offshore trust
Christian Reeves

Offshore Trust vs Offshore LLC

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You’re ready to move some of your assets offshore. But, which structure is best? Should you set up an offshore trust or an offshore LLC? In this article I’ll compare the offshore trust vs the offshore LLC.

I’m focused on offshore trust vs offshore LLC. Both of these structures are meant to protect your after tax passive investments. If you’re going to operate a business offshore, then you will need an offshore corporation.

An offshore corporation can be held by a foreign trust. However, the trust may not operate a business directly. A corporation should hold the business and a trust can hold that corporation.

Also, an offshore IRA LLC is very different from a standard international LLC. An IRA LLC is a specially designed structure to hold your retirement account and only your retirement account. You can’t mix retirement money with personal savings and offshore IRA LLCs are single purpose vehicles.

Finally, there’s a hybrid structure called a foundation. These are available in Panama and Liechtenstein, with the vast majority being set up in Panama. A foundation is a mix between an offshore corporation and an asset protection trust. For a comparison of trusts and foundations, see: Offshore Trust or Panama Foundation?

So, this article will look at standard offshore LLCs compared to offshore asset protection trusts. These are the two most common asset protection structures for passive income and protecting after tax savings.

Two similarities both structures share are 1) the need to follow US transfer rules, and 2) the need to follow US tax rules.

US owners of offshore trusts and offshore LLCs must file foreign tax returns with the IRS. In most cases, the earnings and profits in these passive holding structures will be taxable as earned.

The tax return for an offshore LLC is much less detailed than for an offshore trust. Therefore, an offshore LLC tax return should cost you less in prep fees each year. Most LLC returns cost $850 while trusts are usually $2,500 or more.

For this reason, those looking to reduce carrying costs and annual fees will prefer an offshore LLC to an offshore trust. Also for this reason, we usually recommend a trust for those with at least $1 million in assets to protect.

Both structures need to follow US transfer rules. A fraudulent conveyance is a transfer made to keep money away from a current or reasonably anticipated civil creditor. In most cases, any transfer made to prevent the IRS or other US government agency from taking money away from you will also be a fraudulent conveyance.

This means that you can’t transfer money out of the United States and into an offshore trust or offshore LLC with the intention of protecting it from a current or reasonably anticipated civil creditor. A creditor is “reasonably anticipated” if the harm has occurred but they haven’t yet filed a case against you.

For example, if you hit someone with your car today, and send all of your money out of the US and into an offshore trust tomorrow, that’s probably a fraudulent conveyance that will be reversed by a US court.  If you send your money offshore today and injure someone with your car tomorrow, that’s probably not a fraudulent conveyance.

The most important difference between an offshore LLC and an offshore trust is flexibility. An offshore LLC is meant to hold your foreign assets and investments and will transfer to your heirs through your US will. That’s all it does… hold assets and nothing more.

On the other hand, an offshore trust can be configured to your specific needs. An offshore trust provides maximum asset protection and estate planning. An offshore trust can give you access to large international banks that won’t accept lesser structures.

When combined with an offshore life insurance policy, an offshore trust can eliminate US tax on your passive gains. A US compliant life policy inside an offshore trust basically creates a massive tax free structure.

If you hold the policy inside an offshore trust until you pass away, then the assets will transfer to your heir tax free. If you cancel the policy during your lifetime, you’ve got tax deferral, much like a traditional IRA. If you hold the policy until your death, you get tax free, much like a ROTH.

But this flexibility means that it takes a lot more work on your lawyers part to build an offshore trust than it does to set up an offshore LLC. For this reason, a trust is usually 3 or 4 times more expensive than an offshore LLC.

I hope this article on offshore trust vs offshore LLC has been helpful. For more information, or to set up a confidential consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to review your situation and help you to build a compliant and efficient asset protection structure.

asset protection for defined benefit plan
Christian Reeves

Maximum Asset Protection for a Defined Benefit Plan

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Defined benefit plans are excellent tools to put a lot of pre-tax money away quickly. Because of they don’t have the same contribution limits as IRAs, they allow the business owner to build up savings and reduce taxes efficiently.

Because defined benefit plans build cash quickly, they’re big time targets of lawyers and civil creditors. In this article I’ll show you how to provide maximum asset protection for a defined benefit plan.

The best asset protection for a defined benefit plan is to move it offshore and inside a “trust like” structure. Get it out of the reach of creditors and judges by moving it out of the US and behind the walls of an advanced asset protection structure.

The first step in moving a defined benefit plan is to figure out if it’s eligible to go offshore. In most cases, a plan from a previous employer with a cash value can be protected. If it’s a defined benefit plan from your current employer, and the plan documents allow for a conversion or to be invested abroad, then it too can be placed inside an international asset protection structure.

Sometimes DB plans are in subsidiary companies, or can otherwise be separated from the main business. If this sub can be closed down, the plan might then vest and be eligible to go offshore.

The way you get a defined benefit plan offshore is to convert it into an IRA (either a ROTH or traditional). Then you place that into an offshore IRA LLC. I’ll explain how to do this below. First, you need to find out if your plan can be converted into an IRA.

The bottom line is that you’ll need to ask your plan administrator if your DB plan can be converted into an IRA. They might not know how to take it offshore, but, if they can advise you how to convert it into an IRA, that’s all you need from them.

Assuming you get a positive answer, you need to ask your administrator to convert the defined benefit plan into an IRA.

  • If your administrator says it’s impossible to convert to an IRA, and he’s making money managing your investments, you might seek out a second opinion. I’ve seen many cases where DB plan administrators put their financial well being ahead of their clients.

Once the cash is an IRA, you can move that account or accounts from your current custodian to one that allows for foreign structures and investments. Not all IRA custodians allow for offshore LLCs and international investments. This is a very specialized area.

Now you can finally get the defined benefit plan offshore. We setup an offshore IRA LLC, open an international bank account, and the custodian transfers the money into this structure. As the manager of the LLC, you will have checkbook control of the account. You’ll make all transfers and be responsible for all investment decisions.

All of the above gets you basic offshore asset protection of your defined benefit plan. If you want maximum protection, we can customize your LLC with features you would normally find in an offshore asset protection trust.

You can’t put an IRA or defined benefit plan into a trust, but we can create an LLC that acts like a trust.

The way we do this is by forming the IRA LLC in the Cook Islands, the top offshore asset protection trust jurisdiction. We then build an LLC operating agreement molded after a Cook Islands asset protection trust.

For example, an offshore trust uses an independent trustee, a protector, and has clauses that make it impossible for the trustee to make payments to creditors. Even if one gets a judgement against you in the United States, there’s no way for them to collect on it in the Cook Islands.

