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| "Most of my clients are not frightened by law suits in legitimate
circumstances. What they are frightened about are spurious law suits spurred
on by lawyers on contingency fees and by excessive jury awards."
Peter Double, Esq.
Objections
To Domestic Asset Protection Trusts
In theory, an irrevocable domestic trust for the benefit of your spouse or your children will remove the trust property from exposure to your future creditors, so long as you don't retain any control over the use of the trust property. Under the best of circumstances, you have to make a complete and irrevocable gift of the property to someone else while you are solvent in relation to any current or potential creditors. Such gifts will either (1) use up your available annual gift tax exemptions, (2) use up part or all of your lifetime exemption from the estate and gift tax, or (3) they may trigger an immediate obligation for gift taxes. But theory doesn't always prevail in U.S. courts.
Objections To Domestic Asset Protection Trusts(1) they have no power to revoke or alter the terms of the trust, (2) the grantor can't be a beneficiary of a U.S. trust that provides any creditor protection by means of a spendthrift provision, and (3) the grantor can't be a trustee of his own trust and also enjoy any asset protection benefits. A common practice in establishing domestic trusts is to combine all types of assets in the trust. But, according to Jeffrey Verdon, "Lumping risk and non-risk assets into a ... trust without considering a possible liability claim (arising from the high risk asset) is a mistake commonly made by financial advisors and lawyers, who may glibly suggest buying liability insurance - which is not always an adequate solution." Furthermore, if you are concerned about the potential for the future imposition of currency controls or the future confiscation of assets by government, having your money in a U.S. trust won't help if the government takes control of the trust assets. The U.S. can quickly impose currency controls because such an action only requires an executive order by the President.
Advantages of The Foreign Asset Protection Trust
To hold assets in a more friendly legal systemForeign trusts have been used for hundreds of years by Europeans as a method of protecting family assets from political instability and outlaw governments. Now they are being used by U.S. citizens to protect themselves from an outlaw legal system where spurious claims of injury can result in huge damage awards.As explained by Peter Double, an attorney specializing in international law, "The (primary) purpose of using an (asset protection trust) is simply to hold your assets outside of the jurisdiction of the United States Courts. You may not have seen the effect, but in my experience many judges in US courts are either plainly incompetent or just plain ignore the law, knowing that the costs of an appeal are outside the financial limits of the person against whom (a) wrongful judgment has been made. There also seems to be no limit to the ridiculous awards that are made by (US) juries for injuries." Some foreign trusts are not favorable to U.S. creditorsThe primary benefit of the foreign trust (in certain jurisdictions) is that the laws applicable to creditors and defendants are more favorable to the defendant in the foreign trust jurisdiction. Of all the common law countries, the U.S. law has become the most distorted in favor of plaintiffs. In some jurisdictions, the plaintiff is at a much greater disadvantage. Generally, the Cook Islands are considered to have superior trust laws for the purpose of asset protection.In the U.S., a judgment given in any state is honored in any other state where property is located. With the foreign trust, a judgment in a U.S. court will not be honored, if the judgment is based on statutory law that is contrary to the laws of the foreign jurisdiction. One of the keys to the successful use of foreign trusts for asset protection is the selection of jurisdictions that are more favorable to a defendant than to a plaintiff. In most of the favorable jurisdictions, a U.S. judgment creditor will be required to bring suit against the trustee of the foreign trust, in the foreign courts, based on the laws of the foreign jurisdiction. In addition, the laws in some foreign jurisdictions regarding fraudulent transfers are not as liberal as in the U.S. and the statute of limitations is much shorter. In the Cook Islands, a transfer to a trust more than two years before a legal claim accrues is generally safe. The U.S. creditor must prove that there was a fraudulent conveyance to the trust, based on the laws of the foreign country, within their statute of limitations. Another substantial benefit of a foreign trust is that it greatly raises the cost of pursuing a judgment by a future creditor. First, the foreign jurisdiction will require the creditor to file his claim in their courts, under their laws, using a lawyer authorized to practice in their jurisdiction. Contingent legal fees are not allowedIn addition, contingent legal fees are not allowed in countries with laws that are favorable to the defendant.. That means the plaintiff will have to pay cash to the foreign lawyers to pursue the case. In addition, travel expenses will have to be paid to the U.S. lawyers and any witnesses to pursue the case in the foreign jurisdiction. To make matters even worse, there are some foreign jurisdictions where the loser has to pay the legal costs of the winner. These hurdles will generally eliminate all contingent fee claims by a plaintiff who is looking to take advantage of an exaggerated injury.The Grantor Can Retain Veto Powers Over the TrusteeEvery trust has a grantor or settlor, one or more beneficiaries and one or more trustees. In addition, a foreign trust can have a "Protector" who has specified powers to replace the trustee or to veto certain actions of the trustee.With a domestic trust, some designated person might be given a power of appointment over the disposition of the trust property. But a power of appointment is an affirmative power to direct the distribution of income or assets of the trust. In a foreign trust, the Protector is only given veto powers over trust distributions. The Protector is also given the power to change the trustees and the location (situs) of the trust. In an offshore asset protection trust, the grantor of the trust should not be a trustee, but the grantor can be a Protector. (Some advisors disagree with this.) That gives the grantor veto power over trust distributions and the power to change the trustee, without being subject to a court compelling him or her to take certain steps to reclaim the property from the trust. However, this is an issue which a source of some controversy. Foreign trusts can be used to avoid probateThere is no basic difference