Domestic vs offshore asset protection

The core difference

What separates domestic from offshore asset protection reduces to a single question: does the arrangement sit within US court authority or beyond it? A domestic asset protection trust (DAPT) is formed under the statutes of a US state and stays answerable to US courts. By contrast, an offshore trust is governed by foreign law and run by a foreign trustee, placing it beyond any US court's grasp. From this one distinction flows everything else — the cost, the complexity, the reporting, and the reliability.

The domestic asset protection trust

A DAPT is an irrevocable, self-settled trust set up under the laws of one of the 17 states that allow them, including Nevada, Delaware, Alaska, and South Dakota. "Self-settled" means the individual who establishes the trust may likewise be a beneficiary of it. Such trusts are less costly, more straightforward, and free of any foreign reporting duties. Someone living in a DAPT state who faces moderate exposure may find a DAPT a sensible instrument. Until Alaska and Delaware passed the first DAPT statutes in 1997, the offshore trust stood as the sole route by which a US person could establish a working self-settled spendthrift trust.

The Full Faith and Credit flaw

At the heart of the DAPT lies a difficulty: it dependably shields only those residing in the state whose legislature passed the statute. A creditor is free to bring suit in the debtor's own state, and should that state have no DAPT statute, its court is apt to apply its own law instead of the DAPT state's. Under the Full Faith and Credit Clause of the US Constitution, no state is compelled to enforce another state's self-settled spendthrift statute where doing so clashes with the forum state's public policy. As a result, a DAPT's protection can vanish the instant a court in a state without such a statute rules that its own policy prevails. An offshore trust does away with this problem completely, since neither any US state's law nor any Full Faith and Credit conflict reaches a foreign trustee.

When domestic is enough

For a person residing in a DAPT state, facing moderate exposure, whose probable creditors would file suit within that same state, and whose holdings don't warrant the offshore expense, a DAPT can serve adequately. It also beats having nothing for anyone unable to fund offshore planning. And as a single tier within a wider strategy, it performs well. Plenty of people with real but contained exposure and assets under the offshore threshold are best served by a soundly built domestic plan — retirement accounts, homestead, separation of entities, insurance, and perhaps a DAPT.

When offshore is worth it

Offshore justifies its extra expense once the exposure grows serious, the holdings are sizeable (in the neighbourhood of $500,000-plus in liquid assets), the probable creditor is sophisticated or capable of litigating across state lines, or federal claims or bankruptcy risk are in play that domestic tools cannot reach. It is likewise the right choice for those living in states offering weak protection. Framed honestly, this is not a straight either/or between domestic and offshore — rather, domestic tools come first and are worked through fully, with the offshore trust stacked above them as the layer functioning where US court authority cannot go. See the offshore trust and best jurisdictions.

See cost for the complete cost breakdown and disadvantages for the offshore trade-offs.