To copy these protection elements, we install an independent LLC manager in the Cook Islands LLC. We also set up a protector who takes over should you (the beneficial owner, similar to a settlor) comes under duress.

To support these professional advisors, the LLC operating agreement includes terms that prohibit the manager from transferring money to the custodian or owner if they’re under duress. The agreement basically creates the defense of impossibility in the Cook Islands to protect the assets of the LLC.

I should point out here that setting up this maximum asset protection structure for a defined benefit plan means that you must also follow the same rules that apply to international trusts. For example, rules around fraudulent conveyance.

In its most basic form, a fraudulent conveyance is when you send money out of the United States to keep it away from a current or reasonably anticipated creditor. If you injure someone today and fund an offshore trust or IRA LLC tomorrow, you’ve probably fraudulently conveyed money into the structure.

Thus, your defined benefit plan must be moved offshore well before you have any legal problems. In a perfect world, it is moved offshore 1 or 2 years before a dispute arises. That is, 1 or 2 years before the harm occurs, not before the plaintiff files a claim against you.

I hope you’ve found this article on how to max protect your defined benefit plan by moving it offshore to be helpful. For more information, please send me an email at info@premieroffshore.com or call us at (619) 483-1708. 

offshore trusts and community property
Christian Reeves

Offshore Trusts and Community Property Law

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Here’s an overview of offshore trusts and community property law.  If you’re married, and live in a community property state, you and your spouse must work together to form the most efficient asset protection structure. An offshore trust must include special provisions for those in community property states.

Let me frame the issue surrounding offshore trusts and community property a bit…

In a community property state, all assets are equally and jointly owned by both spouses. When one spouse passes, 100% of the assets get a step up in basis to their value at the time of his or her death.

For example, let’s say you have assets worth $1 million. You purchased them years ago for about $400,000. Thus, if you sell them, you’ll pay capital gains tax on the $600,000 profit.

When a spouse dies in a community property state, 100% of the joint property transfers to the surviving spouse. Also, the basis of that property is bumped up to the value on the date of death.

So, in the example above, the basis of the property increases from $400,000 to $1 million. If the surviving spouse were to sell all of the assets on that date, she would pay zero in capital gains tax. If the survivor holds the assets for 3 years, and they increase in value to $1.1 million, she will pay capital gains tax on only $100,000.

If this same couple didn’t live in a community property state, the surviving spouse would receive a 50% step up in basis, rather than 100%. This is because common law states view ownership as 50/50, rather than 100% by the community.

The surviving spouse would get a step up of 50%, from $400,000 to $700,000. If she sold the assets on the date of death, she would pay capital gains tax on $300,000.

Here’s how community property law impacts an offshore asset protection trust…

Most offshore asset protection trusts are structured to make transfers to them as incomplete gifts, so that the gift tax rules do not apply. When an incomplete gift is made to an offshore trust, the value of trust assets remain in your U.S. estate for federal estate tax purposes.

Because offshore trusts with U.S. settlors / owners are considered grantor trusts under the U.S. code, community property and other rules also apply. This means that, when one spouse in a community property state passes, the survivor should receive a step up in basis of 100% of the assets in the trust. If the couple lives in a common law state, 50% of the assets in the asset protection trust receive this basis increase.

The issue is that offshore trust are, by definition, formed in a foreign country. Some jurisdictions have community property statutes built in to their laws and some do not. If the country where you form an asset protection trust does not have a community property statute, the surviving spouse may not be entitled to a 100% step up in basis. In some cases she will receive only a 50% increase because the offshore jurisdiction will be considered a common law county.

For example, in California, community property transferred to an irrevocable trust loses its community property character. A poorly planned offshore asset protection trust might convert community property assets into common law assets, thereby costing you hundreds of thousands or even millions of dollars at tax time.

For this, and many other reasons, you should always hire a U.S. expert to quarterback your offshore trust.

When selecting a jurisdiction for an offshore trust for a community property client, we often start with the Cook Islands. This country was the originator of the offshore asset protection trust and is always working to improve it’s effectiveness as a tax and asset protection tool for U.S. persons.

The Cook Islands has enacted legislation to preserve the community property character of assets and the 100% step up in basis. Section 13J of the International Trusts Act provides that where a husband and wife transfer community property into an international trust or to a trust that, subsequently becomes an offshore trust (under Cook Islands law), that property will retain its community property status. Specifically, the Cook Islands will deal with the property according to the law of the jurisdiction from where it came (the community property state).

It’s also possible to use this same Cook Islands statute to preserve the separate property status of assets held before marriage in a community property state. For example, a trust set up before marriage might include language ensuring it remains separate property. Also, if both spouses agree after marriage to separate their property with a transmutation agreement, a Cook Islands trust can be designed to enforce that agreement.

The bottom line is that, so long as both spouses agree on how to handle the assets, a Cook Islands trust can be drafted to meet their needs. It’s not possible to transfer community property into an offshore trust without both spouses consent. To do that would result in a fraudulent conveyance.

I hope you’ve found this article on offshore trusts and community property law to be helpful. Please contact me anytime for assistance in forming an offshore trust or asset protection structure. You can reach me directly at info@premieroffshore.com or call us at (619) 483-1708. All consultations are private and confidential.

Private Placement Life Insurance
Christian Reeves

Benefits of Private Placement Life Insurance

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For top tier investors, hedge funds and foreign investments offer broad diversification and attractive returns. Because these returns are often taxed at ordinary rates, affluent investors turn to private placement life insurance for tax efficiency.

The reason to invest using a private placement life insurance is to reduce or eliminate income and estate taxes. All gains inside a properly structured PPLI are tax deferred until taken out as a distribution by the investor. If you leave those investments in the policy, and set up an irrevocable life insurance trust, it’s possible to transfer these assets to your heirs with a step-up in basis and tax free (no estate tax).

This is important because hedge funds and offshore investments can be extremely tax-inefficient. Most hedge fund earnings are taxed as ordinary income or short-term capital gains. Federal rates can be as high ast 43.4% and, when you add in state taxes, the combined rate can be near 50%.

The same goes for many types of offshore investments and foreign mutual funds (which may be inside a hedge fund or you may hold directly). Any foreign investment where 75% of the returns are passive, or 50% of the capital is held in passive investments, is a Passive Foreign Investment Company (PFIC). PFICs are taxed at ordinary rates and gains are taxed in the year accrued, not in the year sold.

Likewise, dividends from an offshore investments are often non-qualified dividends for U.S. tax purposes. Non-qualified dividends are taxed at ordinary income rates.

