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Offshore Trusts Can Create Legal Obstacle Course for Claimants

Published by: Medical Business
Author: Howard Rosen, Esq.
Date of Publication: 1996

Trusts have been used since the Crusades to protect assets. Over the past several hundred years, the protective ability of the trust has been eroded in the US and certain other countries by court decisions and legislation which prevent one from “having his cake and eating it too” in an asset protection sense.

Thus, in the US, very limited (if any) asset protection can be realized for the settlor (creator) of a trust if he or she retains an interest in the trust as a beneficiary. In order to obtain meaningful asset protection for a settlor-beneficiary, we must establish a trust in a non-US jurisdiction with favorable trust protection laws.


The offshore asset protection trust (“APT”) is inherently more protective than a domestic trust for several reasons, not the least of which is its “foreignness”.

Consider the thought processes of your claimant’s attorney contemplating an action to recover assets from a trust in a foreign country. He knows nothing of the country’s geography, laws, procedures, costs, or even its currency. These factors become immediate hurdles in a legal obstacle course upon which he is about to embark.

Because of these hurdles, the APT is not an automatic target of litigation, as its domestic counterpart likely will be. The domestic trust and its trustees are subject to local (US) jurisdiction, and both are just as easily included in litigation (on some legal theory or another) as is the settlor – not so with the APT. The very fact that the APT is an offshore trust will have a significant deterrent effect on the claimant’s decision regarding whether or to what extent to pursue trust assets.

Finally, the trust laws of certain foreign jurisdictions are far more specific and protective than our domestic trust laws. Therefore, if the claimant is (somehow) undaunted by the geographical, financial, and procedural hurdles of the APT obstacle course, he will be confronted with the brick wall of the foreign legal system as the final hurdle.

Key among the components making up this brick wall in a properly selected offshore jurisdiction are the fact that the claimant will have to start his lawsuit all over again – from square one, because the foreign jurisdiction will not recognize his US judgment, he will have to utilize an attorney in the foreign jurisdiction, that attorney will not be able to accept the case on a contingency fee basis (as US attorneys can), and he will likely be faced with an expired statute of limitations by the time the litigation reaches the foreign jurisdiction. Game over!


Much has been written lately about the use of family limited partnerships in asset protection planning. Why use an APT if the limited partnership provides so much protection?

First, not all assets can or should be owned by a limited partnership. For example, a subchapter S election would be lost if S corporation stock were transferred to a partnership. Similarly, the home mortgage interest deduction would be lost if property eligible for that deduction were owned by the partnership.

These assets can, however, be directly owned by a properly structured offshore trust.

Second, although a significant degree of protection is available through the use of the family limited partnership, we can never predict how a local court or jury will act. Sometimes a “result oriented” judge or jury will ignore the laws limiting a claimant’s rights against a partner in a limited partnership, and somehow pierce the partnership protection; this happened in two California cases.

Effective asset protection planning must take such a possibility into account. Unfortunately, some planners stop short of going the “whole nine yards”, and utilize the limited partnership as the end all and be all of their asset protection techniques.

An extremely effective strategy combines the limited partnership and the APT. Such a structure might be implemented, for example, with you as a 1% general partner in the limited partnership, and your APT as the 99% limited partner. Remember: You, as the general partner will write the checks and make all decisions for the partnership, while the limited partner (the APT) is passive. In this manner, you can retain direct control of the assets held in your limited partnership in your capacity as general partner, keep the assets here in the US if you wish, and at the same time utilize the additional protection afforded by the APT through its ownership of the limited partnership interest.

How does this work? If there is concern that an unrelenting claimant may convince a result oriented judge or jury to pierce the partnership, then the trust, as a limited partner, will cause the liquidation of the partnership and move the assets offshore – beyond the jurisdiction of a U.S. court. If the partnership is liquidated, and the assets moved offshore in this manner, you can dictate that all trust accounts and assets must have bothyour signature and the trustee’s signature in order for any transfer to take place. This technique provides the security blanket for those who wouldn’t feel comfortable if the trustee had the sole signature authority over their funds.


The APT should be set up as a “tax neutral” trust. This means that your income, estate and gift tax picture does not change as a result of establishing the APT, although it can offer the unified credit and marital deduction estate planning benefits typically found in traditional living trusts.

Unfortunately, whenever a planning technique becomes popular or receives some notoriety, all types of promoters come out of the woodwork. Some unscrupulous or ignorant promoters have been claiming the APT can offer certain tax advantages by “going offshore”. As far as a US citizen or resident is concerned, nothing could be further from the truth. Simply put: There are no legitimate income tax advantages available to a US citizen or resident using an offshore trust of any kind. In the author’s opinion, those who promote such advantages are either ignorant of the law, or just don’t care what it says. Beware: If you follow the advice of such a promoter YOU will pay for his ignorance.


The APT planning discussed in this article may not be available to you once someone makes a claim against you. Advance planning is crucial to effective utilization of the APT. Don’t wait until you have been sued to protect yourself! At best, your planning options will be reduced, at worst, you will be totally exposed to the creditor’s claim.

This article is displayed with the permission of the publisher.  Unauthorized reproductions are not permitted.

Globally recognized professional asset protection planners in U.S. Donlevy-Rosen & Rosen, P.A. is a law practice with a focus on offshore asset protection planning. Let us explain the significant difference our experience can make when you want to thoroughly protect your assets. Call 305-447-0061 or simply send us a message using our contact page