Depending upon how you count them, there are anywhere from 30 to 60 countries outside the United States that are known as offshore debtor havens. For U.S. citizens who are considering some form of offshore planning, this often creates an issue as to which offshore debtor haven or havens they should use.
Let’s first talk about what constitutes an offshore debtor haven. For something to be “offshore”, it only has to be outside of the United States and its territories. Canada is offshore to the United States despite sharing a roughly 5,500 mile land border. Puerto Rico is not offshore to the United States because it is a territory. In other words, every country other than the United States is considered offshore to the United States.
That is easy enough. The consideration of what constitutes a debtor haven is more difficult. For a country to be considered a debtor haven proper, it will have robust financial secrecy laws that prohibit the disclosure of banking information and the like. It will not have treaties with the United States or other industrialized nations that allow the easy recognition of judgments ― basically, a creditor would have to start a new case against the debtor. It will also typically require that a plaintiff (such as a creditor) post the anticipated legal fees in case the defendant were to win. Finally, a debtor haven will have sophisticated trust laws and business entity laws that are specifically designed to defeat creditors.
The United States has states that are debtor havens of a sort, such as Florida and Texas with their expansive homestead statutes. States such as Alaska, Delaware, Nevada, South Dakota and Wyoming compete against each other with their trust and LLC laws. But these states are still subject to federal laws and federal courts which may compel financial discovery without regard to state law. The citizens of these states are also subject to federal bankruptcy law that may sometimes override contrary state law. Thus, these states are a sort of second tier of debtor haven and of course they are not offshore.
The classic debtor haven is of course Switzerland. In 1934, Switzerland passed the Federal Act on Banks and Savings Banks which made it a criminal offense for a Swiss banking officer to disclose the bank’s financial information of any foreign investor. Thereafter, Swiss banks among other things hid the assets of Jewish depositors from the Nazis and the assets of the Nazis from pretty much everybody. Everybody from European monarchs to corrupt leaders of third-world countries also hid their money in Swiss banks.
A problem with Switzerland is that its laws did not easily mesh with the common laws of the Anglo-American countries. While not based on the Code Napoleon, Swiss law could be described as a weird conglomeration of cantonal laws with a strong flavor of the civil law states that surround it, including France and Germany. One could set up something that approximates an Anglo-American trust under Swiss law, but it’s not quite the same.
In the 1980s, the late Denver lawyer Barry Engel convinced authorities in the Cook Islands that they could develop a potentially lucrative offshore trust business by adopting advanced trust laws. Engel’s efforts led to the Cook Islands adoption of its International Trusts Act of 1984 and its International Trusts Amendment Act of 1989. Among other anti-creditor provisions, these laws allowed a person to create an irrevocable self-settled trust for their own benefit, but for which the spendthrift protections would be operable. Prior to this time, the laws of nearly all the U.S. states allowed self-settled trusts, but the spendthrift protections of such trusts largely did not protect the trust assets from the settlor/beneficiary’s creditors.
Barry Engel was the true “Grandfather of Asset Protection” because of his Cook Islands labors and he would spend the following decade preaching the benefits of Cook Islands trusts as (he then believed, though wrongly as would be exposed in a couple of court cases in 1999) the penultimate asset protection device. This, in turn, resulted in the creation of the modern asset protection planning sector that we know today.
Barry Engel’s representations to the Cook Islands authorities that they could create a robust and lucrative offshore trust company industry proved to be correct in spades. The Cook Islands almost overnight went from a sleepy cluster of 15 islands with vague ties to New Zealand and rarely mentioned outside of National Geographic Magazine to a robust worldwide financial hub where, for awhile at least, seemingly everybody with an offshore trust used the Cook Islands for their trustee services.
The problem with success is not just achieving it but also keeping it a secret. With Barry Engel crisscrossing the United States holding seminars seemingly everywhere that espoused the benefits of Cook Islands offshore trusts, or Foreign Asset Protection Trusts (“FAPTs”) as they became to be known, keeping the Cook Islands’ success a secret was simply impossible.
For other obscure island jurisdictions, cashing in on the Cook Islands’ success was as simple as amending their own trust laws to basically copy those of the Cook Islands. They did so quickly and in droves. Within just a few years, many other jurisdictions had amended their own trust laws to be able to compete for trust services with the Cook Islands. Thus, the list of debtor havens with sophisticated trust laws grew in only a few years to include the Bahamas, Cayman Islands, the Turks & Caicos, the British Virgin Islands, and others in the Caribbean, the Isle of Man in the Irish Sea, Gibraltar and Malta in the Mediterranean, and others worldwide. Readers should note that most of these jurisdictions were current or former British Protectorates which operated on English common law and thus were easily compatible with the U.S. legal system.
