March 2022

Pros & Cons Offshore Asset Protection Trust: When to use an Offshore Trust   Today many estate planning firms tout the benefits of Offshore Asset Protection Trusts as instant asset protection solution for every individual looking for the end-all, be-all. It feels to them like finding a the last raft on a ship that has a pin-sized hole in it. Their first instinct is to throw out the raft and jump off the boat immediately. Unfortunately, things since 9/11 and the global financial crisis of 2008 have changed in this country. Prior to 9/11 we recommended Offshore trusts for a much larger percentage of clients, but that is no longer the case.   The problem is that 99% of the time, jumping off the boat is not the best solution because the nearest land is thousands of miles away and the hole is not that large. What they actually need is for the captain to help them analyze all of their options, the safest and easiest of which is to simply plug the hole. Of course if someone is selling rafts, then it’s even more difficult to expect them to recommend a thoughtful and unbiased solution.   And this is the real challenge if you are considering an Offshore Asset Protection Trust. I am a big advocate of the Offshore Asset Protection Trust (just like I am an advocate of rafts) – but in both cases only when they are absolutely necessary and appropriate. In fact, offshore asset protection trusts are only recommended to a very small percentage of clients these days; those with at least $7-10M liquid assets.     Why an Offshore Asset Protection Trust is a Bad Idea for Most People   Because of the new regulations from the Patriot Act and subsequent banking acts, offshore asset protection trusts are very expensive to maintain.   Going offshore to establish asset protection trusts means going out-of-pocket for between $5,000 to $10,000 per year in maintenance fees. Because of these expenses, many of these offshore trusts will only last about three to four years for the average individual, particularly if they were created in a rush to thwart a perceived upcoming risk; for this reason, grantors often question whether their hasty decision was indeed the right one at the time.   Offshore Trust Maintenance Fees Explained   There are quite a few mandatory and compliance forms to file when going offshore. At a minimum, there’s Treasury Department form 90-22.1, Report of Foreign Bank and Financial Accounts to consider. There may also be a requirement to file a Foreign Bank Account Report (FBAR), which falls under the authority of the Financial Crimes Enforcement Network (FinCEN) form 114.   Aside from filing TD and FinCEN forms, offshore trust grantors may also have to respond to the Internal Revenue Service (IRS) by filing forms 3250 and 3250A. These forms, which require disclosure of trust assets, are handled by a foreign trustee and a CPA based in the United States. As of December 31st, 2012, the U.S. Foreign Account Tax Compliance Act (FATCA) is creating an additional burden on offshore trust grantors and trustees by requiring financial institutions abroad to report on the financial holdings and income of their clients.   With the new filing and compliance requirements also comes uncertainty as to how offshore trusts are managed. It calls for retaining the services of an attorney to work in conjunction with the foreign trustee. If you take into consideration all of the aforementioned factors, it is easy to see the $10,000 annual maintenance cost of an offshore trust.   Why $10,000 Offshore Trusts Are Not Always Sustainable   The mid and long-term costs of maintaining offshore trusts for asset protection simply do not add up for most individuals. With regard to offshore trusts being sustainable solutions, consider the following scenario:   An offshore trust with a $10,000 set-up fee and $5,000-$10,000 in annual maintenance costs will end up adding up to:   Between $25,000 and $50,000 after five years and five IRS Form 3250 filings. Between $50,000 and $100,000 after 10 years and 10 IRS Form 3250 filings. Between $100,000 and $200,000 after 20 years and 20 IRS Form 3250 filings, assuming no inflation.   It’s not just the sizable amount of money required to keep offshore trusts active year after year that prompts most individuals to dissolve them after just three to four years; there’s also the experience and expertise of the firm to think about. Many financial planners rushing their clients through a $10,000 Offshore Trust lack the real-world experience of a firm that actually files and executes documents, disclosures and compliance forms.   As an alternative, some of our competitors propose a better plan that avoids much of the heavy compliance of the foreign trust because they use a foreign trust in combination with a domestic limited partnership structure for a $25,000 inception cost and “only” $1,500 per year maintenance cost (who knows how much these costs will rise each year once you are locked in). They justify the fee because they insert themselves into your trust as a trust protector. Essentially giving themselves the ultimate control over your assets. Their costs will work out to:   $25,000 in the first year $32,500 by the 5th year $40,000 by the 10th year $55,000 by the 20th year   Prospective grantors looking for asset protection strategies should not throw caution into the wind. If anything, shielding assets in advance of a knowingly potential adverse situation should be approached with circumspection. Offshore trust structures are actually very good for grantors who fund their nest eggs with about $7M to $10M, and they can offer a enormous amount of asset protection if executed correctly; however, some plaintiffs have found cracks in the armor and some judges are beginning to formulate a dim view of these instruments.   A Better and More Affordable Long-Term Asset Protection Strategy   A much more optimal alternative to offshore asset protection is the Ultra Trustâ„¢. It