Domestic Asset Protection: Is it Worth the Risk?
The preceding posts in which we pitted pairs of states against one another to debate their asset protection trust laws like political candidates, while fun, were not conducive to addressing a wide breadth of concerns. Each state only responded to five or six questions. Each state only tried to portray itself in the best possible light. And each state only displayed shameful manners, jabbing at the vulnerable spots of one another’s asset protection statutes.
In today’s post, we’ll turn away from the deafening self-promotion of those candidates to break down the potential risks of domestic asset protection statutes and assess how they compare to their foreign alternatives. (And you can see how they compare to one another in this user-friendly chart.)
If you’ve read some of our previous posts, you have a sense of why some choose to create (domestic) self-settled spendthrift trusts rather than turn to offshore planning. You may now pass “Go” and collect two hundred dollars. The proceeding paragraphs are for everyone unfamiliar with the strengths of domestic planning and the weaknesses of foreign.
The price tag is an obvious advantage. Domestic asset protection is immensely less expensive than foreign planning. Yet price is not always an obstacle for the person committed to protecting their wealth, especially when that wealth is substantial. But there are other costs to offshore planning.
Control, for one.
Foreign trusts tend to force the trust-maker to relinquish a more significant degree of control over the trust assets than is required by many domestic asset protection trusts. The logic is that the less authority you have over the money in trust, the less likely the trust is to be declared fraudulent if brought to suit. And that’s true. However, even the most flexible of self-settled spendthrift statutes in the States require the trust-maker to hand over the keys to a third party. Additionally, the distance between the trust-maker and the foreign-held asset can be off-putting for those who prefer to keep their property within sight.
It should also be noted that a growing number of attorneys and planners – myself included – agree that a self-settled spendthrift trust, planned in sufficiently excruciating detail, can domestically provide as high a likelihood of protection from creditors as that afforded by a trust in St. Nevis or the Cook Islands or anywhere else – with a significantly lower bill for the result.
Domestic asset protection trusts also come with the benefit of a much slighter degree of negative stigma because the United States government is the one holding the leash. Couple that sense of legitimacy with the relatively inexpensive costs (price, control) and one doesn’t have to squint to see why more individuals are looking to plan onshore rather than off.
That’s not to say that you’re free of risk by planning domestically. There are a number of questions (which we will momentarily explore) about the efficacy of domestic asset protection trusts, chief among them being whether they’re actually valid. The trouble is that the oldest self-settled spendthrift provision in the States is that of Alaska. It’s only been around ten years. Consequently, there isn’t a significant body of jurisprudential precedent by which to forecast in what circumstances a self-settled spendthrift trust will be upheld or collapsed by a court.
Similarly, Forbes has recently reported on a new attack on a foreign trust under what it called the “Per Se Fradulent Rule.” (The short version is that Illinois doesn’t recognize this kind of trust, therefore anyone who transfers something to it is, per se, committing fraud against potential creditors. It’s a longer story than I can recount here and I doubt I could tell it better than does the gentleman at Forbes, with one of the key takeaways being that not even foreign trusts are impervious to American judges.)
From the limited body of past rulings, we can see that a domestic asset protection trust is on unsteady ground when the trust owns assets – especially real estate – in a state other than that in which the trust-maker is domiciled or in which the trust is made. If the other state doesn’t have a similar self-settled spendthrift statute on its books, then it may rule the trust invalid on any number of grounds, a ruling which – in accordance with the Full Faith and Credit clause of the Constitution – must be honored by all the other states, including the one in which the trust was made.
On the other hand, there we have a lot more history to draw on – and so we generally know what to expect – when a foreign asset protection trust gets hauled off to court. Many times, they’re upheld because the United States government has no jurisdiction over other sovereign nations. Furthermore, because those sovereign nations are buoyed by the money from such trusts, their laws make it extremely difficult for creditors to challenge the trust in their respective jurisdictions.
Those are the facts as we have them. You can learn quite bit more by turning to the resources like the aforelinked chart from ACTEC and the following ones from the Business Owners Toolkit of Bizfilings: Carefully Constructed Trusts Can Protect Your Assets and Offshore Trusts Can Offer Asset Protection.
As I said, I think domestic asset protection can be just as efficacious as the foreign one at much lower cost. Is it worth the risk? Well, that’s up to you. Let me know in the comments below.
Good luck and good hunting.
Miss the previous posts in this series on domestic asset protection? Check out last week’s debates: Delaware v. Nevada and Wyoming v. Alaska.
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