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.