Anyone investing in foreign products or companies generating ordinary income, or PFIC income, should do so through an insurance policy. Gains inside of a Private Placement Life Insurance policy are tax free if held for the life of the insured or tax deferred if taken out as a distribution by the insured.

In most cases, you can use low interest loans against the policy to access the cash during the life of the insured without incurring U.S. tax. Also, you can typically withdraw your original investment in the contract tax free.

But, the real value of a Private Placement Life Insurance policy is in allowing the investments to grow and compound tax free.

Another way to look at the PPLI is as giant IRA without distribution requirements or contribution limits. Investments in an IRA grow tax free (ROTH) or tax deferred (traditional). Add a UBIT blocker corporation to an offshore IRA LLC and you effectively convert investments that would have otherwise generated ordinary income into tax free capital gains.

Like an offshore IRA, a Private Placement Life Insurance policy increases your returns without increasing risk. This “structured alpha” is based on reducing tax costs, not increasing returns.  

Note that this article is focused on foreign investments and those returning ordinary income. A PPLI might not be right for U.S. investments taxed as long term capital gains rates. This is because distributions from the policy to the insured are taxed at ordinary rates.

Thus, it would be possible for a Private Placement Life Insurance policy to convert long term capital gains into ordinary gains. Conversely, if held (deferred) for many years and passed to your heirs tax free with a step-up in basis, a PPLI might be efficient for long term capital gains… it will depend on your situation.

A PPLI provides advanced investors a tax efficient management system not available in any other product. It offers the flexibility to invest in hedge funds, offshore companies, active businesses, foreign mutual funds, and offshore passive foreign investment companies without the tax penalties that keep average people from making these investments and realizing these higher returns.

Likewise, a Private Placement Life Insurance policy eliminates “phantom income” from partnerships or PFICs. Because the gains are tax free, there are no issues of taxable income on a K-1 when no actual distribution is made.

I’ll close by noting that PPLI’s offer excellent asset protection benefits. When held inside of an offshore trust, it’s impossible for a future civil creditor to breach your life policy or access your profits.

Add to this the fact that the trustee can retain the right to limit distributions to heirs if they’re being sued, and you will see significant multigenerational tax and asset protection benefits by combining an offshore trust with a PPLI.

These products are only available to accredited investors and qualified purchasers. You must have a net worth of $1 million (excluding your primary residence) or income of $200,000 (single) to $300,000 (joint) in each of the preceding two years to be an accredited investor. You will also need to have at least $5 million in net investments to be a qualified purchaser.

I hope you’ve found this article on Private Placement Life Insurance to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We can assist you to set up offshore and introduce you to a qualified PPLI agent.

We can also assist you to transfer an existing life insurance policy into a PPLI using a tax-free exchange (called a 1035 exchange).

Offshore Trust or Panama Foundation
Christian Reeves

Offshore Trust or Panama Foundation?

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The top two international asset protection structures are the offshore trust and the Panama foundation. These tools are very different from one another and I don’t think of them as competing solutions. Even so, I’m asked all the time, offshore trust or Panama foundation? In this article I’ll try to explain the differences.

A properly structured offshore trust formed in and managed from a tax free and max protect jurisdiction such as Belize or Cook Islands, provides the strongest asset protection. A foreign trust is more secure than a Panama foundation and offers a wider range of estate and tax planning options.

But these benefits come with limitations. In order to maximize the asset protection benefits, you must be willing to give up control of the assets. An offshore trust is best when a foreign trustee and a foreign investment advisor are making the decisions.

Likewise, the settlor (you) and any U.S. persons connected to the trust should not have the ability to replace the trustee nor the right to terminate the trust. If these rights rest in a U.S. person, a U.S. court can compel the trust be dissolved and the assets brought back to this country.

In most cases, both the offshore trust and the Panama foundation will be tax neutral. They’ll not increase nor decrease your U.S. taxes and all income and gains generated in the structure will be taxable to the settlor as earned.

A trust has additional advanced tax planning options not available to the foundation. For example, you can build a dynasty trust or multi generational trust that can eliminate gift, estate, and capital gains tax. In addition, a trust can hold a U.S. compliant offshore insurance policy which will operate as a massive tax free account, with no capital gains and estate tax due when the assets are distributed to your heirs.

For these reasons, an offshore trust is best for someone who wants to put a nest egg offshore for his or her heirs. A foreign trust will provide the highest level of protection and give you access to banks and investment options around the world typically closed to Americans. And it will accomplish this by bringing in foreign advisors and other professionals to make the trades, distancing itself from its American owner.

An offshore trust is not the structure for someone who wants to manage their own investments, is an active trader, or wants to protect an active business. A trust is meant to be static and stable over many years. It’s the castle behind whose walls you store your wealth… a castle that will stand the test of time and will prove impenetrable for decades and generations to come.  

If you prefer to balance flexibility with asset protection, then consider a Panama Foundation. While the offshore trust is about maximum protection, the foundation is about control and maximum privacy. If you need an estate planning and asset protection structure to hold an active business, look to a Panama foundation.

The Panama foundation is a hybrid foreign trust and holding company. It’s meant to hold both active businesses and investments (real estate, brokerage accounts, etc.). And it comes with many of the same asset protection benefits of a traditional offshore trust.

One reason I’m so high on the foundation is that it’s used by foreigners (Americans, Canadians, etc.), expats, and locals (Panamanians). Every wealthy family in Panama holds their local assets inside of a foundation. Also, the shares of most most banks, investment firms, and large businesses in the country are held inside of foundations.

Because Panama is a major financial center, and because the foundation is used by both locals and foreigners, it’s unlikely the laws will ever change. The Panamanian government will not reduce the protection or privacy of it’s foundations because to do so would go against their ruling class and entrepreneurs.

The bottom line is that both offshore trusts and foundations are sold asset protection and estate planning tools. Each has its strengths and weaknesses and each will give you access to a wide range of offshore banks and investment opportunities.  

So, should you go with an offshore trust or Panama foundation? That depends on your situation. If the above hasn’t answered this question yet, then consider the costs of each and compare that to amount of assets you need to protect.

The costs to form an offshore trust can range from $10,000 to $30,000 compared to $3,500 to $9,500 for a Panama foundation. Also, the costs to maintain an offshore trust will be much higher than a foundation because of the use of foreign trustees and advisors. Most foundations are managed by the founder / owner.

For this reason I recommend a trust when a client has $2 million or more in assets they wish to protect. More importantly, they have this amount in cash and want to hold it offshore to be managed by a Swiss, Cook Islands, or Belize investment advisor.

