Academic journal article Vanderbilt Journal of Transnational Law

Offshore and "Other" Shore Asset Protection Trusts

Academic journal article Vanderbilt Journal of Transnational Law

Offshore and "Other" Shore Asset Protection Trusts

Article excerpt

Think of the liability system as a poker game. Each person, corporation, or other entity in the economy is a player. Players risk their chips, that is, their wealth, by tossing them into the pot, that is, investing them in liability-generating economic activity. Chips contributed to the pot are at risk of loss; the system can take them to satisfy liability. Chips withheld are not at risk.

This poker game has an odd twist to it. Withholding chips does not reduce significantly the amounts players can win nor players' likelihood of winning. Even players who don't put any chips in the pot--that is, players who are judgment proof--can keep playing the game and are eligible to win.

Why do players put chips in the pot? No rule requires them to do so. There are social, cultural, and economic pressures. But mostly, they do so for convenience. A wealthy player who wants that wealth available for use, but not in the pot to be lost through liability, must build arcane legal structures and document them through extensive record keeping.

In recent years, computer technology has dramatically reduced the cost of record generation and, consequently, the cost of keeping chips out of the pot. Major players are reducing their stakes. By doing so, they are breaking down the social norms and cultural barriers that prevent further reductions. The process is feeding on itself. Soon no one will have significant chips in the pot. When that happens the fundamental nature of the game will change. Liability will die.(1)

I. INTRODUCTION

The use of offshore asset protection trusts to "keep chips out of the pot" has exploded in the last decade. In 1994, one commentator estimated that approximately $1 trillion was held in offshore trusts.(2) Less than five years later, Britain's Home Secretary Jack Straw estimated in a recent unpublished report that $6 trillion is now held in offshore trusts.(3) The Home Secretary report estimated that this is as much as a third of the wealth of the world's most affluent people.(4) An estimated five to ten percent of the $6 trillion, up to $600 billion, is held in the tiny British offshore islands of the Isle of Man, Jersey, Guernsey and Sark.(5) There are an estimated 100,000 offshore trust companies in the British offshore islands.(6)

The use of offshore asset protection trusts is no longer limited to the ultra-rich. Offshore trusts are marketed in financial magazines and on the internet to people whose net worth is in the hundreds of thousands of dollars. Setting up an offshore trust is not cheap. Attorneys specializing in offshore trusts typically charge as much as $18,500 to set up a trust and several thousand dollars each year for maintenance of the trust.(7) However, if a person owns several million, or even several hundred thousand, dollars of assets and has trouble with creditors on the horizon, this may be a relatively small price to pay to put assets out of the reach of creditors.

Recently, Alaska and Delaware have enacted trust laws that purport to provide some of the same type of protections against the claims of creditors that are found in the laws of offshore jurisdictions.(8) These domestic asset protection trusts may have several advantages over offshore trusts. First of all, they are cheaper: it may cost only $6,000 to $12,000 to set up an Alaska trust.(9) In addition, settlors may feel that their assets are safer in a U.S. trust than they would be in a foreign trust.(10)

Asset protection trusts and asset protection trust laws are designed to protect a person's assets from the claims of his creditors. It is virtually impossible to obtain personal jurisdiction over an offshore trustee. Further, the typical offshore jurisdiction does not recognize foreign judgments.(11) Thus, a fraudulent conveyance, action in a United States court against an offshore trustee offers little or no hope for recovery.

Offshore jurisdictions have either short statutes of limitation on fraudulent conveyance actions or, as in the case of Belize, no fraudulent conveyance statute at all. …

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