Offshore Trusts Are Giving Way to Trusts Back on Shore

Offshore trusts have long been used by the wealthy as a means to protect assets and gain access to better-performing foreign investments generally unavailable in the U.S. In addition to granting control over investment diversification, estate planning and asset distribution, foreign trusts can shield assets from frivolous lawsuits and creditors. However, the key with offshore trusts is to establish them early (before they are needed) to ensure their protections are valid.

Foreign or international trusts allow for more control over assets in the event of a lawsuit. However, the reporting requirements for offshore trusts are ever increasing and failing to file the proper paperwork can result in prison time and financial penalties in increments of $100,000. Moreover, some U.S. judges are starting to jail those who will not (even if they cannot) produce the foreign assets.

For those reasons, domestic asset protection trusts (DAPTs) are becoming more and more attractive. Thirteen states currently allow DAPTs, which are basically trusts set up for the person's own benefit for protection against creditors. These trusts are banned by all other states and protect assets from creditors unless the creditor can prove a fraudulent conveyance-that the asset was only transferred to the trust to elude creditors.

DAPTs make it more difficult for creditors to prove an asset transfer to the trust was fraudulent and they give creditors a shorter window to try to prove their claim. Aside from bankruptcy claims, DAPTs protect assets in nearly every circumstance, even from property settlements, alimony and child support. However, DAPT assets are still subject to the jurisdiction of federal bankruptcy courts if they were transferred to the trust within the previous 10 years and the transfer was fraudulent.

As investment diversification is crucial to long-term financial health, having both domestic and offshore trusts makes the task of claiming assets more daunting for creditors. The more time and money a creditor expects to have to spend on penetrating the walls of a trust or trusts, the more likely the creditor is to settle a claim. Sometimes, the protection of the trust can be so strong that creditors will settle for pennies on the dollar.

Nevertheless, DAPTs are not without risks. Very specific legal criteria must be met to ensure the trust's efficacy. Moreover, DAPTs are relatively new and there is much unchartered territory when it comes to how the courts will uphold them. For example, there is no definitive case law on whether a DAPT created in one state will protect the assets of a resident of another state. Such uncertainties will only be resolved when such a DAPT structure is challenged.

The benefits of domestic asset protection trusts cannot be understated, but there are uncertainties and specific legal requirements for establishing DAPTs. If you are considering establishing a trust, contact an experienced estate-planning attorney to discuss your situation, your goals and your options.