A Panama foundation can be formed for a variety of reasons. Most clients either hold $100,000 in assets or an active business. Because of it’s lower cost, the foundation is an excellent estate planning tool for anyone with foreign investments.

I hope you’ve found this article on the offshore trust vs Panama foundation to be helpful. For more information, and a confidential consultation, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to review your situation and devise a custom solution that fits your needs.

Best Lawsuit Protection
Christian Reeves

Best Lawsuit Protection

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The best lawsuit protection is an offshore trust… period. No structure or plan, no matter how complex, can compete with the good old offshore trust for lawsuit protection. It’s the only way to move your assets out of the United States, out of our court system, out of the reach of creditors and U.S. judges, and behind an impenetrable barrier.

To come to the conclusion that the best lawsuit protection is an offshore trust, I start from the position that all U.S. structures are flawed. Domestic asset protection is governed by U.S. law and U.S. judges. So long as your assets are in this country, they’re subject to the whims of an American court.

The way to escape our creditor friendly country is to change the jurisdiction and venue of the fight. To move your assets to a country that values your rights of ownership and self determination. To a country whose laws were specifically designed to protect you and your family from civil creditors and to get the case heard by a judge who will uphold those laws.

The two most important components of building the best lawsuit protection trust offshore are timing and control.

Timing is everything when funding an offshore trust. You must setup your asset protection structure before you have a problem. Once the cause of action has arisen, you will be unable to transfer assets out of the United States.

For example, if you hit someone with your car today, and fund a trust tomorrow, your offshore trust won’t protect you. A U.S. judge will likely claim the transfer is a fraudulent conveyance and hold you in contempt until you bring the cash back under his or her control.

  • The cause of action arises when the harm occurs, not when a case is filed.

The second component of the best asset protection is that you should give up control over your assets once they’re in the trust. Professional investment advisors and a trustee should be hired to manage the trust per your written directives. These experts should be outside of the United States and, like your assets, out of the reach of the U.S. courts. No one with the authority to dissolve or modify the trust should be in the United States.

Not everyone who sets up an offshore trust gives up control. It’s possible to retain control through a variety of mechanisms. What I’m saying here is that, if you want maximum protection, and truly the best lawsuit protection, you must turn over the management of the trust to a third party.

What I’m describing is the Cadillac of asset protection structures – an offshore trust formed in the perfect jurisdiction managed by licensed and experienced professionals. This is not an off the shelf product for the masses. It’s not a cheap solution. It’s the best in lawsuit protection, not some offshore shelf company sold on the corner to anyone with a few grand to protect.

Not everyone can afford an offshore trust, nor does every situation call for a top of the line solution. For example, I would not recommend an offshore trust to anyone looking to protect less than $2 million.

If an international trust isn’t appropriate, then the best lawsuit protection is the offshore structure you can afford to build, maintain, and keep in compliance.

If the Cadillac is a foreign trust, then the Ford is a Panama Foundation. This will cost a fraction of a trust, allows you to maintain control of your investments, and is a solid deterrent. This structure will get you into some good banks, doesn’t require a foreign trustee or investment advisor, and has a strong world image (Panama Papers notwithstanding).

Another lower cost option is to move your retirement account offshore. Rather than a trust, you might form a single member LLC, owned by your IRA, and place that with an international bank… one with no branches or exposure to the United States.

The most important advice I can give you about the best lawsuit protection, and going offshore in general, is this: If you can’t afford to do it right, don’t do it at all.

Any American living, working, investing, or doing business offshore is a target. The IRS is waging war on those who move their cash out of the reach of their government, and the penalties for failing to comply are severe.

For example, failing to properly report an offshore trust can result in minimum penalties of $40,000 per year ($10,000 for each missed form, 3520, 3520-A, FBAR and 8938). Worse, the penalties for 3520 and 3520-A can be 10% of the trusts assets. If the trust has $5 million, your penalty could be $500,000 per year!

For these reasons, you must hire a U.S. expert to quarterback your offshore plan. If you’re a U.S. citizen, you need someone who understands the laws of your home country and how those interact with your country of formation.

Remember that 100% of your risk of liability is in the United States. Your offshore trust or other structure is a tool to protect your assets from U.S. creditors. Thus, only someone experienced in both jurisdictions is qualified to help you achieve your goals.

If you’re unable or unwilling to pay the fees charged by U.S. professionals, stick to domestic asset protection. If you’re going to go offshore, you need to do it right or not at all.

I hope this article on the best lawsuit protection has been helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

offshore trust tax
Christian Reeves

Offshore Trust Tax Status and U.S. Tax Filing Requirements (Form 3520-A)

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An offshore trust owned by a U.S. person must file Form 3520-A and a variety of other reports to remain in compliance with the IRS. Here are the tax filing requirements for offshore trusts with U.S. owners.

First, allow me to define a few terms around offshore trust tax reporting:

Settlor or Grantor: The person or persons creating and funding the trust. The terms settlor and grantor are synonyms for estate planning and the U.S. tax code.

Owner of an Offshore Trust: The settlor is the owner of the trust until his death. Once the trust passes to the heirs, they become the owners for U.S. tax purposes.

Grantor Trust: A grantor trust is considered a disregarded entity for income tax purposes. Any taxable income or deduction earned by the trust will be taxed on the grantor’s tax return. The settlor(s) or grantor(s) are the beneficial owner of the trust for tax purposes until his or her death.

Beneficial Owner: The owner of the assets of the trust for tax purposes. More specifically, Any person treated as an owner of any portion of a foreign trust under the grantor trust rules (Sections 671 to 679 of the U.S. Tax Code).

U.S. Person: Any U.S. citizen, green card holder, or tax resident. This article is focused on offshore trusts owned by U.S. persons. The rules are different for offshore trusts owned by non-resident aliens who become U.S. persons after the trust is funded.

Tax Resident: Any person who spends more than 183 days a year in the United States.

Now let’s get to the U.S. tax filing requirements of offshore trusts with U.S. owners.

We start from the position that U.S. persons are taxed on their worldwide income, no matter where it’s earned and no matter where they live. So long as you hold a U.S. passport or green card, or are a U.S. resident for tax purposes, the IRS will expect you send them their share each year.

Next, all offshore trusts with U.S. owners are grantor trusts for U.S. tax purposes. This means that all income earned within an offshore trust is taxable to the grantor. Likewise, this means that the settlor is considered the beneficial owner of the trust assets for tax purposes.

Note that I repeatedly write, “for tax purposes.” The settlor may not be considered the owner of the assets for liability and litigation purposes. Also, she might not be the owner of the assets for estate planning purposes. This article on the U.S. tax status and filing requirements of offshore trusts looks at these matters only from the point of view of the IRS.

