Trusts 101 for physicians part 11 – Offshore trusts

Offshore asset protection trusts for physicians can provide an exceptionally high level of protection and predictability. Like with any complex legal structure, there are some important details and compliance issues to be aware of to do it right.Here’s a first look at what you need to know.

Our last installment in an ongoing series on trust basics for doctors covered some of the basics of domestic asset protection trusts (DAPTs). This week we start a look at the vastly misunderstood world of ‘offshore asset protection trusts’ or OAPTS, also often referred to ‘international asset protection trusts’ or or IAPTs.

Contrary to popular lore, using offshore trusts and banks does not typically involve Bond girls moving briefcases full of money to secret accounts in beachside resorts on private jets, at least not if you are doing it legally. It is a relatively boring paperwork and compliance heavy process that ensures compliance with U.S. tax law, the laws of the offshore jurisdiction and the compliance burdens of the custodial banks and trust companies involved, many of which are meant to protect you.

What Makes Offshore Trusts Effective?

• The trustee of the trust is outside the jurisdiction of the U.S. Court system and can’t be ordered to pay a judgment from a “foreign” U.S. court
• U.S. court judgements are not valid or enforceable in the best trust jurisdictions
• The assets themselves are held by banks outside the jurisdiction of the U.S. court system
• The laws of the trust jurisdictions have short statutes of limitation, may prohibit distributions to judgment creditors, distributions made under duress and strictly limit any available cause of action to a fraudulent conveyance claim
• Pursuing an offshore trust requires significant time, expense and specially qualified legal counsel

Separating Fact from Fiction - Important Basics to Know

• It is completely legal for a U.S. taxpayer to use complaint offshore trusts and bank accounts
• OAPTs are not “secret”. If you are questioned about their existence or asked to list your financial assets in a formal legal proceeding like a deposition, debtor’s exam, in response to written interrogatories, etc. you must disclose them. NOTE: Disclosure does not make a properly timed and structured OAPT any less secure.
• WARNING: Any strategy, domestic or offshore, that relies on “secrecy”, will fail. Such strategies rely on several fatal flaws including hoping that no one will find out about the assets or ask you about them, your willingness to lie under oath and commit perjury if you are asked about them and probably, your willingness to commit tax evasion, in an effort to conceal the existence of the trust.
• OAPTs are not tax free. U.S. taxpayers must report the existence of any offshore trust or bank account to the I.R.S. and pay taxes on any profits made offshore. Although painted in a negative light in recent popular lore because of issues with large numbers of tax evaders (many of who are American doctors) the defensive value of the IAPT remains intact. The simple mistake made by most of the people you read about having trouble with offshore accounts can be reduced to simply failing to report the accounts as the law requires. You do have a well-established right to have offshore bank accounts and trusts and the event of moving money to a foreign bank account owned by a trust is typically not taxable in and of itself.
• Merely having money in an offshore bank, titled in any of the following ways, is not considered the most effective asset protection available by most experienced practitioners, (but it admittedly does provide additional distance, expense and delay for plaintiffs).
  • An offshore account in your own name
  • An offshore account in a revocable trust
  • An offshore account held by an LLC or IBC (international business corporation) you control or controlled by an agent you direct
  • An account held by a “private offshore foundation” that you control directly or indirectly
• Using trustees and banks with a U.S. presence is not effective offshore asset protection. If the U.S. court system has or can get jurisdiction over either the trustee or the bank holding the trust assets, it will do so to enforce a judgement. As such, using banks like Credit Suisse and UBS, that have U.S. offices, is not recommended.

Our next installment will provide additional detail on OAPTs, including when they fail.