Can You Protect Cryptocurrency in an Offshore Trust?

You can protect cryptocurrency in an offshore trust. Offshore trusts established in jurisdictions with strong asset protection laws provide asset protection from U.S. judgment creditors and other advantages, including privacy and efficient estate planning.

What Is an Offshore Trust?

Offshore trusts are trust agreements formed in countries outside the United States. The principal trustee of an offshore trust is situated in the same foreign jurisdiction.

Our clients typically use offshore trusts are used mostly for asset protection planning. The best offshore trust countries, including Cook Islands and Nevis, do not recognize U.S. court civil judgments. U.S. creditors must relitigate their cases in the offshore court system using foreign attorneys.

Some offshore trust jurisdictions do not permit court pleadings in the English language. Trying to duplicate a U.S. judgment in an offshore jurisdiction is very expensive and time-consuming for the creditor.

Our clients most often place traditional assets, like real estate or cash, in offshore trusts for their creditor protection. However, offshore trusts can also help protect digital assets like cryptocurrency from civil U.S. judgments and additional risks unique to crypto. Cryptocurrencies face unique security threats, including hacking and theft. An offshore trust creates a “firewall” around these digital holdings.

Key Considerations for Cryptocurrency in Offshore Trusts

Legal Compliance

The offshore trustee’s compliance with both the U.S. and offshore jurisdiction’s laws is essential. As cryptocurrency regulations vary, especially in different international jurisdictions, we help choose an offshore trust jurisdiction that supports and legally protects digital assets.

Reporting Requirements

U.S. laws subject offshore trusts to rigorous reporting requirements. U.S. citizens must disclose foreign trust ownership and financial accounts through forms like the Foreign Bank Account Report (FBAR) and under FATCA guidelines. Failing to report these assets can lead to severe penalties, including fines and possible criminal action. Before transferring cryptocurrency into an offshore trust, you should ensure that your trustee will help you adhere to all U.S. reporting obligations.

Advice for Holding Cryptocurrency in an Offshore Trust

Here are specific strategies for holding your cryptocurrency in an offshore asset protection trust:

Professional Partnerships with Trust-Level Cryptocurrency Options

Some offshore trustee companies partner with specialized firms such as Bespoke and BFI, which offer specific options for holding cryptocurrency at the trust level. These partnerships are structured to securely hold cryptocurrency assets within the trust framework while minimizing risks associated with giving up private keys or seed phrases. However, these options can be costly, making them better suited for high-value cryptocurrency portfolios.

Setting Up an LLC to Hold Cryptocurrency

Some of our clients prefer not to transfer direct control of their cryptocurrency to a trustee due to concerns about sharing seed phrases or private keys. In such cases, an alternative strategy is to create an offshore LLC, and then assign the LLC membership interests to your offshore trust.

You can serve as the manager of the LLC, retaining control over cryptocurrency transactions, as well as other assets titled in the LLC, and you still benefit from the offshore trust’s asset protection.

Cold Storage Options Held Under an LLC

Cold storage wallets, which are offline storage solutions, offer our clients a secure cryptocurrency within an offshore structure without being subject to the same level of ongoing oversight required by some financial institutions.

By holding these cold storage wallets within an offshore LLC, you can maintain tighter control of your digital assets while benefiting from the asset protection of the offshore trust.

Steps to Establish an Offshore Trust for Cryptocurrency

Creating an offshore trust for cryptocurrency involves collaboration with professionals knowledgeable in both asset protection and cryptocurrency management.

Seek Professional Advice

The first step in establishing an offshore trust for cryptocurrency is consulting with an attorney specializing in offshore trusts. Due to the unique nature of cryptocurrency, your trust attorney should be familiar with regulations pertaining to cryptocurrency management.

Transfer Assets and Document Ownership

After establishing the trust and structuring the cryptocurrency holdings, you transfer the assets to the offshore trustee directly or by transferring ownership of the LLC that holds title to the assets. Documenting the transfer and registration is important to ensure that your cryptocurrency is legally within the trust.