

The term “foreign trust” means an irrevocable trust governed by the laws of a foreign jurisdiction. Foreign trusts are similar or even identical in most respects to the standard trusts that we all see every day. The main difference is the governing law. If the trust provides that it will be governed by the laws of California, then California trust law will apply. If the trust provides that it will be governed by the law of the Cayman Islands, then those laws will govern the trust. When we draft the trust we get to pick the governing law by simply drafting it into the trust.

Several foreign countries have enacted trust laws designed to assist debtors with asset protection. The laws of these countries go through every step possible to make it impossible for a plaintiff to pursue the assets of a foreign trust.

These foreign countries erect the following obstacles in the creditor’s path: (1) They will not recognize a legal judgment from any other country, including the U.S. This means that the judgment obtained against you by your creditor here in the U.S. is meaningless. (2) Because the creditor’s attorney is not licensed to practice law in that foreign country he would have to hire local attorneys to litigate for him, which is an expensive proposition. (3) The trustee of the foreign trust is a trust company that has no connections to the U.S., which means that a U.S. judge will not be able to force the trustee to distribute trust assets to the plaintiff.

The assets transferred to a foreign trust are usually liquid, such as bank accounts or brokerage accounts, but can also include intellectual property, interests in legal entities and other. The assets owned by the trust can be located anywhere in the world, including the U.S. or Europe. The assets are almost never held in the same country where the trust is set up. After all, who would want to keep their life-savings in a country like Vanuatu, which most Americans have never heard about.

Most of our client transfer the ownership of their assets to the foreign trust but keep the assets in the United States, with their existing banks or brokerage firms.

Often, foreign trusts are established in such a manner as to allow the client to be the only one who can know what assets are owned by the trust and to be the only one who can reach those assets. Even the trustee of the trust can be effectively prevented from having access to your assets. This way you don’t need to worry that anyone will run off with them.

Over the years foreign trusts have become a favorite planning technique for many debtors. These structures are perfectly legal, tax neutral (while they usually have to be disclosed to the IRS, they are treated in the same manner as living trusts – ignored for income tax purposes) and extremely effective in protecting assets from lawsuits.

It should be noted that many debtors believe that simply moving money to an offshore bank account will serve as sufficient protection from creditors. While the plaintiff may have a difficult time enforcing his judgment in a foreign country and levying on a foreign bank account, the debtor will never have a problem withdrawing the money if the account is directly in the doctor’s name. Consequently, the plaintiff may petition the court to direct you to withdraw the money from your foreign account and to pay it over to the plaintiff. With a foreign trust that can never be a problem, because you will not be the legal owner of the assets of the trust.

Posted in: Commonly Used Structures