There are many types of trusts, but for this example I will define a asset protection trust as any trust formed for a term of years in a foreign jurisdiction, which does not recognize (or imposes significant barriers to the recognition of) United States judgments. Honestly, this is every country in the world since every country requires that the case be re-argued under their law.
This is not to say that assets have to leave the USA to be protected, they don’t. You simply use a foreign trust to force creditors to litigate abroad, NOT to move your money there. The reason I will focus on trusts with a “foreign arm” attached is because those are the only types of trusts that are virtually impenetrable by creditors. An asset protection trust is best thought of as a legitimate and internationally recognized vehicle for a solvent person to place a portion of his wealth into a secure entity which allows that person substantial control over the assets yet protects these assets from future unanticipated creditors.
Some jurisdictions require a trial de novo (which means trying the case anew, as if it had never been tried before). Other jurisdictions have a procedure whereby certain United States judgments can be recognized (usually not penal or fiscal in nature) provided certain procedural hurdles (which may amount to a mini-trial) are met. No country in the world automatically enforces judgments from any United States court. This is probably because all other nations are worried about one aspect or another of our anti-trust, environmental, securities and tort laws.
Asset protection language uses and references these primary entities:
- Trust – an entity created to hold assets for the benefit of certain persons or entities, with a trustee managing the trust (and often holding title on behalf of the trust). Most trusts are founded by the persons (called trustors, settlors and/or donors) who execute a written declaration of trust, which establishes the trust and spells out the terms and conditions upon which it will be conducted. The declaration also names the original trustee or trustees; successor trustees or means to choose future trustees. The creators usually give the assets of the trust to the trust, although assets may be added by others.
- Beneficiaries – Under a foreign APT, the beneficiaries are usually the settlor, the settlor’s spouse, the settlor’s children, and other blood descendants, living parents of the settlor, and possibly one or more charitable organizations.
- Donor – One who makes a gift or transfers lands to another, also one who creates a trust.
- Grantor – The person by whom a transfer of property is completed, also the creator of the trust.
- Protector – One who serves as the champion, the overseer of the trust. Currently the position of a trust protector is not normally encountered in domestic U.S. trusts, but this position is very common in other common law jurisdictions. Under many foreign trusts the protector is originally the settlor, which can change later.
The trust protector often has the following powers
The power to remove and replace any trustees; The power to reject investment decisions of the trustees; and The power to reject distribution decisions of the trustees.
- Settlor – Also one who creates the trust or provides the reason for creating the trust.
- Trustee – Person or institution that oversees and manages a trust.
So Who Needs Asset Protection?
The fundamental answer is anyone with ANYTHING that they don’t want to lose needs some form of asset protection. If you have assets or a business worth at least $25,000 or more you are a potential target for a financial attack from one of many predators…including creditors, unscrupulous attorneys, even the IRS.
If you run your own business, if you have stocks and bonds, if you are in the public eye as a celebrity or even known in small circles as someone who is “doing well,” you could become the target of a sue-happy individual. What’s more, if you happen to engage in activities in your business or personal life that could create a liability situation for you, you need to think very seriously about what would happen to you and/or your family if you were to be sued…could you easily fund and weather the mental and financial burden of a lawsuit? Could you recover if you were to lose everything?
A business owner or a licensed professional has a one in three chance of being named a defendant in a lawsuit in the next year. And it will only get worse with more than 100,000 law school students in school each year.
Any of these could leave you penniless and in debt
A negligence or injury claim, whether justified or not, that exceeds any insurance coverage you may have.
Lawsuits from disgruntled business partners or employees.
Huge fines for violating state or federal law.
Lawsuits because of the actions of an employee.
A costly accident and negligence claim.
Nursing home or catastrophic medical bills.
A lawsuit for defamation.
Claims from creditors should your business fail.
Breach of contract through no fault of your own.
Catastrophic medical bills.
Seizure of your home or other assets without due process by U.S. Customs or other government agencies with forfeiture power.
A huge tax bill and escalating penalties following an IRS audit.
A professional malpractice suit.
