Control of Assets Held in an Offshore Trust

One major concern for people considering offshore trusts as a protection mechanism is control. Control of the assets. Giving one’s assets to a trustee who is expressly prevented from returning those assets by the express language of the governing trust documents can be scary, to say the least.  The rub is that control over the assets must be ceded, or else a court can disregard the trust.  This is not just an abstract concern but, rather, one that has resulted in actual losses for actual clients of other firms in reported cases involving foreign asset protection trusts.  So control over assets must be surrendered in order to gain the full benefits of an offshore protection trust, but clients are hesitant to surrender control.  How can we solve this problem?

Enter the Savvy Asset Protection Attorney

If a settlor retains control of trust assets, a U.S. court could simply order that settlor to make a distribution to her or himself, and such distribution would then be paid over to creditors.  That is a nightmare scenario.  So asset protection attorneys devised an incredible mechanism.  The trust protector.  In a broad theoretical sense, trustees “report” to trust protectors.  Trust protectors have no control of the actual management of the trust or decision-making with respect to trust assets.  Rather, the protector can hire and fire trustees, veto certain actions of the trustee, and otherwise make sure that the trustee is managing the trust in a manner acceptable to the settlor.

One obvious problem remains.   If a trust protector is a U.S. resident domiciled in the United States and subject to the jurisdiction of domestic courts, what is there to stop a judge from order the trust protector to replace the current foreign trustee with a person subject to the court’s jurisdiction–a person like the settlor?  Nothing.

There are a few ways that a smart asset protection attorney can deal with this problem.  The first is to appoint a trust protector who is not subject to the jurisdiction of U.S. courts but who is a trusted friend or family member of the settlor.  The second option is to give the trust protector only veto power over certain actions of the trustee.  In other words, the trust documents can specify that the trust protector can veto the affirmative actions of the trustee, even though the protector does not have the ability to replace the trustee.  In the event that a court requires the trust protector to exercise it’s powers, those powers will be of limited use in repatriating trust assets.

Use of Multiple Trustees

Another mechanism is the use of multiple trustees, some of whom will be domestic and at at least one of whom must reside in the jurisdiction of the trust.  If a lawsuit is ever filed, of course, the domestic trustees will be required to resign.  Only at that point, however, will the stigma of allowing a foreign trustee to control the settlor’s assets come into play, and hopefully by that time the foreign trustee (likely an institution with a very solid track record of asset management) will have earned the settlor’s trust.