“Have You Converted Your Assets?”		«BACK
	by Scott Husaby
	from Krass Monroe, P.A.

In the past we have been relatively comfortable insulating ourselves from potential liability through the use of corporate entities and/or by purchasing insurance to cover specific risks. However, some would argue that the corporate veil is being pierced with increased regularity and that there are increasing concerns regarding the insurance option, such as the solvency of the carrier, the increase in premium costs, and the existence of constantly broadening policy exclusions such as punitive damages or damages resulting from acts of gross negligence.

Before addressing the specific features of a successful asset protection plan, it is important to dispel a few myths regarding this increasingly popular area. The first misconception is that asset protection planning is based on hiding assets. Given the disclosure that individuals are required to make on their federal income tax returns, an asset protection plan relying on secrecy will certainly raise difficult ethical issues and possibly even have criminal implications. Because of these reasons, a well-drafted asset protection plan will not rely on secrecy to be successful. The second myth that must be dispelled is that asset protection planning is an opportunity to defraud creditors. The fraudulent conveyance laws ensure that present creditors and certain subsequent creditors are protected from transfers made by a person who is or foreseeably will become their debtor. A person clearly cannot avoid liability to a present creditor by transferring assets. The distinction becomes somewhat more grey when dealing with future creditors. A recent Florida decision added some insight to this area by holding that asset transfers are entirely permissible as to one’s possible creditors, but not as to one’s probable creditors. We strongly recommend that the fraudulent conveyance issues be avoided in their entirety by being proactive in establishing an asset protection plan prior to becoming subject to a creditor’s claims. The final myth that should be addressed is that an asset protection plan is a tool for evading taxes. This misconception is especially popular in the context of foreign asset protection trusts. Since the United States Federal income tax is a tax on worldwide income, an asset protection plan (even one based in a foreign country) will have no particular income, gift, or estate tax advantage other than the usual estate tax advantages that can be accomplished through gifting and trust planning.

While there are a myriad of asset protection planning ideas, this article is limited to a brief overview of foreign asset protection trusts (FAPTs) and domestic asset protection trusts (DAPTs). The primary goal of using an FAPT (also commonly referred to as an "offshore trust") is to place property out of the reach of U.S. Courts and to subject the property to the laws of a jurisdiction that will not enforce U.S. judgments. Therefore, the trust must have a situs in a foreign jurisdiction. The choice of the situs of a foreign trust is important because the laws of that country will determine the level of protection afforded the trust assets, as well as the administration of the trust. Most of the foreign countries utilized for FAPT planning have enacted debtor-friendly legislation to encourage foreign trust business. Some of the more commonly utilized countries include the Cayman Islands, Bermuda, Bahamas, Channel Islands, Cook Islands, and Belize. The basic concept underlying FAPT planning is that a creditor who obtains a U.S. judgment against a debtor with assets protected by a FAPT will be forced to travel to the foreign jurisdiction in an attempt to obtain a new judgment because the U.S. judgment will likely not be recognized by the foreign jurisdiction. This alone will be enough to deter some creditors (or at least increase the debtor’s negotiating position). Even if a creditor pursues its claim against the debtor in the foreign jurisdiction, the pro-debtor laws of the foreign jurisdiction may make obtaining a judgment against the debtor difficult. In addition, a properly drafted FAPT will also provide additional options such as the ability to move the trust assets to another foreign jurisdiction in the event a creditor is pursuing a judgment in the jurisdiction in which the trust is currently situated (i.e., a fleeing clause).

While some people are attracted to the prospect of establishing an offshore trust, others are uncomfortable placing a significant sum of money in the control of a foreign trustee. For these individuals, recent state legislation in the U.S. has opened the door to another exciting planning opportunity.

The hottest topic in the area of DAPT is the recent enactment of special trust provisions by the state legislatures of Alaska and Delaware that are intended to allow individuals to establish trusts that enjoy the same kind of protection that many individuals enjoy in offshore locations. While the asset protection features of these new laws have not yet been tested in court, estate planners are excited about having a domestic alternative to the FAPT. While experts generally believe that FAPTs still provide more effective asset protection, the Alaska or Delaware trusts may provide a viable alternative for those individuals seeking asset protection but who cannot get comfortable with the concept of placing their assets in a foreign country.

Asset protection planning is a very complex and constantly evolving area of the law. The basic FAPT and DAPT planning introduced in this article can be coupled with countless other asset protection options and layers to personalize an asset protection plan to a particular individual’s planning needs. Any individual concerned with protecting a modest to large estate in today’s environment should consider the concept of asset protection planning in his or her overall business and estate plan.