Some of these offshore jurisdictions then began to similarly tinker with their LLC laws to make them more attractive to the asset protection crowd, most notably Nevis. Again, most of the offshore jurisdictions followed suit with their own advanced LLC laws and evened up the offshore playing field.
The boom in offshore asset protection and financial services eventually resulted in the creation of so-called Shorex (offSHOre EXhibition) conferences held in London during the 1990s. The Shorex conferences not only allowed each offshore haven to pitch their wares to would-be clients, but they also created an easy opportunity for every offshore jurisdiction to see what every other offshore jurisdiction was doing and to conform their own laws to the cutting edge.
I had the pleasure of going to the 1997 Shorex conference and, man, it was really something. Every jurisdiction that claimed to be an offshore debtor haven was represented one way or the other and many had exhibition booths, lots of glossy brochures, and unique swag to bring on the flight back home. But why Shorex ceased and, indeed, why there was a downturn in offshore planning (except for Russians laundering money in the post-USSR era) is a story for another day.
The point of all this being ― if by this point in the article you had started to wonder― is that the laws of all the offshore jurisdictions ended up being roughly equivalent for all practical purposes.
The real strength of offshore planning is not in any brilliant technical aspects of the laws, but rather that the debtor’s assets simply are outside the jurisdiction of the United States. An American sheriff can’t levy on offshore accounts. An offshore bank can safely throw an American subpoena into the shredder. This has been borne out in another important fact: There has never been a reported opinion in the U.S. case law that turned on some aspect of some offshore debtor haven’s laws that was better or worse than the laws of some other offshore debtor haven.
The Cook Islands monopoly on irrevocable self-settled beneficiary trusts was very short-lived. Starting in the mid-1990s, which was also the real heyday of offshore planning, one had the choice of many offshore havens whose laws were as good as any others’ laws.
Today, the choice of which offshore haven to use is driven not by comparative laws. It is driven by things such as convenience of travel and presence of the desired financial institutions, such as the bank one wants to use.
Once upon a time when I was doing a lot of this work, my preferred places were the Bahamas and the Cayman Islands. They were both easy to travel to, they were fun places to visit, and they were chock-full of the leading worldwide banks. Since all offshore laws are roughly similar, it was these factors that decided which jurisdiction to use for trust services.
There are still a bunch of planners who use the Cook Islands as their preferred locale for offshore trust services. Ask them why and you’ll get a mumble that translates to something like, “the Cook Islands has the best trust laws”. That was certainly true in 1989, but it hasn’t been true for the last three decades. Now, Cook Islands have trust laws that are no better (and no worse) than the trust laws of most offshore debtor havens.
This article isn’t meant to be a dig on the Cook Islands. Rather, it is a criticism of asset protection planners who continue to solely use the Cook Islands largely because of intellectual inertia on the part of these planners. Not just a few of these planners have hand-me-down trust forms once originally drafted by Barry Engel way back when, and they are afraid to try to do anything differently ― even if some other offshore jurisdiction would be a better fit for their clients. This is especially true of the offshore trust mills where everybody gets a Cook Islands trust whether they really need it or not.
Indeed, the better asset protection planners will frequently max-out those debtor protections that are available in the United States (homestead exemptions, ERISA protected retirement accounts, other forms of domestic planning) before turning to offshore planning at all. Sometimes there is no need for offshore planning at all, particularly in states that have very liberal exemptions. This is because offshore asset protection has proven to be far from bulletproof, but that is for another day as well.
The point here being that if somebody is going to consider offshore planning at all, then they should likewise consider the wide choice of offshore jurisdictions and not be limited to just one. Maybe the Cook Islands make sense for a particular client, maybe it doesn’t. Maybe the Bahamas makes sense, maybe it doesn’t. Maybe Malta makes sense, maybe it doesn’t. These are considerations that should be explored and not merely presumed.
This brings us in conclusion to answer the question of this article: Which offshore jurisdiction is best? It is a trick question since there is no “best” offshore jurisdiction. There are offshore jurisdictions that are better for some and worse for others. But, really, for most practical purposes most of them are alike.
And sometimes none of them are the correct answer for particular persons. But, again, that’s what planning is all about.
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