This all means that the settlor or owner of an offshore trust must pay U.S. tax on the taxable gains earned within the trust. This includes capital gains from stock trading, rental income from real estate, and the gain realized on the sale of any trust assets.

Of course, it’s possible for an offshore trust to have non-taxable gains. For example, profits earned within a U.S. compliant offshore insurance wrapper are not taxable to the owner.

The bottom line is that, any income earned within an offshore trust which is not within a tax exempt structure is taxable to the owner. Taxes are not deferred until the profits are brought into the United States, they’re due when the gains are realized.

U.S. Tax Filing Requirements for Offshore Trusts

The most important filing requirement for an offshore trust with a U.S. owner is Form 3520-A.

An offshore trust treated as a grantor trust for U.S. tax purposes must file IRS Form 3520-A each year. Gains, losses and ownership are reported to the IRS on this form. It doesn’t matter whether there were transactions or gains in the trust, Form 3520-A must be filed each and every year.

Failure to file Form 3520-A, or filing an incomplete or inaccurate Form 3520-A  can result in a penalty of the greater of $10,000 per year or 5% of the gross value of the trust assets owned by U.S. persons. That means that the minimum penalty for failing to file this form is $10,000 per year.

An offshore trust where the settlor is alive and a U.S. person will be 100% owned by a U.S. person and the penalty for failing to file Form 3520-A will be 5% of 100% of the trust assets. In the situation where the settlor has passed and one or more of the beneficiaries are not U.S. persons, the penalty will apply only to the portion of the assets owned by U.S. persons.

Note that an offshore trust with U.S. owners must also file Form 3520 to report changes in ownership and certain transactions involving the trust. Failure to file this subform will result in an additional penalty of the greater of $10,000 per year or 5% of the gross value of the trust assets owned by U.S. persons.

So, failure to report an offshore trust in a year where both Form 3520-A and Form 3520 are required can result in a total penalty of $20,000 or 10% of the gross assets. Miss these forms or file them incorrectly for a few years and the penalties add up quickly.

Foreign Bank Account Report (FBAR)

The most basic offshore form is the Report of Foreign Bank and Financial Accounts, Form FinCEN 114, generally referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

The $10,000 amount is the value of all offshore bank and brokerage accounts combined. If you  have 4 offshore accounts, each with $4,000, your total offshore balance is $16,000 and an FBAR report is due each year.

The penalty for failing to disclose an offshore bank account is $10,000 for each non-willful violation. If the violation is intentional, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. A separate penalty will be imposed for each year you failed to report the international bank and/or brokerage account associated with your offshore trust.  

In addition to filing the Foreign Bank Account Report, your offshore account must be disclosed on Form 1040, Schedule B of your personal tax return.

Other Tax Forms for Offshore Trusts

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations. If your trust owns a foreign corporation, Form 5471 will be required.

A foreign corporation or limited liability company owned by an offshore trust should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity.

Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities. If your foreign trust owns an offshore Limited Liability Company, you might need to file Form 8858. If not this form, then Form 5471. Which form is required is determined using the instructions to Form 8832.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation. If your offshore trust invests in a U.S. business, or in an offshore corporation that does business in the United States, you may need to file Form 5472 to report U.S. source income.

Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation. Form 3520 is generally used to report transfers to an offshore trust. Form 926 can be required if you transfer property into a foreign corporation owned by your trust.

Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States. Whether this Form 8938 is required will depend on many factors, such as the value of your foreign assets and whether you’re living in the United States or abroad. I won’t go into the details here. Suffice it to say that most offshore trusts are large enough that Form 8938 is required.

Conclusion

Because of the complex web of tax forms and rules that apply to offshore trusts, the severe penalties for getting it wrong, and the potential to use an offshore trust as a tax planning tool (when combined with an insurance wrapper) or as a way to minimize estate tax, I strongly suggest you hire a U.S. expert to form your structure.

Only a U.S. tax and asset protection lawyer is qualified to design and implement an offshore trust for an American citizen or resident.

Only a professional with years of experience in the field should be hired to quarterback your asset protection team.

Only a U.S. lawyer can build an asset protection trust to protect you from U.S. creditors. If your risks are in the United States, so must be your legal counsel.

Only a U.S. tax expert is qualified to keep your offshore trust in compliance.

Only an attorney experienced in both offshore planning and U.S. taxation can assist you with pre-immigration planning using offshore trusts.

Sure, it’s cheaper to hire an offshore trust agent. Take a read through the penalties for failure to file or report again, and then consider whether the savings are worth the risk.

Here’s the bottom line: If you can’t afford to do it right, don’t do it at all. If the amount of assets you want to transfer offshore don’t warrant hiring a U.S. lawyer, then don’t go with a trust. Plant your first flags offshore in a less costly and less complex structure.

For example, if you will move $100,000 offshore, go with a Panama Foundation rather than an offshore trust. The cost savings will be significant and the Foundation offers many of the same asset protection benefits. Also, a Panama Foundation is a great way to hold active trading accounts and businesses, which don’t play well with offshore trusts.

If you want to take a U.S. retirement account offshore, use an offshore IRA LLC rather than an international trust. Your setup and ongoing costs will be a small fraction of those associated with a properly designed trust.

Finally, it’s possible to invest offshore and legally report nothing to the IRS. If you buy foreign real estate, or hold gold offshore in your name, there will be no IRS reports to file. Stick to gold and real estate, avoid offshore structures, and do not have an offshore bank accounts with more than $10,000, and your investments will remain totally private.

Assets within an offshore corporation, including gold and real estate, must be reported on Form 5471. The above refers only to assets held in your name without a corporate structure, LLC, or foreign trust. For more, see: Offshore Privacy Exists!

I hope you’ve found this article on the U.S. tax status and IRS filing obligations of offshore trusts to be helpful. For more information on building an international asset protection structure, please contact me at info@premieroffshore.com or call us at (619) 483-1708 for a confidential consultation.

Christian Reeves

Offshore Asset Protection for Affiliate Marketers

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Affiliate marketers face unique asset protection, privacy, and tax planning challenges. This article will review your options and point out some of the pitfalls to watch out for. We’re specialists in offshore asset protection for affiliate marketers and can help you to grow your online business in an efficient and compliant manner.

At the end of the day, www.premieroffshore.com, and our lifestyle site www.escapeartist.com, are internet based businesses. I write SEO optimized posts like this one to drive traffic and bring in leads. We’re a remote business with our publishing group based in San Diego and fulfillment in Belize and Panama City.

As the editor and chief marketing guy, I spend my days on the road, tapping away on my laptop. Our in-house attorneys are chained to their desks, but I made sure the marketing team was portable.

