Asset protection trusts
One of the realities of life in the
The first question one must ask is what type of liability risk do I face and can I insure against it? Clearly there are certain events for which conventional insurance can be a solution. For example, personal liability resulting from injuries or death caused to others in an automobile accident.
However, most conventional insurance contracts contain maximum limits (generally around $1 million), although additional coverage can be obtained. Umbrella policies can offer a layer of protection that wraps around the lower limits offered in most property and casualty type contracts. We generally recommend that higher net worth families have at least $1 to $2 million of umbrella coverage. While there are many strategies one can use to reduce the risk of loss from litigation, some of the more complex and more intriguing involve the use of Asset Protection Trusts (APT).
Going back through literally hundreds of years of Anglo-American jurisprudence there is a lot to be learned. APT’s generally fall into two main categories. They are Domestic Asset Protection Trust (DAPT’s) and Foreign Asset Protection Trusts (FAPT’s).
The DAPT’s are commonly known as The Alaska Trust, The Delaware Trust, or The Nevada Trust since those are the states that have prominently authored legislation that allows self-settled spendthrift trust (trusts in which the individual establishing the trust can also be the trustee) for purposes of sheltering the trust’s assets from the claims of creditors. There are two major drawbacks to the DAPT. First, the Bankruptcy Reform Act of 2005 provides for 10 year limitations period for transfers to self-settled trust, effectively neutering these trusts from bankruptcy creditors. The second drawback is that there is no case law that validates them.
The FAPT is a self-settled trust that is set up offshore. The primary jurisdictions with the most favorable creditor protection statutes are The Cook Islands and The Island of Nevis. Unlike their domestic counterpart, offshore trusts have had a considerable history of case law, which in large part substantiates the efficacy of this approach in protecting ones’ assets, especially when the assets were not transferred in contemplation of imminent liability. It is important to note that FAPT’s are treated for tax purposes just like a domestic trust, meaning that there is no tax advantage in having assets held offshore. There are, however, financial vehicles that can be owned in an offshore trust which do provide favorable tax benefits under U.S. Tax Law and when properly structured can provide some meaningful tax sheltering opportunities.