Asset Protection Planning: Using Foreign Asset Protection Trusts
ASSET PROTECTION PLANNING: WHO GOES OFFSHORE?
Protecting your assets from the risks involved in business and personal financial planning is not a new objective. A healthy dose of apprehension about the exposure of personal assets to claims against business activity makes sense. Invoking the corporate shield or limited liability protection is a time-tested practice.
Vast theories of liability behind increased litigation weigh in favor of asset protection planning. Asset protection falls within lifetime estate planning involving protecting and conserving accumulated wealth.
The major goal of asset protection planning is to reduce your financial profile. If you can restructure your assets to place them beyond the reach of potential creditors, while keeping a beneficial interest in those assets, you have succeeded in reducing your financial profile. Fostering doubt about whether a creditor can collect on a judgment makes you far less attractive target for litigation. Thus reducing the likelihood that you will be; or if you are sued, increasing the likelihood of a favorable settlement.
The Use of Trusts in Achieving Your Goal of Asset Protection Planning
A trust is a means of conserving and protecting property for its beneficiaries. However, most domestic trusts do not protect the trust assets from creditors. A typical revocable living trust provides slight protection against creditors. Absent specific legislation, to the contrary self-settled trusts are not effective for asset protection planning purposes.
A Foreign Asset Protection Trust (“FAPT”) is a trust set up in an offshore jurisdiction, which has enabling trust legislation providing protection against creditors of the trustor. One of the greatest advantages of the FAPT is to attack its assets the claimant must strike on foreign territory. The FAPT is much more expensive to set up and create than a domestic trust and requires a willing Trustor to deal with offshore jurisdictions and trust entities. The FAPTs’ greatest value is for asset protection planning well before any potential creditor problem. FAPTs are more readily used when the client already has some international connections and networking. Recent cases have stressed the need for careful planning in structuring the FAPT if it is to be legally efficient and successful in meeting the purposes and objectives of the trustor.
Top Five Advantages of an FAPT:
- No Comity of Law in Foreign Jurisdictions. Most foreign jurisdictions do not recognize US judgments. So to reach the assets of the FAPT the clamant is forced to seek a new trial on the merits under the laws of the foreign jurisdiction. The legal fees and court costs of a new trial on foreign soil is too expensive for most.
- More Favorable Law. Most foreign jurisdictions place the burden of proof in challenging asset transfers to a FAPT on the creditor and do not shift the burden to the trustor. Also, many foreign jurisdictions impose a higher standard of proof on civil litigation comparable to the “beyond the reasonable doubt” standard. This is a sharp contrast to the “preponderance of the evidence” principle used in US domestic civil cases.
- Statute of Limitations. The FAPT legislation of many jurisdictions sets up a statute of limitations for challenging asset transfers to a FAPT beginning on the date of transfer. This is contrary to US law where the statute may begin to run the date the transfer is “discovered” by someone with a claim against the trustor. Also, the statute of limitations of many FAPT jurisdictions is much shorter than the typical four year statute found under US law.
- Fees and Expenses of Litigating in Foreign Jurisdictions. Generally, it is much more expensive and inconvenient to prosecute a claim offshore. Think of the inconvenience of having to chase a claim out-of-state and then multiply that by two to three times the cost to follow the matter in a foreign jurisdiction. Many foreign jurisdictions forbid contingency fee arrangements forcing the claimant to finance litigation on their own. Creditors may think twice about having to deal with a different legal system out of the country. This unfamiliarity, plus the added expenses and costs, and the entire confusion with the process, is a significant advantage to the FAPT.
- NonAsset Protection Purposes. The FAPT may help the trustor in achieving several other objectives and planning goals independent of asset protection planning. An FAPT can address traditional estate planning issues such as: orderly transfer of property at death; avoiding probate; strengthening spendthrift provisions; greater privacy; management of offshore assets; and businesses and premarital planning.
How an FAPT Protects Your Assets
The easiest way to understand how an FAPT protects cash and securities is to understand what is required of a claimant trying to reach trust assets. The claimant has two options, either bring his case in a court that has jurisdiction over the trustee, or file suit in the court that has jurisdiction over the assets themselves so the court can attach or seize the assets. However, if your offshore planning tactics are structured and implemented properly, a domestic court cannot succeed in forcing the offshore trustee to expatriate or return the assets. Nor does the court have the ability to levy on assets properly held outside the United States.
Protecting non-liquid assets like real estate, accounts receivable and business equipment involves stripping the equity from the assets. Holding these assets in a business entity affording charging order protection can provide limited protection. However, the most effective tactics available to protect a domestic illiquid asset is to strip that asset of its value. An asset is stripped of its equity when it is used as collateral for a loan. The loan proceeds are protected with your other liquid assets in the FAPT. This discourages creditors from trying to levy on an asset that may have considerable value, but has little equity because of a loan encumbrance or lien.
Offshore Planning Structure
One typical offshore strategy is for the client to set up the offshore asset protection trust using an offshore trustee. The trust would then set up an offshore limited liability company entirely owned by the offshore trust. The client can manage the LLC with direct signature control over bank and securities accounts. Should the need arise, the client would resign as a manager and appoint a trusted friend, relative or a management company in your place.
The explosion of lawsuits and the growing concept of liability that is common in our court system understandably trigger concerns regarding wealth preservation in the United States. Many doctors and lawyers as well as business owners, corporate executives, real estate developers and investors, contractors and others work in a high-risk environment. Lacking confidence that they will be treated favorably in the US and seeking to reduce their financial profile, these individuals are likely to seek offshore planning. This alternative may well be the best planning vehicle available for maximum comfort and peace of mind.