We’ve been providing offshore asset protection to affiliate marketers via the web since 2003 and understand the unique needs of your business model. We’re the only firm that provides offshore structures and U.S. tax compliance… at least, the only one in the middle of the market. Our price points are a bit lower than Deloitte, PwC, and E & Y.

  • Our offshore protection structures are positioned in the middle of the market. Less than big name CPA firms and higher than offshore incorporation mills that provide no guidance or support.

This post will focus on asset protection for affiliate marketers. As I said above, we also provide tax planning for offshore businesses, as well as for those in the U.S. territory of Puerto Rico. For more on Puerto Rico, see: Puerto Rico is the Top Offshore Jurisdiction for Americans.

To summarize Puerto Rico, if you move your business to the island, and hire 5 employees, you’ll cut your U.S. tax rate to 4%. To compare that tax deal to moving offshore, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

The remainder of this article will focus on offshore asset protection. Offshore asset protection for affiliate marketers is generally tax neutral – it should not increase nor decrease your U.S. taxes. It’s meant to keep your transactions private and your cash safe from future civil creditors.

You can combine offshore asset protection with an office or division offshore that helps to manage your worldwide tax obligations. But, your asset protection plan is independent of your international tax plan. Thus, you might start with an offshore asset protection plan for your affiliate marketing business and grow it into a business tax savings plan.

Issues in Asset Protection for Affiliate Marketers

When planning an offshore asset protection structure, affiliate marketers face a number of interesting challenges. For example, the need for privacy and the ability to diversify with  subsidiaries are more urgent than with other business models.

Affiliate marketers value their privacy. For this reason, we created the Panama max privacy structure. We use a Belize LLC as the founder of a Panama foundation and a Panama corporation under the foundation to run the business. We can add corporations from other jurisdictions, as active business subsidiaries of the foundation, where necessary.

For more on our max privacy structure, see: The Bearer Share Company Hack

The Panama foundation provides estate planning and asset protection for your business units… and acts as a holding company to bring them together under one umbrella.

Panama offers great asset protection and banking facilities. The problem is that they have a public registry of ownership. That means the founder of a foundation, along with the shareholders and directors of corporations, are public record. We work around this with a Belize LLC because Belize doesn’t maintain a registry and Panama allows the founder to be a person or a foreign company.

That’s all a fancy way of saying that the Belize LLC maximizes privacy by acting as the founder of your Panama Foundation. When someone searches the Panama registry, all they find is the name of your Belize company.

I believe you’ll find that the Panama foundation is the best choice when planning an asset protection structure for your affiliate marketing business. It’s primary competitor, the offshore trust, is a great tool, but not recommended for managing an active business.

An offshore asset protection trust is the solution for someone who wants to build a nest egg offshore out of the reach of future civil creditors. You can add money managers as trustees and maximize protection with a “protector” in case you (the settlor) come under duress.

That is to say, an international trust is perfect for someone who wants to put cash away for the future. A trust is not the structure to hold an active business where you want to maintain control and maximize privacy.

Many of our clients move a portion of their after tax net profits out of the Panama structure and into an offshore trust. You can combine both for the best of both worlds while diversifying your holdings.

Offshore Merchant Accounts

Specializing in offshore asset protection for affiliate marketers means working with many banks and acquirers around the world. We’re experienced in merchant account issues as described here: How to Get an Offshore Merchant Account.

For example, many of our clients run multiple MIDs and require subsidiaries from a variety of jurisdictions to hold those accounts.  This allows them to maximize privacy, diversify risk, and build systems that spread chargebacks among their portfolio.

To support this requirement from affiliate marketers, we’ve built a network of agents around the world. We can incorporate subsidiaries in a different countries quickly and at a reasonable cost.

We also understand that subsidiaries must be formed in countries which are acceptable to your processor. For this reason, we have U.K., Hong  Kong, E.U., Caribbean, and Panama solutions. We also advise on U.S. accounts for companies in Puerto Rico.

  • A comapny incorporated in the U.S. territory of Puerto Rico can open bank accounts at just about any U.S. bank.

Another option for a business with no office or employees in the United States, is to form a subsidiary in the U.S. That subsidiary will hold only bank and merchant accounts and pass profits to the parent company.

This solution is recommended for entities with no U.S. source income. You will likely need a U.S. person to open the account… it’s become difficult for foreign persons to open U.S. accounts… and nearly impossible for non-U.S. persons without U.S. credit scores to get a low cost merchant account.

Why Hire a U.S. Provider?

Internet marketers know how to outsource. How to leverage low cost labor around the world to get things done. Why should you pay U.S. prices for your international tax or offshore asset protection plan?

Simple: only a U.S. expert can build an offshore asset protection structure that’s U.S. compliant.

When you outsource  your offshore structure, you will get answers to your questions and solutions based solely on the laws of that country. For example, contact an offshore trust promoter in Cook Islands and they’ll answer inquires based on Cook Island law.

But, when you’re a U.S. citizen, your compliance risk and liability from lawsuits is in the United States. Thus, the focus should be on how the laws of your asset protection jurisdiction interact with those of your home country.

Since this is a post on asset protection for affiliate marketers, here’s a tech example…

You, the IT professional, can outsource website design because you’re an expert in website design. You know exactly what you want to accomplish and how to get there. You write the text and manage the process from start to finish.

What if you weren’t an expert in design or SEO issues? Should you hire someone to quarterback the project or should you outsource? Knowing what you know now, would you have gone it alone or hired someone to guide you in those early days?

You’d hire a quarterback because you don’t know what you don’t know. As an an expert, you understand how complex a major design or redesign can be. You know that a layperson will likely screw it up terribly, putting the entire project at risk.

This knowledge has come over years in the industry. Through trial and error, you know where the pitfalls are. You know how to drive traffic and optimize your sites. You know what works and what doesn’t.

I have a friend who’s new to the online world. He was tasked to redesign a 10 year old website with 15,000 pages and a solid Google reputation. The owners of the site didn’t want to spend any money, so he was on his own and outsourced design.

While updating the site, he thought it would be a good idea to restructure the URLs. To create a few different categories and make the permalinks more descriptive.  Yeh, he decided to change the URL structure and break the thousands of inbound links for an authoritative site… the links that gave the domain much of its “reputation.”

As an internet professional, you know what a bad idea it is to change the URL structure of an authoritative website with years of history. But my friend had no idea what he didn’t know. Had he hired a quarterback, the expert would have stopped him from falling in this obvious trap.

