Overseas Asset Protection Trusts

The June 15, 1998, issue of Forbes magazine (p. 240) included an article entitled “Your trust has a hole.” In that article, the author wrote what appeared to be an unflattering expose of the efficacy of using an offshore trust to protect assets from creditors. In the piece, the author is asserting that asset protection trusts are not as effective at protecting assets as advertised by the asset protection industry.

The author cites several interviews she had with noted asset protection lawyers who described varying results achieved by their clients whose APTs were used in connection with creditor challenges. These results included settling claims for 18 to 48 cents on the dollar — instead of having to pay 100 cents, or more, on the dollar without an APT. We believe the structure has been effective if the existence of the structure results in the claim settling for a lesser amount than if the APT had not been established.

It is important to note that parties to lawsuits settle for a number of reasons, despite having an APT. Most people do not wish to go through the rigors of a legal dispute because of the emotional and financial wear and tear they will have to endure. The existence of the APT generally caouses the creditor to come to the bargaining table motivated to fashion a mutually agreeable settlement. In most cases, without the existence of the APT, a favorable settlement could not be reached.

The APT should not be a strategy intended to defraud existing creditors, and none of the lawyers who were mentioned in the article would knowingly establish an APT for a person seeking to defraud their creditors. However, there is the occasional client who does not tell the lawyer the entire truth about his situation and who, therefore, ends up with the structure not fully protecting assets. Even unscrupulous APT settlors gain an advantage because it forces the creditor to expend time, money and effort to proceed against the fraudulent structure. Lawyers have an ethical duty to refuse to represent clients who are seeking to defraud their creditors.

The article warned about the Passport Trust that is being sold through mail order by a mutual fund manager. It is a “do-it-yourself” trust kit that purports to afford all the protections of an APT for a fraction of the price. While the article claims that over 4,000 kits have been sold, the class of clients we represent would be hard-pressed to believe that a lay person could competently establish their own APT and expect it to survive a creditor’s challenge. It is the equivalent of performing open-heart surgery on yourself.

The article further warns of using asset protection trusts to dodge the tax collector. We strongly agree and suggest that one never use an offshore trust to hide taxable income.
Finally, the article concludes that one seeking to establish and APT do the following:

  1. Be wary of any claim by a lawyer that an offshore trust can’t be cracked.
  2. Never try to use an offshore trust to protect U.S.-based assets.
  3. Avoid mass-marketed “kits” for setting up these trusts. Pitfalls await.
  4. Find a lawyer who’s an expert in the field. The extra cost is worth it.

You should be encouraged by the revelations concerning APTs in the article. You should also be comforted by the fact that the legal system worldwide will not support those seeking to defraud their creditors, while upholding the protections afforded to bona fide offshore trust arrangements. The offshore trust industry does an excellent job of self-policing and will generally refuse to represent crooks and thieves.

Again confirmed, one is generally better off having the options of asset protection designed into their estate planning structure when faced with a financially ruinous lawsuit.