Asset Protection Trusts: Domestic Versus Offshore Accounts

Trusts are popular estate planning tools that were once used primarily to pass assets down through generations. Since this tool can reduce the fees and taxes associated with transferring money, some choose to use trusts as a way to better manage their financial portfolio.

In recent years, the benefits associated with trusts have expanded. One primary example involves the shift society has made toward litigation. As litigation has increased in popularity, trusts have evolved to offer an effective form of asset protection. Asset protection planning is designed to help ensure that assets are beyond the reach of potential future creditors, litigants and ex-spouses.

Asset protection in practice: Protecting money with a trust

Those looking to protect their assets often consider using one or more trusts. One goal of a trust is to shield the creator's assets from potential future creditors.

The trust may not be impenetrable, but the threat of a lengthy legal battle to access the money held within a trust can often serve as a deterrent. This deterrent may be enough to force potential future creditors to settle for a much smaller amount.

Generally, a trust is most successful at protecting a creator's assets when the creator does not have a direct interest. If, for example, the creator is also a beneficiary to the trust, the creditors may be able to reach the assets.

Asset protection: Determining the best route

When considering which type of trust works best, a common question is whether to base the trust in a domestic or offshore account.

Historically, offshore accounts have offered a high level of protection. It was difficult for lawyers to access the assets held within these accounts, let alone find them. As technology has advanced, though, it is easier than ever before to locate foreign accounts.

Not only are the accounts easier to locate, but the federal government has recently forced some overseas banks to divulge the names of American citizens with accounts at those banks. The U.S. government's action was taken in an effort to find U.S. citizens who had not paid U.S. income taxes on qualifying offshore accounts, but simply having a foreign account and making appropriate filings and payments for that account does not put Americans at risk.

Determining which type of account is best for your financial situation can be difficult. One thing to consider is the type of assets you wish to hold within the trust. If you are looking to purchase shares in companies located in foreign countries or foreign private equity funds, it may be wise to set up an offshore account. However, if your financial portfolio focuses more heavily on mutual funds, a domestic account may be the better option.

If your asset protection plan involves large amounts of money, diversification may be the best bet. In this situation, a mix of asset protection trusts both within the United States and in foreign countries may offer the greatest form of protection. Of course, an experienced asset protection lawyer can provide legal counsel on whether establishing a foreign or a domestic account, or some other form or account, is best for you.