Offshore planning is usually associated with asset protection. In fact, a number of small countries make a business out of it. And, most of debtor havens are tax havens as well. Small, wealthy countries such as the Duchy of Luxembourg and Switzerland are in competition with smaller, poorer countries such as those in the Caribbean Commonwealth (CARICOM), pacific island countries such as Nauru, Vanuatu and other colonies and protectorate countries of the British Commonwealth.

All of these jurisdictions offer the same thing: They do not enforce U.S. judgments in their courts. In short, if a creditor wishes to recover assets, he must do so even though the creditor has a judgment in the U.S. There is no chance of the creditor being successful because these jurisdictions have padded their laws with provisions such as a short statute of limitations and restrictive fraudulent transfer laws. These provisions benefit the debtor.

In addition, these jurisdictions have strict confidentiality laws which make it a criminal offense for any financial institution or trust company to divulge information about their clients without a court order from that jurisdiction.

The intent of these jurisdictions is to be as friendly as they can be to the debtor in order to attract asset protection business. In fact, these jurisdictions compete for the best laws. And the courts in these jurisdictions are debtor friendly and as a matter of course make decisions that keep creditors from reaching assets even in situations involving securities and consumer fraud. Because it would be bad for business, it’s rare that a court in these jurisdictions reaches a decision in favor of a creditor.

However, just as these offshore courts do not respect U.S. laws and judgments of U.S. courts, U.S. courts do not have to respect the laws of these havens or judgment of their courts either. A long as U.S. courts have jurisdiction over the physical person of a debtor and throw can him/her in jail for contempt, it can also order the debtor to repatriate his/her assets from the havens to satisfy the creditor’s judgment. So, in order for offshore planning to be successful with the debtor’s assets offshore, the debtor must remove himself from the reach of U.S. courts as well. However, while this might work for some, it is unworkable for the majority of debtors because leaving the country entails leaving behind families and comforts behind.

The strength of offshore havens is that persons and things physically located in the havens are not subject to U.S. Court judgments and Orders. These courts are not bound by the Constitution of the U.S. nor are they interested in U.S. court judgments. Rather, offshore courts pride themselves in repulsing attempts of U.S. courts when they attempt to assert judgments offshore.

Along with judgments, offshore courts ignore discovery orders of U.S. courts. If an offshore trust is subpoenaed, the subpoena will be ignored and there isn’t anything a U.S. court is able to do about it. Therefore a creditor will find that evidence will be difficult to obtain in an offshore haven. Therefore a creditor is denied a witness to testify issues involving transactions, or the trust will either refuse to produce the documents or have them destroyed. Even if the debtor consents to discovery, the process is very time consuming in offshore havens, and costs a lot of money besides. Another problem faced by creditors is the difficulty of a U.S. court asserting jurisdiction over a person offshore or an offshore entity, which is important if the offshore person is a necessary party to a lawsuit (meaning, the lawsuit won't go forward if that party isn’t brought into the case.)

The most popular use of offshore companies is the manager or general partner for U.S. limited liability companies (LLCs) and limited partnerships. This means that, even if a creditor obtains a charging order against a debtor’s interest, the creditor won’t be able to force the offshore manager/general partner to distribute without litigation abroad.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.