How to Protect Real Estate with an Offshore Trust

An offshore trust is a sophisticated asset protection tool designed to move assets outside the reach of U.S. creditors and jurisdiction.

Offshore trusts, especially in trusted jurisdictions like the Cook Islands, offer effective protections for financial assets.

Protecting U.S. real estate, however, presents unique challenges. Unlike financial assets that can be moved offshore, real estate is fixed to its physical location, leaving it under the legal jurisdiction of U.S. courts.

Challenges of Protecting U.S. Real Estate with Offshore Trusts

Real estate is subject to the jurisdiction of the court where the property is located. This principle means that changing the owner of the property to an offshore entity doesn’t eliminate the jurisdiction of U.S. courts over the property.

While an offshore trust can securely hold assets like cash and securities outside of U.S. jurisdiction, protecting U.S. real estate requires a different approach.

How Equity Stripping Protects Real Estate

To protect real estate with an offshore trust, a common strategy is “equity stripping.” Equity stripping involves using a lending structure to “strip” equity from the property by securing a loan from an offshore lender. The loan places a lien on the property, giving the lender a superior interest that can deter potential judgment creditors.

In essence, equity stripping turns the equity in your real estate into cash, which is then placed in an offshore trust, effectively protecting the cash outside the U.S. jurisdiction. For those with high-value real estate, this can be an essential layer of asset protection.

Steps to Implement Equity Stripping with an Offshore Trust

Here’s how to set up equity stripping within an offshore trust structure:

1. Establish an Offshore Trust and Engage an Intermediary: Start by establishing an offshore trust, often in a jurisdiction like the Cook Islands. Work with a licensed intermediary, such as Wealth Web Marketing Limited, which connects borrowers with Caribbean-based lenders to find the best match for their needs. This intermediary manages the application process, assisting you from onboarding to loan facilitation.
2. Lender Approval and Loan Terms: After matching with a lender, the lender evaluates your property and trust structure. Loans are often available for up to 95% of the property’s value—a high loan-to-value ratio that can maximize available cash. Note that the lender may charge an annual facility fee based on the loan balance, structured as follows: 1.2% of the balance for the first four years, 1.1% for the fifth year, and 1.0% each year after, with a minimum annual fee of $15,000 over a minimum five-year term. For larger loans (above $1.25 million), fees and terms may be negotiable.
3. Cost-Offsetting Strategies for Facility Fees: To help offset the annual facility fee, you may invest additional funds with the lender in low-risk instruments, such as U.S. Government bonds or an additional CD at CSB (the affiliated bank). The interest earned on these investments can reduce or even offset the facility fee, making this strategy more cost-effective.
4. Loan Deposit and Investment in Offshore Trust: Once the loan is approved, the proceeds are placed into your offshore trust’s bank account, often held at CSB. The trustee then invests the loan proceeds in a Certificate of Deposit (CD) or similar low-risk financial instrument. Interest earned on the CD can offset the loan interest, with any remaining costs covered by the offshore trust.
5. Grant a Mortgage to the Offshore Bank: You or your LLC holding the property grants a mortgage to the offshore bank. The mortgage is recorded in the county where the real estate is located, securing the loan with the real estate itself. This recorded mortgage acts as a protective layer over the property, reducing its value to creditors since the offshore lender holds priority interest.

Unwinding the Equity Stripping Structure

Once you no longer foresee legal threats, your offshore trustee may liquidate the CD and other trust assets to pay off the mortgage. When the loan is repaid, the title to the property can be transferred back to your name or a domestic LLC, if preferred.

Is Equity Stripping a Fraudulent Transfer?

Equity stripping is structured to avoid the risks associated with fraudulent transfers. In the U.S., a fraudulent transfer is when a property transfer is deemed to have been made to prevent creditors from collecting. For instance, transferring a U.S. property title to an offshore trust without reasonable value in return could be reversed by a U.S. court if deemed a fraudulent conveyance.

To avoid this risk, equity stripping includes receiving “reasonably equivalent value” in the form of cash from the offshore lender. Since this structure mirrors a typical commercial mortgage transaction, it is less likely to be challenged as fraudulent.

Common Questions about Protecting Real Estate with an Offshore Trust

• Can U.S. Courts Reverse My Offshore Trust Structure?
  While U.S. courts have jurisdiction over domestic real estate, the structure of an offshore trust combined with equity stripping can add layers of protection that make collection challenging.
• Is Equity Stripping Legal?
  Equity stripping is a lawful strategy that involves securing your real estate’s value with a legitimate loan and placing the proceeds in a protected offshore trust. This commercial mortgage structure helps avoid issues associated with fraudulent transfers.
• What Are the Costs of Setting Up an Offshore Trust?
  Costs vary depending on the jurisdiction and structure but typically involve setup fees, trustee fees, and annual maintenance fees. Consult with a qualified attorney to understand the full cost and benefit of an offshore trust.