Advantages of a Foreign Trust
No one chooses to become a judgment debtor. But risks are rising just about everywhere you go today. The privilege of being a landlord for example, is to enjoy a financial return on the home’s rental value, but every so often, a property-owner can lose everything in a stroke of bad luck or a lack of attention to property maintenance, smoke alarms, carbon dioxide, etc.
The best solution to this problem is advanced estate planning. What Americans need is access to solid asset protection. In the realm of trusts and estates planning, no method is 100% bullet proof, and whoever tells you otherwise, is lying. Most states, including New York, are creditor friendly. The vast gap between creditor and debtor laws in the U.S. and foreign jurisdictions, creates a hands down favorability towards foreign trusts. Trusts in general can be an impregnable use of asset protection, but if the laws of the jurisdiction are unfavorable to the debtor’s circumstances, this leaves the trust creator and the beneficiaries at the mercy of the judge hearing the case. At the same time, not every offshore jurisdiction offers significant asset protection benefits. Knowing which do, requires a knowledgeable estate attorney experienced in offshore trust accounts. The differences between a U.S. based trust and and a foreign trust is explained below:
Unenforceable Judgments
If a creditor wants to litigate or access assets in a foreign jurisdiction, he’ll have to pay dearly for it. Most lawyers in the U.S. are not licensed in other countries, thus, the creditor will have no choice but to seek foreign counsel. Frequently, a plaintiff’s lawyer is the same lawyer that pursues collection after a successful verdict or judgment, or hires a company that does this on the routine. Of course, lawyers and collection companies exist in other jurisdictions. The key is choosing a jurisdiction that does not honor a U.S. based judgment.
For example, an estate wins a lawsuit and obtains a judgment against the decedent’s landlord for three million dollars for wrongful death due to faulty wiring. The landlord has transferred all liquid assets into an offshore trust, and his building is encumbered by a large mortgage with barely any equity. In order to collect, the creditor must (1) find the debtor’s assets; and (2) attach the judgment to the asset. Chase Bank, for example in the U.S., routinely honors judgments obtained in our courts. As a consequence, the debtor’s bank account will be seized and turned over to satisfy the debt. But produce the same judgment in a certain foreign jurisdiction, and its as good as toilet paper. As a result, the creditor will be forced to start a brand new lawsuit, losing out on valuable time and resources.
Shortened Statute of Limitation
A major hurdle for a judgment creditor can be the statue of limitations. The statute of limitation (ie expiration date) to bring a lawsuit varies state by state, and can vary drastically in debtor-friendly foreign jurisdiction. Litigation in U.S. courts can take several years, resulting in an expiration of the statute of limitations in the offshore trust jurisdiction long before the lawsuit is concluded in the states. So, not only is the debtor better off creating an offshore trust due to shorter statue of limitations, but also because of the high probability that the statue of limitations has expired in the foreign venue way before a creditor obtains a judgment in the states. Since the creditor is restricted from bringing a new lawsuit for the original action (ie negligence, wrongful death, etc) in the offshore venue, he’ll have no other choice but to pursue a fraudulent transfer claim, thereby, running into the same problem – short statute of limitation and higher burden of proof than proving negligence and injuries!
Burdensome Fraudulent Transfer Requirements
Some jurisdictions have a tendency to attract foreigners because of their favorable trust laws. In the United States, fraudulent transfer claims are common, and a debtor typically stands little to zero chance of prevailing when assets are transferred into a trust prior to a judgment issuing (or after). Favorable jurisdictions have strict laws and a variety of prongs to satisfy before a creditor can reverse a trust transfer to recover his damages. Besides the short statue of limitations to
bringing a fraudulent transfer claim (which is huge on its own), some foreign jurisdictions hold that in order to prevail, a creditor must show beyond a reasonable doubt, that the debtor transferred assets into a trust with the intent to defraud. Many are unable to meet this standard and can’t recover on their loss and damages. The beyond a reasonable doubt standard does not exist in New York or other states for fraudulent transfer claims.
The Better Alternative
When faced with a judgment, many estate planning lawyers will tell a potential client that its just too late. But truth is, a judgment debtor doesn’t suffer from lack of choices, the issue is that they don’t know choices exist. For families and individuals in dire circumstances, asset protection is a right that foreign and offshore trusts can provide. It is true that offshore trusts are more expensive to buy into, but the protection and peace of mind is unparalleled. Foreign trusts are not 100% foolproof, nothing in life is, but for debtors wanting to keep their assets, its the best existing asset protection alternative.
It is estimated that over 30 trillion is held in offshore accounts. There are approximately a few dozen cases in which a foreign trust was compromised. Even if we are to assume that poor drafting or bad circumstances are not the epitome of the problem, this figure still represents a microscopic percentage of all offshore trusts. Although foreign trusts have lots of appealing features, there is a pretty straightforward reason why offshore trusts are so effective: unless the creditor is the government or a large corporation, it’s too darn expensive to go after a foreign trust.
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