With the election of President Trump, the academic and main stream press has recirculated articles about the wealth of President Trump and his advisors. To be fair, such stories about politicians have been written before and are not party focused. Stories about the wealth of President Obama and his Secretary of Commerce, Penny Pritzker, and candidate Mitt Romney, popped up during previous elections. Many of the current articles[1] focused on wealthy individuals and advisors, however, point towards the use of offshore trusts as an unseemly asset protection vehicle.

The critics of offshore trusts - breathless, shakily conclusory, agenda driven, not rooted in science or finance - decry the use of offshore trusts as tax evasion.[2] Untrue. Offshore asset protection is simply a risk mitigation and estate planning tool, perhaps more complicated than most, but no different than buying a house and owning it as tenants by entirety, or purchasing life insurance. Offshore trusts also may be used strategically to build wealth, particularly when coupled with the use of a country’s Limited Liability Company statute.

Critics point to exotic locations as where assets “may be hidden”- such as the Cook Islands, Cayman Islands, Belize, and Luxembourg. The Cook Islands Foreign Asset Protection Trust (“FAPT”) may offer extensive protection and privacy but historically, asset protection trusts are rooted in English common law; early asset protection trusts were created in Jersey (Channel Isles), and have existed for centuries.

Some countries’ asset protection trusts have been characterized as a form of morally dubious economics stimulation. This criticism is undeserved.  In our last issue, we wrote of Bermuda’s cheerful and deserved exuberance of its overhaul of its Limited Liability Company Act to stimulate economic activity on the island. Foreign Asset Protection Trusts also share this characteristic. Moreover, the overall loss of tax revenues to the United States, with no reliable estimates of the amount, is minor in comparison to the benefits of the protection.

Offshore trusts are used by professionals, business owners and high net worth individuals who are unable to achieve protection of a lifetime of work that is not provided by US courts and laws. Doctors fearing malpractice suits, single-owner businessmen and women, and extended wealthy families are examples of those frequently using offshore trusts. And yet, the press likes to point out that offshore trusts are used as a criminal artifice. To be sure, such criminal activity does occur; witness R. Allen Stanford and his bank in Antigua and “Baby Mama Trust” in the Cook Islands. However, to equate the use of offshore trusts with fraudulent conveyances is simply inaccurate. Thankfully, most US courts objectively analyze such claims. Courts make fact and legal determinations on intent and timing in determining whether the creation and transfer of assets to offshore trusts amount to fraudulent conveyances under US laws, which is more work than many writers care to do.

The use of onshore trusts, also known as Domestic Asset Protection Trusts (“DAPT”), has also become popular.[3] Sixteen states from South Dakota to Tennessee to Delaware have ramped up their protection of assets through trust statutes. Other states, like Wyoming, have coupled their trust protection with increased protection through its limited liability company acts, much like Bermuda. So, for all those articles describing offshore trusts as an “ethically gray area”, “formally legal but socially illegitimate”, or as contributing to “worldwide wealth inequality,” or “shell game extraordinaire”- offshore trusts are not illegal - they are simply a logical choice.

Finally, hiding assets offshore from the United States, i.e., not reporting assets in an offshore trust, is a crime. The lawful use of using offshore trusts for asset protection, privacy, investment diversification and legal tax savings comes with responsibility to report offshore accounts worth $10,000 or more on tax returns and separately report annually to the US Treasury in a Foreign Bank Account Report (“FABR”). There are extreme penalties for failing to file such report.

So when considering the merits of an offshore trust, put aside the naysayings from the social pundits and look objectively at the facts. When properly executed and managed, an offshore trust can be an effective—as well as legal and ethical—tool for wealth management.

  1. Sources and case law available on request
  2. Read anything by Brooke Harrington or Gabriel Zucman
  3. According to the founder of the Panama law firm, Mossack Fonseca, the Panama Papers leak has triggered an increase in onshore trusts and related activities.