Asset Protection Trust

Sample of an asset protection trust set up. Please see comments below.

Asset Protection Trust Diagram

People frequently say “I want bullet proof asset protection.”  I had an attorney friend of mine some years ago joke during seminars that the only true way to be bullet proof was to be poverty stricken and destitute.  Then he would go on to say that the next best thing to that was to form and International Asset Protection Trust (IAPT).  This was 12 years ago that he used to say this.  It was true then and it is still true today.

Many Asset Protection Trusts that are formed are actually hybrids.  They are both in the U.S. and outside of the U.S.  This allows for easy tax compliance and does not initially require any extra IRS or Treasury Department reporting requirements.  As long as an Asset Protection trust meets the Court and Control test it does not have any special reporting requirements. The Court and Control test, simplified, says that as long as the trust is controlled from within the U.S. and is subject to U.S. court jurisdiction it does not have to do any special reporting. Basically it is a U.S. Grantor Trust.

Over the past 20 to 25 years IAPTs have become the most popular trusts for U.S. citizens to set up in foreign jurisdictions.  The ease of annual administration is simple and inexpensive and they have been proven to have highly effective asset protection benefits.  Essentially, at the time of formation, the Asset Protection Trusts are not offshore trusts.  They are domestic trusts with the ability to become an offshore trust, if necessary.

In reality, most trusts that are set up as hybrids never have to become true offshore trust.  The reason is that most creditors quickly back off once they find that an International Asset Protection Trust  is in the picture.  If the IAPT was set up long enough ago that there is no issue of fraudulent conveyance, then the creditor knows that an attack is futile.  In fact many creditors that could make a fraudulent conveyance argument rarely do. It is simply too expensive for them to go down that path.  In the 20 years our company

has been in business, only two trusts needed to convert to offshore status.  In all other cases the creditor either walked away or the client was able to negotiate a satisfactory settlement.

Elements of an International Asset Protection Trust

There are various elements to a trust that make it an International Asset Protection Trust.  Although, different people will have different definitions, these attributes are common in an IAPT.

  • 1. It has a U. S. Managing Trustee
  • 2. It has an offshore Custodian Trustee or Standby Trustee
  • 3. It has a U.S. Protector
  • 4. It has a foreign registration in an asset protection county
  • 5. It states clearly in the trust document that the trust is a U.S. Grantor Trust for tax purposes

Most clients want to be their own Managing Trustee.  This is an absolute no no.  This control will immediately allow a creditor to get access to the trust assets. If properly done a client can be the Protector if necessary.  But, even this position id

eally should be someone else.  The Custodian Trustee is a trust company in a foreign jurisdiction and normally an asset protection country such as Belize, the Cook Islands, or Nevis is used. These countries are considered asset protection jurisdictions because they have trust laws that support International Asset Protection Trusts and prevent any access to the trust or its assets.

Asset Protection TrustAs mentioned the International Asset Protection Trusts are set up as U.S. Grantor Trusts at inception.  However, in the face of a very aggressive creditor, the trusts can morph into a true foreign asset protection trust. Once that happens there is no longer a U.S. Managing Trustee or a U.S. Protector. Thus, there is no U.S. presence and no U.S. court can gain jurisdiction over the trust. The Asset Protected Trust is now managed in a jurisdiction that has laws and policies that are favorable to the trust, the trust Settlor and the trust assets.

Obviously the trust document for an International Asset Protection Trust is a very specialized and finely tuned instrument. This is not something that is available “off the shelf” from a foreign trust company. There are no foreign trust companies that make this document available to the general public.

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