It’s the same when planning an offshore asset protection structure. You need someone to manage the process and keep you in compliance. Outsource and the promoter will tell you what you want to hear (sure, we can restructure your URLs). Hire an expert and they will tell you “no,” when you need to hear it!

For example, when you want to use a nominee singor on your offshore bank account, you need to hear no. When you, a U.S. resident with no employees offshore, want to setup a company to hold foreign profits and only pay U.S. tax when you bring the money into the U.S., you need to hear hell no!

As with internet marketing, there are many risks in going it alone. Unlike online risks, the penalties for getting out of compliance or using an offshore structure incorrectly can cost you hundreds of thousands of dollars in penalties or even land you in jail. The U.S. government has become extremely hostile to non-compliant offshore structures and you must have an expert in your corner to keep you from becoming a target.

The world of offshore is ever changing, complex, and fraught with risks you can’t see. We can guide you the maze and quarterback your offshore structure, all with a focus on your internet based business.

I hope you’ve found this article on asset protection for affiliate marketers to be helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

offshore asset protection trust
Christian Reeves

Don’t Believe the Media Hype Around Offshore Asset Protection Trusts

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Ever since the Panama Papers, bashing the offshore asset protection industry has been chic. Every publisher on the planet has put out articles on how the rich abuse the system, hide their assets in offshore asset protection trusts, and don’t pay their fair share of taxes. The problem is that very few writers truly understand the industry and the complex web of worldwide tax laws in play. They tend to focus on the laws of jurisdictions such as the Cook Islands and ignore how those laws interact with those of the client’s home country.

This results in one sided and naive articles by good writers who can’t get beyond the hype surrounding their subject matter. They see only the tip of the iceberg and miss the mountain lurking below the surface.

These articles create great risk for U.S. citizens who read them as “how to” guides rather than the tales of injustice and inequity they’re meant to be. They do harm to U.S. citizens who contact an offshore provider to “do as they read” and get crushed by the system.

I know this to be true because I get calls everyday from people who want to incorporate offshore. They want tax savings like Apple and Google or asset protection as described in The New York Times. They don’t want to do anything illegal, they just want to use these amazing trusts and corporations they read about.

In most cases, I tell them tax savings is impossible because their business is too small (unless they move out of the United States and qualify for the Foreign Earned Income Exclusion) and that it’s too late to protect their assets. That the horses have bolted, so there’s no need to lock the barn door.   

Had they called an offshore provider rather than a U.S. firm, the answer they would have received would’ve been very different. They would’ve likely been told that their business won’t be taxed in Panama or that no one has ever breached a Cook Island offshore asset protection trust. Both of these may be true, but they ignore the realities of how an offshore structure will interact with U.S. law.

My purpose here is to separate fact from fiction and explain some of the limitations of an offshore asset protection trust. My comments are in response to an October 15, 2016 post in Business Insider on offshore asset protection trusts. The title of the article is A sociologist trained to become a tax-avoidance expert — here’s what she learned about how the ultra wealthy keep their money by Brooke Harrington.

Let me start by saying that I’m not saying Ms. Harrington’s article is factually incorrect. Her post is well researched and expertly written from an offshore perspective. In fact, much of it would make great marketing collateral for a Cook Islands Trust provider (an idea she probably finds repugnant).

However, because her article fails to take into account how the laws of the Cook Island interact with those of the United States, it gives the impression that a U.S. person can move their assets offshore with impunity. The fact that this will create confusion in a small subset of her readers is an unintended consequence of a lay person writing on offshore asset protection and publishing to a global audience.

For example, an American going through a divorce might read her article, call up a Cook Islands agent, be told what they want to hear, and move their assets out of the reach of their spouse. This will create a world of pain in the United States, no matter how the trust is viewed under Cook Islands law.

The author is not giving legal advice nor advocating for offshore asset protection trusts. I assume her purpose is quite the opposite – to expose inequity and argue against the availability of these structures. Nor is she writing only for Americans, though one of her three examples is a U.S. case.

However, by publishing on major platforms like Business Insider and The Atlantic, her words will reach those who can act upon them. People who will believe the hype to their detriment.

Here’s a little background: Brooke Harrington is an associate professor of economic sociology at the Copenhagen Business School. The article referenced here is soon to be a book published by Harvard University Press about elite occupational groups within finance and their impact on international law and stratification.  

She’s spent 8 years researching the international wealth-management profession and was so committed that she trained to become a wealth manager. She wrote, “I spent weeks in hotel conference rooms in Switzerland and Liechtenstein learning about trust and corporate law, financial investment, and accounting. Ultimately, this earned me the “Trust and Estate Planner” qualification (TEP): an internationally recognized credential in wealth management, much like the CPA for accountants.”

  • A CPA requires a 4 year college degree, though most in the United States go 6 to earn a master’s degree. A CPA also requires passing a difficult exam and 500 hours of documented work experience (usually for free in service of a CPA firm).

Even with all of that training, none of which was in the United States, she misses the elephant in the room: the fact that the laws of the settlor’s or defendant’s home country will often control the tax and asset protection benefits of their offshore structure.

If someone with this many hours of training can’t see the forest for the trees, what chance do less committed lay writers have? This is why so many get it wrong.

Here are a few of the sections of the article that might mislead a U.S. citizen:

Quote: “Looking at a costly divorce? No problem—just hire a wealth manager to put your assets in an offshore trust. Then the assets are no longer in your name, and can’t be attached in a judgment. Even if a foreign court sought to break your trust, if you have a clever enough wealth manager, you can be made effectively judgment-proof. Consider the case of the Russian billionaire Dmitry Rybolovlev, who has just settled what has been termed “the most expensive divorce in history.”

Although a Swiss court initially awarded half of Rybolovlev’s roughly $9 billion fortune to his ex-wife, Elena, an appeals court later ruled that most of those assets are untouchable in the divorce settlement because they are held in trust or are otherwise inscrutable to the law. (The amount of the agreed-upon settlement has not been disclosed.)”

Answer: Americans, don’t get it twisted. You’re NOT Russian oligarchs free to do as you like. Putin doesn’t have your back (unless your name is Trump or Snowden).

You’re a U.S. citizen and subject to our laws first and foremost, no matter what your offshore estate planner tells you.  If you set up an offshore trust to cut out your current spouse, you’re more likely to end up behind bars than on a beach in the Cook Islands. Here’s why:

Anytime you convey an asset in order to delay a creditor, you’re engaging in fraudulent conveyance. If you’re aware that your assets are at risk and should be used to satisfy a legal obligation and you move that asset out of reach, you have NOT committed a crime. Exceptions would be if there is actual fraud or crimes related to hiding assets from a bankruptcy court.