in using an offshore trust to avoid probate and using a revocable domestic trust - except for the cost. However, the offshore trust can provide substantial asset protection benefits where the domestic trust can't. If you decide to establish a foreign trust for asset protection purposes, you do not also need to establish separate living trusts in the U.S. in order to bypass probate.Foreign trusts can also function as credit shelter trustsA foreign trust can serve the same purpose as an A/B credit shelter trust to take advantage of the marital deduction and the dual $625,000 estate and gift tax exemption. It isn't necessary to have separate domestic trusts for that purpose.The trust location can be movedThe trust can be drafted so that the Protector (or the trustee) can move the trust to another jurisdiction in the event there is any risk that the first jurisdiction might become politically risky for the trust. The main purpose of this provision is to permit the trust to be moved if the laws of the host country become unfavorable. However, the "flight" clause can also be used to increase the costs and the time it might take a creditor to get an attachment of the trust assets.The grantor can be a beneficiaryPerhaps the most important single difference between the foreign trust and a U.S. trust is that the grantor can be a discretionary beneficiary of the trust without losing the ability to protect the trust assets from a creditor.In the U.S., a domestic trust can be drafted to include a spendthrift clause that prohibits any beneficiary from assigning an interest in any future distributions of the trust. That prevents the beneficiary from being able to sell the present value of his or her future benefits from the trust, and it also prevents creditors from being able to get an assignment of those future benefits. However, in domestic trusts, a spendthrift clause is not allowed when the grantor is a beneficiary. Thus, you can't protect your assets in your own domestic trust to the extent of any interest you may have in your trust. But ... a foreign trust does allow you to be a beneficiary and to prohibit creditors from getting an assignment of your interest in the trust so long as the trust is not established for your primary benefit. The Trust Can Be Revocable or IrrevocableThe foreign asset protection trust can be either a revocable trust or an irrevocable trust, but is nearly always drafted as an irrevocable trust. In some cases, it's designed to terminate after a term of years - at which time it can be renewed by the grantor. The foreign trust usually has a clause that empowers the foreign trustee to dismiss any co-trustees who are subject to U.S. laws and to move any trust assets to a foreign location. That prevents the grantor from having the legal power to demand a repatriation of the trust assets because of an order by a U.S. court.When the grantor becomes subject to a judgment, the foreign trustee will terminate any U.S. trustees and will move any assets in the U.S. to a foreign location. Of course, it will also remove the property from the direct control of the grantor, but if the grantor is a discretionary beneficiary, the property can be recovered after there are no legal claims against the grantor. This may cause some people to wonder if they can be sure that the foreign trustee can be trusted to return the property. Those who are experienced in dealing with non U.S. trustees contend that such a concern is groundless. They argue that it's unheard of for a foreign trustee to not comply with the terms of the trust as long as you are dealing with a reputable trust company. A Foreign trust can pay the expenses of a beneficiaryThe U.S. grantor of an asset protection trust will be subject to income taxes on any income earned by the trust. If the grantor becomes subject to a claim, any distributions from the trust to pay his living costs and his taxes could be intercepted by future creditors. To prevent this, the trustee can be empowered to make direct payments of taxes or other expenses on behalf of the grantor and to pay other living expenses to the grantor's spouse or directly to utility companies and credit card companies.Since a U.S. trust can't be used to protect the assets from the creditors of the grantor, it would not be possible to use a U.S. trust to pay the expenses of a grantor while also protecting the property from future creditors of the grantor. The grantor can control the assets with a domestic FLPFor many U.S. citizens, giving up direct control over their property isn't acceptable. They would rather take their chances on being sued. To counter that objection, some asset protection experts came up with the idea of combining a domestic family limited partnership (FLP) with an offshore asset protection trust.The advocates of this structure argue that the U.S. citizen can retain direct personal control over the assets as the general partner of the domestic partnership, but the limited partnership interest is transferred to the offshore trust. The general partner has access to the assets via distributions of partnership capital (through the foreign trust), compensation for serving as the general partner or via loans from the partnership. Thus, the general partner can control and recover the assets without having to dismantle his or her asset protection structure. Briefly, you would put cash and marketable securities like publicly registered stocks and bonds into a limited partnership in exchange for an interest as a limited partner. You would also be the general partner. Then you would transfer your limited partnership interest to the foreign trust and it would become the limited partner. As the general partner, you would continue to control the investments, but you would no longer be the legal owner of the limited partner's share of the partnership. So long as you made the transfer at a time when you were solvent, your transfer should hold up. And, if it's no longer an asset, you can no longer report it on a financial statement.
Is the APT/FLP The "Ultimate" Asset Protection Structure?Special thanks for help with this issue of APS.
Further details about protecting your assets from future lawsuits are available in our subscriber's web site. Changes in the tax laws and various federal and state laws affecting various asset protection devices are provided in our monthly newsletter on Asset Protection Strategies.
NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article. About the author: Vernon Jacobs is a CPA/CLU who works as a tax author and consultant. He sponsors and moderates a free discussion group on asset protection and offshore topics. His email address is vkj@rpifs.com. He can be reached by phone or fax at (913) 362-9667.
Sponsored by Offshore Press, Inc., Copyright, 2001, all rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. (913) 362-9667. Email to rpi@rpifs.com. |
