An offshore trust can be a powerful tool for protecting a U.S. family's savings from future lawsuits. It is also widely misunderstood. Before you establish one, it helps to know who it is for, what it can do, what it can't do, and what makes the difference between a plan that holds up and one that fails.

Who should consider one

An offshore trust is typically a fit for people with more than $1 million in assets who are likely to be sued, or who worry about being sued. That includes physicians, business owners, real estate investors, developers and executives.

Some clients are very wealthy, but most are not. Most of the people who establish offshore trusts have between $1 million and $10 million in assets: enough that a single lawsuit could undo decades of work, but not so much that they have a family office managing risk for them.

What it can do

• Protect assets from future lawsuits. Once assets are held by an independent foreign trustee, a U.S. judgment is not automatically enforced against them. A creditor typically has to start over in the trust's home courts, under that country's law.
• Protect assets in a divorce. Assets placed in the trust before a marriage, or before marital problems arise, may be kept out of reach in a later divorce.
• Plan for many generations. The trust can continue for your children and grandchildren, with the same protection carried forward for each of them.
• Avoid probate. Because the trust, not you, owns the assets, they pass under the trust's terms without going through probate.

What it can't do

• Hide assets. Everything is reported to the IRS. The trust is disclosed every year on Form 3520 and related filings.
• Evade or reduce taxes. The trust's income is taxed to you as if you still held the assets. There is no tax benefit.
• Protect someone who keeps control or defies a court. A client who keeps the practical ability to move the money, or ignores a court order, may be held in contempt.

What the case law shows

Domestic asset protection trusts have failed at critical moments. In In re Huber (Bankr. W.D. Wash. 2013) and Toni 1 Trust v. Wacker (Alaska 2018), courts reached assets held in Alaska trusts. The problem is structural: a U.S. trustee and U.S.-held assets remain within reach of U.S. courts.

Offshore trusts with independent foreign trustees have typically held up when planning was done early and the client complied with court orders. A Cook Islands Trust adds deadlines that work in the client's favor under the Cook Islands International Trusts Act:

The four rules

Success typically depends on whether the trust maker follows four rules:

• Timing. Fund the trust before any threat exists.
• Legality. Make no fraudulent transfers, and stay fully tax compliant.
• Control. Give up control to the trustee. A trust you can still direct is a trust a court can direct through you.
• Compliance with court orders. Never defy one. The protection comes from the trustee's independence, not from the client refusing a judge.

The trusts that have failed in court typically broke at least one of these rules.

Setting it up

• Costs. Expect to invest roughly $20,000 to $40,000 to establish the trust, plus about $5,000 to $10,000 a year in maintenance fees.
• Hiring a law firm. Work with a qualified legal team. Your communications with your attorneys are protected by attorney-client privilege, and law firms operate under strict regulatory oversight.
• Choosing a trustee. Select a reputable, licensed professional trustee, such as Atlas Trust Company.
• The role of the Protector. The Protector's role is limited to changing trustees and amending the trust deed, subject to the trustee's consent. The Protector does not manage or move the money.
• When to fund. Fund the trust before a legal threat arises.
• How to fund. Funding typically involves opening an offshore bank account in the trust's name, executing deeds for real property, and using equity stripping where appropriate. Real estate raises its own questions; see Offshore Trusts and Real Estate.

Accessing funds and reporting

• Accessing funds. You can ask the trustee for distributions, and in ordinary circumstances the trustee may approve them. The trustee must deny a request made under court order or duress.
• Reporting requirements. You must stay fully compliant with every U.S. offshore reporting obligation, every year. That typically includes Form 3520, Form 3520-A, the FBAR and Form 8938, prepared with an accountant who knows foreign trusts.

An offshore trust typically works as part of a careful, transparent plan, set up early and maintained every year. Planned that way, it can give you and your family lasting peace of mind.