Self-Settled Asset Protection Trusts

Although foreign asset protection trusts (FAPTs) have been around for decades, recently they've increased in popularity because litigation expenses and perceived inequities in the U.S. legal system have prompted many individuals to look offshore for protection. As a matter of fact, several foreign jurisdictions have established favorable asset protection laws to attract U.S. capital, including Nevis, Cook Islands, Maldives, Belize, Bahamas, Bermuda, Isle of Man, Guernsey, and Jersey.

Creating a FAPT is fairly straightforward. You first need to pick a country with favorable trust laws and debtor protections, such as the Cook Islands or Nevis. Then choose a reputable independent local trustee, prepare the necessary trust documents, and transfer title of the assets to the trust.

However, The assets themselves do not necessarily need to be held in the trust jurisdiction. In fact, asset protection specialists recommend that they be held in a bank located in a debtor-friendly country other than where the trust is located, in order to further shield them from potential creditors.

Because FAPTs are administered offshore, they provide many advantages for U.S. settlors. For example, because U.S. courts have no jurisdiction over a foreign trustee, they can't order the trustee to distribute trust assets. Rather, in order to collect on a judgment entered against a settlor by a U.S. court, the creditor has to have the judgment executed in the jurisdiction where the trustee resides.

Unfortunately for creditors, jurisdictions catering to U.S. clients rarely recognize judgments in favor of foreign creditors. Instead, the creditor will have to file suit in the trust jurisdiction and litigate the settlor's liability all over again.

Even then, the creditor will be out of luck, because most well-crafted FAPTs include a "flee clause" which allows the trustee discretion to move the trust to a new country. Unless the creditor is successful in invalidating the "flee clause", the trustee can literally move the trust from one country to another, keeping one step ahead of the creditor and forcing him/her to file multiple lawsuits in multiple jurisdictions with little or no hope of success.

Furthermore, because most FAPT jurisdictions are located in remote areas, the financial burden of prosecuting a lawsuit overseas can be enormous. Hiring local attorneys (who often don't work on a contingency basis), complying with local court requirements, and traveling across the globe to provide testimony and attend hearings is a daunting task, even for sophisticated creditors. Robert Mintz, an asset protection and estate planning attorney in Oceanside, CA says, "They create a huge psychological and financial deterrent to most potential litigants."

Most foreign jurisdictions have shorter statutes of limitations for creditor claims than most U.S courts, as well as heightened standards of proof. This is particularly useful when determining whether a settlor fraudulently conveyed assets into a trust to delay, hinder, or defraud potential creditors.

"Many of the offshore jurisdictions have a two-year statute of limitations for fraudulent-conveyance claims, versus four years for most U.S. courts," says Scott Farber, a financial adviser with Boston-based Woodstock Corp., "And they may require the plaintiffs to prove any allegations beyond a reasonable doubt, rather than by a preponderance of the evidence as required in most U.S. civil actions."

It should be noted, however, that creating and administering a FAPT is expensive. Legal creating the trust can cost from $7,500 to $30,000, and trustee fees can add another $2,000 to $6,000 a year, depending on the jurisdiction and trust company.

Another concern is the political stability of the country the trust is located.

Although a U.S. court has no jurisdiction over an offshore trustee, there is the risk that a court might require the settlor to instruct the trustee to repatriate trust assets to satisfy a creditor judgment. While this issue is currently somewhat unsettled and is dependent on circumstances, there have been a few cases where courts have ordered FAPT settlors to issue such instructions and, when they failed to do so, had them incarcerated for a contempt order for failing to comply. So, FAPTs, when created correctly, can be very successful. However, when settlors attempt to retain too much control over the trust, they could find themselves in trouble.

Using a FAPT outside the normal business-creditor context can also create problems. For instance, there have been three recent court cases where a husband tried to use a FAPT to shield assets during divorce proceedings. In each case, it was ruled by the court that the FAPT was part of the marital estate and the wife could collect her portion of it from other available marital assets. In fact, one court went so far as to hold "the use of such trusts to avoid alimony, child support, and a fair division of marital property upon divorce is reprehensible to us." And, although not all courts may feel the same, the trend is clearly toward treating FAPT assets as part of the marital estate in order to allow an equitable division of all the couple's property.