Is Offshore Asset Protection Right for My Financial Plan?

If Hollywood is the only introduction you’ve had to offshore asset protection, you may view this investment strategy as a shady endeavor suited only to the fabulously rich or deviously criminal. This mass-media depiction is far from the truth. Offshore asset protection is a safe and valid way to protect certain funds and improve your estate planning.

Though offshore asset protection isn’t for everyone, it’s not restricted to the upper echelons of society. You can utilize this strategy regardless of your income, provided that its main tenets meet your current financial needs. Understanding the pros and cons of offshore asset protection will help you understand where to place your funds and how to best protect all that’s valuable to you.

Key Takeaways:

• Offshore asset protection moves your assets outside of United States court jurisdiction.
• It’s best to have at least $250,000 in assets to place in an offshore trust.
• An offshore trustee manages your foreign trust while your trust protector oversees this trustee.
• Creditors and claimants typically find pursuing funds in an offshore trust too expensive and time consuming.
• Funds in an offshore trust are still subject to taxes, though you may pay less in certain circumstances.

What Is Offshore Asset Protection?

Offshore asset protection is a strategy that allows individuals and entities to move their assets to a foreign jurisdiction to shield them from U.S. laws, regulations, and judgments. It places the assets outside of the reach of U.S. courts, meaning they will be governed by the laws of the foreign, debtor-friendly jurisdiction that will provide better protection. The Cook Islands, Bahamas, U.S. Virgin Islands, and Switzerland are especially popular for this purpose. These locations do not recognize U.S. judgments and successfully keep assets beyond the reach of U.S. creditors.

Offshore assets include all of your real and personal property located outside of the U.S., including:

• Bank accounts.
• Securities.
• Stocks.
• Retirement accounts.
• Real estate in a foreign country.
• Personal items stored in an offshore safe-deposit box.

Who Can Use Offshore Asset Protection?

As an individual, you may elect to move your assets offshore to protect your personal wealth and property; you may also use this tactic for a business entity. Offshore asset protection can offer safety and security for:

• Limited liability companies (LLCs).
• Limited partnerships.
• Corporations.

Most lawyers recommend having a minimum of $250,000 in assets to place in an offshore trust. This is generally considered the lowest amount that warrants the time and money needed to invest in this type of account.

How Does Offshore Asset Protection Work?

Offshore asset protection places your assets under the protection of an offshore trustee. This offshore trustee is a local in the country where you’re securing your funds. You may act as the beneficiary yourself or appoint a family member as the beneficiary.

You should also utilize a trust protector for your account. This is a law firm or an attorney who oversees your offshore trustee to ensure that your assets are properly cared for. Your trust protector helps you structure the terms of your trust and makes sure your account complies with all applicable laws and regulations.

One popular way to set up your trust is through a limited partnership. You act as the general partner and typically keep 1% of the shares and total control of the account. The remaining shares go into a foreign trust, though they can remain invested within the United States. Lawyers generally won’t complete the transfer of funds until you’re threatened. Your assets are safe from domestic lawsuits as long as the trust is established before a suit is filed.

What Are the Benefits of Offshore Asset Protection?

Individuals and companies pursue offshore asset protection for many reasons. You typically enjoy greater autonomy, protection, and flexibility with an offshore account. Depending on your specific needs and situation, some perks may be more enticing than others, such as:

Financial Privacy

Individuals, corporations, and government entities can research domestic assets. Placing your assets offshore helps to secure them from prying eyes, giving you the privacy that you deserve for your financial affairs. Offshore asset protection will keep your finances confidential during your lifetime and after you’ve passed, which makes them particularly favorable for estate planning.

Lower Taxes

In some cases, offshore trusts will lower your tax burden. An offshore trust does not absolve you of your tax obligations completely, so it’s important to speak with a qualified attorney about exactly how this will work in your case.

You will be taxed on any income that you generate, regardless of its origins. Thus, you will pay taxes on the money you used to originally fund your account and on any capital gains or interest the account generates. However, you may be able to defer some of these taxes if you’re not taking immediate distributions from the trust.

Greater Freedom and Flexibility

The funds in offshore trusts are not under U.S. jurisdiction, therefore there are no laws restricting the use of these funds. You can easily use these accounts to fund foreign investments.

Protection From Aggressive Entities or Unfavorable Conditions

Domestic lawsuits and creditors cannot easily reach foreign accounts. This is especially true if you diversify your offshore asset protection by using trusts in multiple countries. Creditors will find it exorbitantly expensive and incredibly time consuming to pursue judgments in more than one jurisdiction. The high burden of proof creates a mountain of paperwork for creditors who want to pursue funds in foreign accounts. Meanwhile, the relatively short statute of limitations on these lawsuits means that collectors may run out of time to collect before they can finish making their case.

A solid offshore asset protection strategy can help protect you from:

• Competitors.
• Political situations.
• Economic situations.
• Creditors.
• Lawsuits.

What Are the Drawbacks of Offshore Asset Protection?

While offshore asset protection offers many advantages, there are also certain risks and drawbacks to consider.

Cost

Maintaining offshore assets is a costly endeavor. In addition to the expense of setting up your offshore accounts, you’ll also face ongoing charges. You must pay annual fees to your offshore trustee, trust protector, and offshore financial institution.

Political Risks

Though offshore accounts are generally safer than many of their domestic alternatives, you can’t mitigate risk entirely. Political instability in another country may have an impact on your offshore accounts, making it difficult or even impossible to access them later. In such a case, you must weigh the domestic and foreign risks and make an informed decision.

Is Offshore Asset Protection Right for Me?

Offshore asset protection is an effective strategy for many individuals and companies. This approach can certainly help wealthy parties protect their funds, maximize their investment opportunities, and secure their estates. Moving assets offshore provides an extra layer of protection against anyone who may seek to seize your property or funds.

Offshore asset protection is especially beneficial for individuals in certain occupations. Some professionals, such as lawyers, doctors, accountants, and real estate agents, are especially likely to face lawsuits. Keeping their assets offshore will generally protect them from these lawsuits. Plaintiffs must pursue litigation within a particular jurisdiction, and because they are usually unable to file a lawsuit in a foreign country, the defendant’s offshore funds are safe from judgment.

It’s important to note that you cannot protect your money by setting up a trust after someone files a lawsuit against you. You must set up your trust in advance.

If you’re looking for a way to avoid taxation, an offshore trust isn’t the best option. The IRS requires that you disclose any foreign assets and accounts, and you’re still subject to income and estate taxes on these funds.

The Bottom Line

Offshore asset protection is an effective option if you have a large amount of cash or extremely valuable assets that you want to protect from certain U.S. laws, regulations, creditors, or claimants. Since you must set up the trust in advance of these adverse actions, you need to evaluate your risks to determine whether this type of trust is appropriate for you. A skilled financial advisor can help you assess your situation carefully, enabling you to make an informed decision regarding offshore asset protection.