ONSHORE vs. OFFSHORE TRUSTS

Onshore asset protective trusts are heavily promoted today. But are they reliable compared to offshore, or international trusts? What are the risks? And how are the U.S. courts treating them when challenged?

Today we jump right in and ask…..

Onshore Trust vs. Offshore Trusts – which are better?

Some local legal advisers suggest that an onshore trust used for asset protection is as good, or even better, than an offshore, or international trust.  We use the term “onshore trust” for those trusts registered in a U.S. state (e.g. Alaska or Delaware, or in a dozen other states) instead of outside the U.S. (e.g. Cook Islands, Nevis, or in some forty other venues) for purposes of protecting assets.

Our office can register a trust in any domestic or foreign venue. We are not beholden to any trust company or jurisdiction. It therefore becomes a matter of measuring the statutory and common law legal benefits offered in each venue, and then weighing up the pluses and minuses. Thus, understanding the options, and weighing the pros and cons, balanced against individual’s needs and objectives, reveals the good, better, and best places to register a trust.

I began authoring articles discussing the concerns associated with onshore trusts from almost day one. For example, the shortcomings of onshore trusts were expressed in 2000, in my first edition of How to Legally Protect Your Assets, and again in 2007, in Offshore Living & Investing, first edition. Subsequent second edition books continued expressing these concerns. 

And if you visit our web site at Past Articles, a newsletter remains posted written in 2009, titled Offshore vs. Onshore Asset Protection discussing these same issues. Another article, Offshore Myths & Controlling Assets, can also found at our web site.

Legal issues arising from new laws generally take time to rear their ugly head. Early on I was viewing the onshore shortcomings through the front windscreen, but the court system deals with the issues through the rear window, or after the fact. In this case, onshore trust laws first became law, marketers and promoters then offered the product and their services, some clients bought into the onshore trusts, and only then over ensuing years, ‘stuff happened’ that challenged the legitimacy of the laws and the planning.

The legal process can literally take years – or a decade or longer - before resolving a single issue, for better or for worse, for an individual’s onshore trust.

But now a number of onshore asset protection trust cases have been grinding through the legal system. In 2011 and 2012 two cases worthy of note were published creating considerable alarm for onshore planning. These cases are consistent with the initial concerns I expressed more than a decade ago. And they are only two of the many examples of how onshore trusts are a great concern when used for asset protection purposes.

While I have never supported limiting asset protect planning “onshore,” it still confirms a gradual shift in the trend away from the negative stigma attached to asset protective trusts, in general, of recent days past. This is a big change from when I began implementing asset protective trusts more than two decades ago.  

But does that mean onshore is a good thing?

While the changes in U.S. attitudes are promising, onshore trusts are still very problematic if you are genuinely interested in quality and reliable asset protection.

Reprinted from my 2000 first edition of How to Legally Protect Your Assets I went on record stating:

Some of the reasons (for not using onshore trusts) include conflict of law issues between states (when multiple venues and parties are involved, which law applies?); Full Faith and Credit laws (Federal laws requiring judgments in one state to be recognized and enforced in another state); results orientated activist judges (increasingly a problem when judges are more concerned in results and not following the law); Fraudulent Conveyances Statutes (easy to unwind a domestic trust transfer unlike in offshore protective jurisdictions); and various "look back" provisions under local bankruptcy laws (which offshore asset protection jurisdictions do not recognize).

Simply stated, for more than a decade I’ve argued that onshore trusts are marginal, at best. At its worst, it is nothing more than a false sense of security. And the record for sustaining these onshore trusts, going forward, is not encouraging.

In come the lawyers, judges and vultures

In 2011, a federal bankruptcy court set aside a transfer of property to an asset protection trust registered in Alaska. In the case of Battley v. Mortensen, Adv. D. Alaska, No. A09-90036-DMD (2011), the court refused to apply Alaska law - where the statutory asset protection trust was supposed to prevail - and instead applied federal law. As a result, the court’s ruling invalidated the asset transfers and the trust’s protective benefits despite the fact that the settlor was solvent at the time of the transfers.

This was a tragic outcome for the trust settlor relying upon an onshore asset protection trust created in 2005. What’s more, Alaska has been promoted as the onshore leader for obtaining offshore results, along with Delaware, which followed with its own onshore trust laws.

Importantly, even though the trust was registered in the Cook Islands, and designated that venue as the choice of law, the court refused to apply it. Candidly, it appears that Mr. Sessions’ international planning was terribly deficient. Had he – and his advisors - properly and timely implemented a number of international planning measures when the trust was first created - and then took proper protective steps when the threats materialized - the above outcome could have most likely been avoided.

This means that not only should a trust be implemented in a very strong asset protective offshore venue in the first place, but that ancillary international planning must include protective steps that allow for defensive measures when a threat arises. Implementing these steps only comes from experience, and an international understanding of how to properly implement superior wealth preservation strategies at each stage.

Follow this link to learn more about the characteristics in a planner you should look for when seeking quality planning.

Is an onshore trust used for asset protection merely illusionary?

Today, assets and trusts, not only in Alaska and Illinois, but in all other states, are now equally vulnerable when planning is not properly implemented, particularly when using onshore trusts.

These two above case results are exactly as I predicted more than a decade ago. The reason is that the overwhelming majority of state and federal laws do not favor self-settled spendthrift trusts used for asset protection. It is often considered either void, or per se fraudulent. This is elementary.

And this means that creditors can seize the assets transferred into the trust, as if the trust never existed. The so-called onshore trust used for asset protective measures is nothing more than an illusion.

How is that reliable planning?

