In 2004, our client Ruby, a retired physician living in Florida, established an irrevocable trust in Liechtenstein with funds totaling $1 million. Ruby’s goal was to protect her life savings from potential malpractice litigants. Ruby filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income.
In 2006, a former patient obtained a judgment against Ruby in a New York court. Shortly thereafter, the judgment creditor served a restraining notice against Ruby’s assets in New York. Later that year, the judgment creditor domesticated his judgment in Florida in order to attach Ruby’s assets there. However, Ruby had minimal attachable assets in both states.
Frustrated with the lack of attachable U.S. assets, in 2008 the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. Since Liechtenstein’s short statute of limitations expired years earlier, the creditor could not re-litigate his malpractice claim, nor could he claim the trust was formed as a fraudulent conveyance. Instead, the creditor argued that because Ruby was a beneficiary of the trust, she had a right to trust assets and that right was attachable by the U.S. creditor.
First, a lower Liechtenstein court required the creditor to deposit $100,000 with the Liechtenstein court to cover Ruby’s legal costs in the (likely) event the creditor lost. Then the court issued an injunction preventing the trustee from transferring trust assets while that court considered the U.S. creditor’s claim. However, an appellate-level Liechtenstein court quickly determined that because the trust was a discretionary trust (i.e., distributions were only in the sole discretion of the trustee), Ruby had no “right” to trust assets that was attachable, and therefore the Liechtenstein courts lacked jurisdiction over Ruby. Thus, trust assets could not be taken to satisfy the creditor’s judgment and the lower court’s restraining order was cancelled.
The U.S. creditor appealed, but the highest Liechtenstein court upheld the lower court’s ruling in favor of Ruby against the creditor. Ruby’s assets remained safe in Liechtenstein and the creditor paid Ruby’s legal fees.
This case is instructive in a number of ways. First, the ultimate lesson here is that despite the legal challenge by a U.S. creditor, the Liechtenstein trust assets remained safe and protected from the creditor. The U.S. creditor was forced to commence a new action in a foreign jurisdiction, pay legal fees in advance (contingency fees are not allowed in good offshore jurisdictions), and overcome short statutes of limitations and prohibitive burdens of proof. With the odds so strongly stacked against him, the U.S. creditor lost and also paid our client’s legal fees.
Second, unlike many offshore trusts created by amateurs, this trust was impenetrable because distributions to the U.S. client were completely discretionary by the Liechtenstein trustee. This was the basis for the appellate court’s ruling that Ruby had no “right” to trust assets. Had Ruby been entitled to mandatory distributions, the court might have determined that she had a right to trust assets, and the court might have found in favor of the U.S. creditor. This demonstrates that for effective offshore asset protection, the U.S. client must part with legal control of the assets. However, the trust assets will still be protected and guarded by licensed, bonded, qualified and reputable trustees who understand that their obligation is to always act in the best interest of the beneficiary.
Third, clients who protect their assets offshore must still disclose those assets, and all gains thereon, to the IRS. Clients cannot expect their assets to be “hidden” – neither from their creditors nor from the IRS. The assets will be protected offshore, but U.S. taxes are still due and disclosure requirements must be met in order for the asset protection to be effective.
Finally, this case demonstrates that offshore asset protection is alive and 100% effective, provided that it is done properly and tax compliantly. “Hiding” assets does not work; protecting assets does.