Asset Protection

The United States as an offshore asset protection jurisdiction – the world’s best kept secret


By Alexander A. Bove, Jr, Esq. (04/09/2009)

Asset protection planning has now earned a formal position in the world estate planning community, and the trust is the prominent vehicle used to accomplish the objective. Briefly, the settlor will establish a discretionary trust for the benefit of himself and/or his family in a jurisdiction that offers such trusts special protection from the settlor’s creditors. Currently, the more popular jurisdictions chosen for settlement of such Asset Protection Trusts (APTs) include the Cook Islands, Gibraltar, the Isle of Man, and Liechtenstein.

 

For settlors in and around countries in Europe and the European Union (EU), however, many of these jurisdictions give rise to concerns about their proximity to each other and the fact that a reciprocity of judgment recognition scheme is rapidly developing in the EU area, so that a judgment in the UK, for instance, may be recognized in Austria, which in turn may be recognized in Liechtenstein.

Almost universally overlooked by such settlors as a favorable jurisdiction in which to settle their asset protection trust is the United States (US). As of writing, ten US states have adopted special laws favoring the self-settled asset protection trust, and although up until now the focus has been on the US settlor, the fact is that the United States Asset Protection Trust (USAPT) may be the ideal asset protection strategy for the non-US settlor.

 

As noted, a number of US states have enacted specific laws providing for the self-settlement of trusts, which, barring a fraudulent transfer, can protect the trust assets from claims of creditors of the settlor, even though the settlor may be a discretionary beneficiary. But as with all asset protection schemes wherever they take place, the question of a fraudulent transfer is the first issue to consider.

 

Where the settlor is a non-US person (a non-resident alien) and the transfer is made from a situs outside the US to the USAPT, the question arises as to which jurisdiction’s law will apply to the transfer, and thus, what would be the applicable limitations period on attacking the transfer as being fraudulent. As a general rule of law, the law of the situs of the transfer should govern. In that event, if a non-US person transferred assets to a USAPT, the non-US person’s creditors could attack the transfer in accordance with local law regarding fraudulent transfers. The problem for the creditor in such an event, however, is that he would then have to attempt to apply the foreign law in the US in pursuing the assets that were transferred to the USAPT.

 

The stereotypical USAPT legislation provides that a creditor of a settlor/beneficiary will not be able to reach assets of the self-settled trust so long as:

 

  • The trust is not revocable by the settlor;
  • The settlor was not in default of a child support or alimony payment by 30 days or more;
  • The trust contains a spendthrift clause, basically providing that the assets of the trust will not be reachable by a creditor of any beneficiary, nor may any beneficiary anticipate, assign, or encumber his beneficial interest;
  • Distributions to the settlor are at the discretion of the trustee;
  • The transfers to the trust were not fraudulent;
  • The settlor may not retain a lifetime power of appointment (though the settlor’s retention of a testamentary special power by the settlor is permissible, and someone other than the settlor – e.g., a protector – may have a power of appointment during the settlor’s lifetime or thereafter);
  • The trust provides it will be governed by the laws of the selected USAPT state; and
  • At least one trustee resides in the USAPT state.

In the typical case, the creditor will obtain a judgment in the settlor/debtor’s home jurisdiction and then attempt to enforce that judgment against the trust in the US. As noted earlier, if the settlor, the creditor, and the trust are all in Europe or the UK, it may be possible for the creditor to enforce the judgment, as recent cases have demonstrated. On the other hand, if the APT is in the US, the creditor would:

  1. First have to obtain a judgment from the appropriate court(s) in the non-US jurisdiction, then overcome the very complicated obstacles to a US court’s recognition of the foreign judgment, and press his case through the US courts (likely more than one court);
  2. Establish in legal proceedings that the foreign judgment against the individual settlor was enforceable against the trust, technically and legally a different party;
  3. Bear the huge legal expense associated with such time-consuming and complicated litigation; and
  4. Even if ultimately successful in his attack against the trust, the result would be that only that creditor’s judgment would be paid from the trust. The trust would otherwise continue as before, ready to defend against any future attacks.

 In addition to the formidable barriers provided by the USAPT, there are considerable tax benefits as well. First, US tax law provides certain incentives to foreign investment in the US, and these may be obtained by a non-US person through a properly drafted USAPT. The benefits include total avoidance of US tax on capital gains (other than gains from US real estate) and tax on interest from bank accounts and US government or corporate bonds. And most of the US states that have asset protection trust legislation will not tax the trust if there are no beneficiaries in the particular state. The USAPT established by a non-US person should not hold shares in US corporations, as any dividends are subject to US withholding and tax. Further, on the death of the settlor, the shares will be considered US situs property and subject to US estate tax. The estate tax exposure can generally be avoided by holding the US shares in a foreign (non-US) corporation and holding the foreign corporation shares in the USAPT. [Note that the foregoing is a dangerously brief overview of some of the highlights of a US grantor trust established by a non-US person and offered only as an illustration of possible results in some circumstances.]

Conclusion

For non-US persons who seek creditor protection, the US should be one of the first jurisdictions to consider. The establishment of a trust in a US state that has enacted asset protection trust legislation may provide the settlor with benefits not found in any other asset protection jurisdictions in the world, including:

 

  • Tax benefits;
  • Established and respected judicial system;
  • Established and secure financial markets; and
  • Solid asset protection trust legislation.

 Copyright © 2009 by Alexander A. Bove, Jr. All rights reserved.