JohnAlanCohan@aol.com 310.278.0203 Probate/Conservatorships IRS Audits IRS Collection IRS Appeals U.S. Tax Court IRS Criminal Investigation Tax Litigation Tax Opinion Letters Business Plans Aviation Law Tax Exempt/Nonprofit Organizations All aspects of equine and livestock law, particularly tax matters, syndications, business plans, tax opinion letters, and drafting of business documents.		Asset Protection Trusts by John Alan Cohan, Attorney at Law When Congress recently passed new bankruptcy legislation, some lawmakers suggested that the law has a loophole used by wealthy people to protect substantial assets from creditors even after filing for bankruptcy. This device, known as an Asset Protection Trust (APT), has emerged in recent years as a means of protecting assets from the reach of creditors, and it also functions as an estate planning vehicle. The most frequent requests I receive for setting up an Asset Protection Trust come from doctors, who fear large medical malpractice awards beyond their insurance limits, and CEOs, whose assets are in jeopardy due to new rules that make them personally liable in the event they have signed off on false or misleading financial statements. Owners of aircraft are concerned that an action for negligence might easily exceed their aviation policy limits. And farmers and ranchers often have concerns about protecting their assets from the reach of creditors. The importance of this topic is that we live in a litigious society, and there is nothing wrong with transferring assets to protect oneself against future unknown creditors. Attorneys, required to adhere to ethical standards, are not permitted to assist clients who intend to engage in a fraudulent conveyance. Attorneys are required to conduct due diligence to insure that the client is not seeking to defraud creditors, that he is not about to default in obligations, that his corporation is not in trouble, etc. An APT is not intended to avoid income or estate taxes. Existing reporting requirements mandate filing returns upon creation of these trusts or the transfer of assets to them. The main purpose of an APT is to provide the client and family with income, and to protect assets from creditors. A well thought-out asset protection plan requires expertise in property law, domestic and international tax law, estate planning, the law of trusts and estates, and bankruptcy, and is therefore very demanding. Most asset protection plans are “offshore,” in such jurisdictions as the Bahamas, Bermuda, Jersey, the Isle of Man, or the Cook Island, among others. These jurisdictions have specific trust laws on the subject, have political and economic stability, favorable tax laws, modern telecommunications facilities and professional fiduciaries with established reputations. It is imperative to have referrals to a credible, established trustee and bank at these locations. Alaska, Delaware, Nevada, Rhode Island and Utah have laws that permit a kind of APT, but there are certain restrictions compared to a trust created offshore. For instance, Alaska’s law requires that the trust be irrevocable, that the grantor can have an interest as a discretionary beneficiary, that the trustee must be an unrelated party, some assets must be located in the state, the trustee must be domiciled in state, and some part of the trust’s administration must occur in the state. These restrictions are not found in offshore APTs. An APT created offshore has more flexibility and greater protection. The jurisdiction will not recognize U.S. judgments. If a creditor seeks to attach assets in an APT on grounds that there was a fraud against creditors, the burden of proof is on the creditor and the claim must be made in the foreign jurisdiction, as judgments rendered in the U.S. are not recognized. In the Bahamas there is a two year statute of limitations in which creditors must commence an action based on allegations of a fraudulent conveyance. One must keep in mind client’s overall estate planning objectives. The most important fact is the timing of the creation of the trust and the date the creditor claim arose. In a typical offshore APT, the trust is irrevocable, but the grantor can grant another person (usually referred to as the “protector”) most if not all of the powers inherent in the power of amendment or revocation. The “protector” can be one’s spouse, and also has the power to replace trustees and veto certain trustee action. Flexibility is built into the trust. To avoid gift tax the settlor retains a special testamentary power of appointment. One’s spouse can serve as co-trustee with the foreign corporate trustee. There can be a provision that in the event of a lawsuit the trustee is automatically removed and the trust automatically is diverted to another jurisdiction. When a creditor realizes that there is an offshore trust, this establishes certain leverage to resolve the dispute on favorable terms. When the creditor realizes that a U.S. judgment will not be nonrecognized, and that there are almost insurmountable roadblocks to enforcing the claim against the trust, this compels a quick and cost-effective settlement in the defendant’s favor. All kinds of assets can be transferred into an APT, including securities, realty, money and other property. Sometimes, in more complex situations, a Family Limited Partnership should be utilized as an extra layer of protection. One does not normally transfer all of one’s assets into an APT. To do so might enable creditors to argue that that the client did not retain enough funds to pay anticipated liabilities as they became due and therefore made the transfer with the intention of prejudicing creditors. If a present claim exists, the client should simply retain an amount adequate to cover that. The offshore trustee will charge an origination and setup fee and annual fees, but this does not include fees for managing the trust funds. A funds manager may be separate from the trustee, and can be in a different jurisdiction than the trustee. Quarterly reports are given. As mentioned, Asset Protection Trusts are of particular value to persons in high risk businesses and professions where possible future contingencies could create significant claims against one’s assets. Establishing an APT before such claims arise is a very sound method of protecting oneself from claims that could arise in a highly litigious society. Back to Top