However, moving community or joint property out of the United States without your spouse’s consent, or to prevent a court from administering a division of assets, can be a crime. You may be charged with theft, embezzlement, etc.

Rather than going through all the trouble of charging and convicting you of a crime, a judge can simply hold you in contempt until you return the assets.

In most divorce cases, the judge issues a “standing order” instructing each party not to do certain things, such as take each other’s money. If you violate that order by sending community / joint property offshore, you can be held in contempt of court, fined, and jailed.

And don’t think that the “impossibility defense” will save you from a contempt charge. While impossibility is a defense to civil claims, self-created impossibility is not a defense to fraudulent conveyance. Nor will a judge accept this defense in a divorce case. After a few weeks or months of cooling off in the local jail, you’ll probably see your way clear to instructing your offshore trustee to bring the cash back to the U.S.

Note that there are legitimate uses of offshore asset protection trusts in divorce cases. For example, to hold separate property that you came into the marriage with and both parties agree will remain separate. If you’re already married, you might use a transmutation agreement to separate your assets and then fund an offshore trust.

Quote: “No litigant on earth has been able to break a Cook Islands trust, including the U.S. government, which has repeatedly been unable to collect on multi-million-dollar judgments against fraudsters convicted in federal court. These include infomercial king Kevin Trudeau, the author of a series of books on things “they” don’t want you to know, as well as an Oklahoma property developer who defaulted on his loans from Fannie Mae.

Since 2007, the two have owed Uncle Sam $37.5 million and $8 million respectively, and they have employed some clever wealth-management strategies to avoid paying those judgments. With their fortunes secure in Cook Islands trusts—on paper, at least—there is no way for the U.S. government to force payment unless it wants to send a legal team on the 15-hour journey to Rarotonga (capital of the Cook Islands), where the case would be argued under local laws.

Needless to say, those laws are not very favorable to foreigners seeking to access the assets contained in local trusts.”

Answer: The concept that “no litigant on earth has been able to break a Cook Islands trust,” is very dangerous. Going into battle with the U.S. government with that mindset will be disastrous. It may be true that your assets are safe in the Cook Islands, but your most important asset will likely be sitting in jail.

When I (a U.S. practitioner) write about the strength of an offshore asset protection trust, I say that the Cook Island Trust gives you maximum protection against future civil creditors. It’s not intended to protect you from the IRS, SEC, or other government creditors. Nor is it meant to protect against current or reasonably anticipated creditors.

Using the trust to protect assets from current or reasonably anticipated civil creditors creates the fraudulent transfer issue mentioned above. The quickest way to break an offshore trust is to hold the settlor in contempt until the money is returned to the U.S. The court doesn’t need to break the trust when it can break the defendant.

So long as you create and fund the offshore trust well before the cause of action or debt arises, you will avoid the fraudulent conveyance issues. That is to say, a fraudulent transfer is one that is made after the harm has occurred. If you’re proactive, you can avoid the issue and your trust will hold up against civil creditors.

Going to battle with the United States government is a different matter. Just about any case can be escalated to a criminal charge, which makes transferring assets offshore or using an offshore trust very high risk. Also, a judge is more likely to hit you with contempt of court for refusing to pay the U.S. government than the average civil creditor.

As noted in the article, Kevin Trudeau has about $37 million offshore and untouched by the U.S. government. The same goes for Mark Rich with $100 million in a Cook Island Trust and Allen Stanford with a “sizable” offshore asset protection trust on the island. Mr. Trudeau is serving 10 years, Mr. Stanford 110 years, and Mr. Rich was pardoned by Bill Clinton. All of them chose the Cook Islands to protect their assets.

Let’s focus on Ms. Harrington’s example of Kevin Trudeau. Mr. Trudeau was sentenced for criminal contempt for violation of multiple court orders and failure to pay a $37 million fine. The 10 years he got is extremely unusual for a contempt of court charge. Had he closed the trust and paid the bill he might have done a year or two, but certainly not 10.

Keep in mind that one of the primary reasons Mr. Trudeau is doing time is his Cook Island trust. He chose to do the time rather than pay the fine. I would never hold him out as the poster boy for the benefits of a Cook Islands asset protection trust!

You might be thinking that you’d trade $37 million for 10 years in a low security prison. Well, it’s unlikely Mr. Trudeau will ever see his money.

For example, all the revenues from his books and business are being taken by the court. As of October 2015, the trustee had collected $8 million in royalties from the sale of Mr. Trudeau’s books while he was incarcerated. It was used to give a partial refund to more than 820,000 people who bought his book, The Weight Loss Cure “They” Don’t Want You to Know About.

Assuming good behavior, he will do about 85% of the time, or 8.5 years. When he gets out, he’s looking at years of probation. He will not be allowed to travel internationally during this time and any money he makes will be paid to the U.S trustee overseeing his finances.  

Let’s say he’s off paper in 2023. Now the U.S. government has a few more tricks up their sleeve. They may refuse him a passport or file additional contempt charges for refusing to pay his debt. Prosecutors can also make his life hell while on probation, causing him to violate and be returned to jail.

  • A U.S. passport is a privilege and not a right. In 2016, the IRS and other government agencies have used passport revocations and refusals to renew as a weapon against tax debtors. If Mr. Trudeau can’t travel abroad, he won’t be able to spend his cash.
  • For an article on the topic, see: Warning: The IRS Can Now Revoke Your Passport

So, it’s true that a Cook Islands Trust will protect your assets from the U.S. government. These trusts have never been broken and the United States seems unwilling to litigate on the Island. However, many Americans have been broken by U.S. judges over the years.

Unless you’ve made a sizable donation to the Clinton Foundation (Mark Rich), or are willing to do 10 years for your principals, I don’t recommend going to battle with the U.S. government with an offshore asset protection trust. While the trust will remain intact, the government will make an example of you as they did and will continue to do with Mr. Trudeau.

When the options are pay up or go to jail, most pay. For this reason, offshore asset protection trusts are the best protection available against future civil creditors. Don’t let the hype confuse you into thinking they’re a magic bullet protecting you from the IRS, FTC, SEC, or any other three letter agency.

I’ll leave you with this: You must hire an attorney in your country to form your offshore trust. The key to a successful asset protection structure is combining the laws of your home country with those of a more favorable and defendant friendly offshore jurisdiction. Only a U.S. attorney can advise a U.S. citizen on how to work within the system and maximize the value of an offshore trust.

I hope you’ve found this article on the hype vs. the reality of offshore asset protection trusts to be helpful. Please contact me at info@premieroffshore.com or (619) 483-1708 for a confidential consultation on this and other international asset protection and trust topics.