Offshore trusts and litigation

A spendthrift trust enables people to place their assets in a specialized trust that creditors cannot sue or attach in bankruptcy to seek satisfaction for their loans. But once the money is distributed, creditors are free to pursue it. Spendthrifts were invented to allow people to care for their family members and maintain control over their assets to ensure that the family member does not squander it on ill-advised purchases.

The United States allows spendthrift trusts, but they are only permitted for the benefit of third parties. People who place their assets in spendthrift trusts and manage it for their benefit are routinely sued by creditors and lose. The courts do not recognize the protections in spendthrift trusts when they are formed and managed by the same person for the benefit of that person.

To avoid this problem, some people go offshore and form their trusts. Many countries allow people to set up spendthrift trusts and manage it for their benefit. In theory, trusts that are formed abroad should be governed by that law, even if the suit is litigated in the United States. But, many courts still employ the “smell” test when evaluating foreign trusts.

The smell test means that if it smells like a inter vivos (living trust or trust that creditors can access) then it must be treated as an inter vivos trust and therefore lose its special protected status. But the few cases that involve these trusts that resolved in favor of the creditor were supported by egregious facts (i.e. obvious fraud) therefore the value of these rulings in grayer cases is questionable.

Are you engaged in a lawsuit to protect your trust’s assets? You may want to call a lawyer. An attorney can go over the details of trusts and help you plan a strategy to defend those assets. You don’t need to go through this alone, an estate litigation attorney can help you.