Everyone will flirt with liability and financial disaster, regardless of lifestyle, occupation, or caution. Dangers can be minimized but never entirely avoided. Even though you can’t eliminate the possibility of the above listed points; you can greatly reduce your financial exposure due to them.
Settlement Of The Trust
This refers to the complete establishment of the trust, meaning it is created and finalized as an existing entity. Remember, for a trust to serve as a protection from creditors, the settlement of the trust must occur long before any significant creditors or liabilities materialize. I always advise my clients that establishing a trust should involve only a portion of their assets, leaving them demonstrably solvent after the transfer. Done in this fashion, the asset protection trust is a very effective tool.
Practical Uses Of Offshore Asset Protection Trusts
The following is a partial list of the benefits of foreign trusts with asset protection characteristics. Some relate to asset protection and some relate to general business considerations. When documenting the trust the business oriented justifications for settlement of the trust should be emphasized.
- A Supplement Or Replacement To Insurance
- A Tool To Settle Or Discourage Litigation
- To Keep The Ownership Of Assets Confidential
- An Alternative To Traditional Pre Nuptial Agreements
- A Protection Against Potential Exchange Controls
- To Give An Insolvent Debtor A Fresh Start
An important motivating factor for the settlement of an asset protection trust is the dramatic rise in the United States of both the number of lawsuits and the magnitude of verdicts. New theories of liability are created everyday and suits are being brought more often. Approximately 18 million civil suits are filed annually in this country – one for every 10 American adults. Some professionals utilize asset protection trusts as an add- on or replacement to insurance.
As malpractice rates rise, many professionals are reducing their coverage but still preserving their right to a defense under their policy, and implementing asset protection trusts. On occasion, these professionals go completely bare, particularly once all of the relevant statutes of limitation periods have expired. Many individuals recognize that heavy insurance in the current judicial climate serves to draw litigation and that by reducing or eliminating the size of the potential recovery the incentive of any claimant to institute and pursue litigation is likewise reduced.
Few lawsuits are brought on principle, particularly if the lawyer for the plaintiff is being compensated on a contingent fee basis. Once the plaintiff and his attorney discover that a properly settled and implemented asset protection plan is in place and that any judgment will be difficult or impossible to collect, their motivation to proceed with litigation fades. One principal effect of a carefully crafted plan is the destruction of the plaintiff’s economic incentive to litigate.
The confidentiality and secrecy laws of many offshore jurisdictions are taken very seriously and in fact impose criminal penalties for their violation. Notwithstanding the near-absolute secrecy permitted by some jurisdictions the settlor should be aware that the settlement of an offshore trust normally does not result in any tax savings or mean that the United States government (utilizing the resources of FinCEN) cannot discover the trust through a governmental investigation.
An unmarried person may normally settle an offshore trust without the consent of his prospective spouse. The offshore trust will normally protect the transferred assets in the event of a divorce. The primary difference is that the prospective spouse does not need to consent to the transfer (in fact, the spouse need not even know of the transfer). Offshore trusts are also sometimes useful in pre-divorce planning (e.g., to keep an expected inheritance segregated as separate property). In all cases, an asset protection trust is an estate-planning instrument with the same effect of a traditional domestic trust. (More specific information on marriage and relationships as they relate to assets in Chapter 9 of asset protection in a nutshell.)
There may be a time in the near future when our government suspends our ability to take money abroad. A foreign asset protection trust prevents such restrictions. One managing director of a substantial bank in the Cayman Islands recently remarked, “Exchange controls were firmly in place in the United Kingdom before [former Prime Minister] Margaret Thatcher, and one can’t be certain that they will never be reintroduced. In the U.S., with the shape of its national debt, I would not be surprised at all if limits on foreign investment were adopted. The U.S. has had such limits before, in certain forms.”
There are situations where an individual might separate and insulate future start-up business ventures, which are unrelated to his current activities from past creditors by the use of offshore trusts. This is particularly useful when bankruptcy is not a valid option. This is a way where an insolvent debtor who is entrepreneurial-minded can protect future profits from attachment by creditors.
In this case, extreme care must be taken to guard against the possibility of fraudulent conveyance issues.