Do Offshore Trusts Protect Your Assets?

Physician's Money Digest, February15 2003, Volume 10, Issue 3

Most physicians are rightfullyworried about theprospect of a malpracticesuit. But what happens if yourteenage child gets in a terrible caraccident? In many states, parents areliable for their children's automobileaccidents until age 18. So how doyou protect your assets from theeffects of a reckless teen's driving?

And then, we've all heard ofridiculous lawsuit verdicts. In December1997, a woman successfullysued the owner of a nightclubwhen she fell from the bathroomwindow to the floor and knockedout her 2 front teeth. This occurredwhile the woman was trying tosneak out through the window toavoid paying the club's $3.50 covercharge. The woman was awarded$12,000 and dental expenses.

Having your funds secured in anoffshore trust is certainly legal. Thewealthiest families in America havedone this for years and years, but itmay also be a necessary fixture formost physicians today.

THE ALL-PERILS POLICY

Offshore trusts are not a new concept.However, the asset protectioncomponent should be intelligentlytied into an overall integrated estateplanning technique in which lifetimeasset protection combines with theoverall estate plan. If you are lookingfor tax avoidance, simply establishingan offshore trust is not going to do itfor you. Consider the establishmentof offshore trusts as the cheapest "all-perilsinsurance policy" that youcan possibly acquire.

Domestic trusts remain subjectto the jurisdiction of the local courtsand, therefore, can reasonably beexpected to be a target in litigationagainst the settler if the domestictrusts hold a significant amount ofassets. Experienced attorneys wouldprobably be able to subject thedomestic trust to a "legal shakedown."An offshore trust, however,that is properly drafted, implemented,and administered is not nearly aslikely to be the same automaticdefendant as the domestic trustwould be in such a litigation.

A HAPPY-ENDING SUIT

Two years ago, a physician wasthreatened with a nonmedical-relatedlawsuit. If proven culpable, hemay have been liable for a settlementof up to $300,000. The claim wasdubious, but not without some basisin fact. A financial statement broughtto the attention of the plaintiff'sattorney pointed out that the physicianhad a net worth of approximately$18,000.The attorney was incredulous."I don't believe that," heasserted. "How can that be?"

Four years previously, the physicianhad established an offshore trustin Nevis. What assets were not in hiswife's name were placed in the trust.There were no fraudulent conveyanceissues, and if the plaintiff wanted toprosecute the physician civilly, theycould not touch the physician's offshoretrust funds because there is nocomity (ie, reciprocity) with Nevis. Inother words, a judgment from anyfederal or state court is not going tobe enforced in Nevis or many otheroffshore jurisdictions.

Second, if the plaintiff were tofile suit against the physician inNevis, they would have had to trythe case over again. The statute oflimitations begins to run from thedate of transfer, which had been 4years earlier. This did not give theplaintiff enough time to refile thesuit, as the statute of limitations hadrun out by then.

By law, contingency fees were notpermitted in this case, and the plaintiffwould have had to file a $25,000bond simply to begin proceedingwith the claim. Lawyers in Nevis arevery expensive because there are sofew of them. The $300,000 lawsuitwas settled for $25,000. The physicianwas thrilled that his "insurancepolicy" had worked.

MAKING YOUR DECISION

Life is random, and the future isunpredictable. Will these structureswork for you? It depends. There is arequisite skill level in designing anddrafting an offshore trust asset protectionsystem. This is not just a"form" that some lawyer has. Rather,it's a relationship. Your attorneyshould make certain that you cansuccessfully weather a storm at leastmoderately better than you wouldhave, had you not engaged in assetprotection planning.

The real litmus test for decidingwhether you want an offshore trust isthe degree of fear you have of losingyour wealth. In a country that owns70% of the world's lawyers and files90% of the world's civil lawsuits,where the average upper-middle-classindividual is likely to be sued atleast 4 times in their life, many thinkthat an offshore asset protection trustmight not be a bad idea.

What does it cost? Fees varydepending on what country andtrust company is utilized. However,the typical first year's fee, includinglegal fees, will be around $6000 to$8000, with administrative feesranging from $1000 to $2000 a yearthereafter, depending on the type ofservices needed. All things considered,it seems like a good adjunct"insurance policy."

Donald J. Purser is a managing

member of the Attorneys'

Estate and Business Planning

Group, with offices in Salt Lake

City and Virginia. He has

served as an adjunct professor

of law and has lectured nationwide on tax

strategies. He welcomes questions or comments

at 801-532-3555. For more information,

visit www.estateplanning.com/donpurser.