Can an Offshore Trust Protect Real Estate?

Offshore trusts are most effective when your assets are transported from the United States to a trustee situated in a foreign country. The trust and the trustee are beyond U.S. court jurisdiction. We typically recommend offshore trusts to shield financial assets and personal property that may be easily titled in an offshore trust or LLC.

However, real estate is fixed in its domestic physical location and may not be transported to a foreign jurisdiction.

Florida and most states recognize a general legal rule that makes real estate subject to the laws and courts of the place where it is physically located. We explain to our clients that changing the real estate title to an offshore legal entity will not fully remove the property from the jurisdiction of the courts where it lies.

Transferring Real Property to an Offshore Trust is Difficult

Some people want to convey real estate title to an offshore trustee either to achieve ownership privacy or to prevent creditor efforts to compel the offshore owner to comply with U.S. court orders affecting the property. We inform our clients of the practical difficulties of having offshore trustees hold legal title to real property.

An offshore trustee cannot claim certain tax benefits such as a property tax reduction for primary residences.

A lawsuit relating to the property owner could expose financial assets held in the offshore trust

Obtaining property insurance is more difficult when the owner is a foreign trustee.

The offshore trustee needs a domestic bank account to deposit income and pay ongoing expenses associated with the property. The domestic bank account could expose the trustee and other trust assets to U.S. court jurisdiction.

Homestead Is Best Protected Under U.S. Laws

Some real estate is better protected under U.S. laws than in an offshore trust. In Florida, your homestead property is strongly protected from creditors under the Florida Constitution. Also, any property owned by a debtor and his spouse jointly is exempt from creditor judgments because it is deemed to be a tenants by entireties asset. You can protect Florida homestead and entireties real estate without the help of an offshore trust.

Using an Offshore Trust to Protect Real Estate

We find that offshore trusts are most often requested for the protection of investment and business real estate.

There are two main ways to protect real estate in an offshore trust: (1) using a subsidiary real estate LLC and (2) equity stripping.

An offshore trust may own the membership interests of a domestic limited liability company. Our clients often form LLCs to own one or more valuable real properties. The LLC is owned by their offshore trust. Our clients serve as manager of the LLC, but they do not own the real estate or own the LLC.

Real Estate LLC

The offshore trust owns the real estate indirectly through the trust’s ownership of the LLC membership interests. The creditor’s sole remedy against the LLC membership interest is a charging lien, but this remedy does not work when your offshore trust owns the LLC membership interest.

The combination of an underlying LLC owned by an offshore trust has practical advantages in our clients’ asset protection plans.

Our clients retain direct ongoing control of their properties because they manage the LLCs. Our clients’ LLCs can easily obtain property and liability insurance. Our clients’ LLCs can easily open LLC bank accounts to manage property financial transactions.

Offshore ownership of real estate indirectly through a domestic LLC is flexible. If a judgment creditor attacks the LLC the debtor can resign as LLC manager and appoint an offshore LLC manager. Or, the debtor can stay on as a co-Manager to participate in ongoing property management. Better to relinquish some control to a cooperative offshore manager than expose real estate to the judgment creditor.

For most clients, using an LLC to own the real estate, when the LLC is owned by the offshore trust, is the most appropriate solution.

Equity Stripping

Equity stripping is a lending structure that “strips” the equity from a property. In an offshore equity stripping plan, the property’s net value, or equity, is encumbered by a foreign lender that acquires rights in the property that are superior to the interests of subsequent judgment creditors.

This plan essentially converts your real estate equity, or profit, to cash,  and protects the cash in the offshore trust bank account, for so long as you anticipate a legal problem in the U.S.

Here are the steps to protect real estate using equity stripping in an offshore trust:

1. You establish the offshore trust.
2. An offshore bank agrees to loan money to you.
3. Loan proceeds are placed in the offshore trust’s account.
4. You give a mortgage in favor of the offshore bank, and you may also pledge the money in the bank.

The bank mortgage has priority over a subsequent judgment lien in favor of a U.S. creditor.

First, you establish an offshore trust. You and your family are the trust beneficiaries. A foreign individual or foreign trust company serves as the initial trustee. Moveable trust assets, such as cash and securities, are held in foreign financial institutions.

Second, the trustee of the offshore trust facilitates a loan from an offshore bank to you or to a Nevis LLC you have formed to hold an operating business or other assets. The loan amount and interest rate are based on the real estate equity and the type of real estate asset. The foreign bank typically will loan you at least 80 percent of the real estate’s equity.

Third, the loan proceeds are placed in your offshore trust’s financial accounts. The trustee typically uses the funds to purchase a Certificate of Deposit or similarly risk-free financial instrument. The interest earned is applied to pay the loan interest. In most instances, the interest rate the bank charges for the loan is less than the interest you earn on the CD. Additional loan interest due, if any, is paid from the offshore trust.

Fourth, you or your Nevis LLC gives a mortgage in favor of the offshore bank to secure repayment of the loan. The bank records the mortgage in the county where the real estate is located. The mortgage serves as a protective blanket over the property. A judgment creditor would not benefit from a foreclosure on your real property because the foreign bank would be in the first position to either acquire the property or proceeds from its sale.

How to Unwind the Equity Stripping Structure

Once you no longer anticipate future legal issues, your offshore trustee may liquidate the C.D. and use the C.D. proceeds and other trust money to pay off the foreign bank’s mortgage. Title to the property may then be transferred back to your personal name or your domestic LLC.

Is Equity Stripping a Fraudulent Transfer?

A U.S. judge may reverse transactions that are found to be fraudulent transfers. Remember that U.S. courts retain control over any real property in their jurisdiction. A U.S. court may reverse a title transfer or mortgage that they find is a fraudulent transfer designed to hinder or delay judgment creditors.

For example, if you would transfer legal title to your U.S. real estate to your offshore trust without receiving anything of value in return, a U.S. court would likely reverse the transaction if your transfer appeared to be done to avoid judgment collection.

One effective defense to a fraudulent conveyance allegation is the receipt of reasonably equivalent value for the transfer. A simple example is when you sell an asset and receive reasonable amounts of money in consideration for transferring the asset to a buyer.

In offshore equity stripping, the debtor is transferring a security interest in real estate (the mortgage), and the debtor is receiving cash based on the property value. The equity stripping plan should not be unwound as a fraudulent transfer because the property owner is receiving money in exchange for the creation of mortgage security in favor of the lender. The transaction is a typical commercial mortgage loan transaction, the main difference being that the lender is a foreign bank.

How Much Does Equity Stripping with an Offshore Trust Cost?

Offshore equity stripping first requires an underlying offshore asset protection trust. That requires separate legal and trustee fees. The costs of equity stripping through the offshore trust are comparable to other commercial loans through U.S. banks. These costs include:

• Lender origination fees (points) range from one to two percent.
• Lender annual administration fees.
• Mortgage interest if mortgage payment exceeds interest earned.
• Legal fees.
• Mortgage recording fees and taxes where the property is located.