It gets worse when state laws conflict. This means that one state can decline to enforce the laws and court decisions of another state when it is argued, for example, that there are strong public policy reasons to the contrary. Ultimately, the local court system decides which law to apply, and whether there is a state’s interest in enforcing onshore trusts and asset transfers.

Thus, there is no way to rely upon the protective laws of Alaska or Delaware, for example, to be applied in Texas or New York, or elsewhere onshore.

As also expressed in earlier newsletters, the choice of law provisions set forth in a trust can easily be disregarded. This means that judges may not apply the more favorable asset protective laws outlined in the trust. Again, the question of what law to apply will be decided by a local judge in the local court system.

Moreover, the U.S. Supremacy Clause creates yet another problem for onshore trusts. Under Article VI, it provides that “…the Laws of the United States…shall be the supreme Law of the Land.” This means that in a federal bankruptcy setting there is little reason to believe that a state’s asset protection laws will apply, as clearly resulted in the Mortensen decision.

The two above controversial rulings – particularly in Mortensen - has only recently sparked heated debates among some local planners on whether this could literally invalidate thousands of onshore trusts, whether from Alaska, Delaware, or the other dozen states. This is particularly concerning since these onshore trusts were formerly marketed to provide reliable asset protection. And there are more cases working through the system following the GFC.

I take no satisfaction in saying I told you so, but these results were predictable.

If you care enough to create an asset protection plan, then do it correctly. A superior plan begins with an integrated international trust with estate planning features, as defined here and here and in other past articles found here. It also allows you to maintain control directly over the assets until such time as a threat arises.

Then, it allows you numerous options to restructure the plan to suit the circumstances of the threat to maintain a significantly higher degree of protection than you would otherwise be able to obtain.

Without a doubt, the international trust is significantly superior to an onshore trust that claims to be as good as offshore planning.

And besides, when one thing claims to be as good as something else, doesn’t that tell you which is really better?

But what makes an international trust better?

International trusts for preserving assets has a long and successful history that goes back much further than recent onshore efforts in the U.S.

The first recorded use of trusts to protect assets goes back to early Rome - some 2,000 years ago - when Roman soldiers marched off to battle and placed their assets into trusts to protect them while away, or in case they failed to return. Trusts in rudimentary forms endured throughout the ages, until the rise of the British Empire in the 16^th Century.

Being a mercantilist culture, British legal scholars refined trust provisions. It was routinely accepted for professionals and successful business entrepreneurs to place personal assets into their own protective trust to keep their growing nest egg beyond the reach of creditors.

It is only in recent American history - during the past 200 years - that the U.S. legal system took a different path and refused to allow individuals to place assets into their own (self-settled) trusts to protect them from creditors. As noted above, the U.S. legal system is slowly trending to amend the deviation in history, but there is still a long way for the American legal system to go.

Many of the modern asset preservation measures resulted from the 1930s, as wealthy Jews and other targeted individuals fled oppressive regimes in Europe leading up to World War Two. The European economies were in a slump and the governments in power in Germany and Italy - the Nazis and Italian fascists – were ruthlessly confiscating assets to satisfy debt ridden obligations and fund the war machine.

Those with measurable wealth transferred assets into Swiss and other financial institutions under veils of privacy, while still maintaining control over the assets. Protective trust features such as the right to replace trustees, redomicle the trust or assets to another jurisdiction, exercise veto powers over trustees, flight clauses, and many more asset protective features, protected huge amounts of wealth fleeing from the government of the day.

Individuals that implemented these cross-border, international trust measures, were able to successfully protect their assets until safer times reappeared, if not for themselves, at least for their heirs. Those that failed to take asset protective measures, generally, lost everything. 

Over the years the cross-border trust became more popularly known as the offshore trust. Then due to negative stigma arising from government hype against things with “offshore” attached to the name, the international trust became the more popular reference in recent years.

And there is a very long list of reasons why international trusts provide superior asset protection even beyond its long, successful history.

Provisions that make the international trust successful today

Consider the following, which is a mere sampling of the features:

The non-recognition of judgments from other jurisdictions; an elevated level of proof to establish a fraudulent transfer; procedural barriers to frivolous litigation; illegality of plaintiff lawyer contingency fee cases; self-settled trusts with spendthrift provisions; the creation of “dynasty” trusts; a trust is not void or voidable in the event of settlor’s bankruptcy; a settlor’s right to retain or acquire a power of revocation of the trust, a power of disposition over trust property, and a power to amend the trust.

And the only information filed when a trust is registered is the trust name, the names of the trustees, and the date of the trust. The details of the trust, the beneficiaries and the settlor, and all other details are private, and the trust is not open to inspection.

Further, since judgments in other jurisdictions are not recognized, a claimant must commence new proceedings where the trust is registered and the claim will be subject to the local trust laws; and many proceedings must be brought within the first 12 months of the settlement of the trust.

You can appoint local, domestic trustees at home; provisions allowing trusts to be redomiciled in and out of venues are included in an international trust; a redomiciled trust can maintain the original date of trust formation; and the trust can be governed by the laws of multiple jurisdictions as chosen.

The above, and much more, provide huge benefits for the international trust over the onshore trust when used for asset protection.

The pitch for the onshore trust is basically lower fees. But as with anything else, you get what you pay for, and in this case, much less.

Considering all your assets are at risk, ask yourself this final question:

Why would anyone want to register a trust for asset protection in the same jurisdiction where the problems and the threats originate? (Read that sentence again.)

I can’t figure out a convincing answer to that question either.

Visit this page for more international planning tips. If you’d like to conduct a confidential review of your situation and see for yourself how international planning can fit into your future, start here.

I know I’m biased, but if you are only getting started, and for now only interested in learning more, How to Legally Protect Your Assets and Offshore Living & Investing are two great books.

Until next time…….

David