Asset Protection Trusts (Domestic vs Foreign) why it matters

11 Replies

What is an asset protection trust? Who needs them? Where do you set them up? Lets jump into this.

Lets start with the need for asset protection and why asset protection works. Asset Protection works by removing the economic incentive for a person, and that person’s attorney to pursue you in a court of law. The best way to protect your assets is to take legal steps to make you unattractive to potential predators. But not all systems and planning is equal. But something is always better than nothing.

You are on BP because you are investing in Real Estate or want to invest in real estate. And most are looking for cash flow. The goal of asset protection is to have it actually work. To accomplish the goal it was created for. The legal system has changed over the last 30 years. But for the worst. It’s no longer about “justice” but redistributing your wealth from the ‘haves’ to the have not’s. Since 1977 law firms were given OK to advertise and that opened the floodgate to pursue more litigation and a legal industry driven by sales and profit. We are also fighting a Court Judges Practical Authority. The power a judge actually has to make decisions.

A judge has very broad powers to reaching your assets, including seizing them, placing a lien on them, foreclosure, ordering a sheriff sell, clearing title to enable a clean sell and even wage garnishment.

The problem is, judges, even without legal authority to do this, do these things by exercising their practical authority. And this can be done in direct contradiction to established statutes and case law. The result is that the court’s practical authority just took your asset or real estate with no legal authority.

So the solution to combat all this is to hinder a judge’s practical authority over your assets, so that they cannot circumvent legal processes. This is done with asset protection planning, and having asset protection trusts set up in very strong jurisdictions like the Cook Islands. Outside of the U.S. court and creditors control.

When you are setting up an asset protection trust you can create them either domestically in the U.S. called a (DAPT) or offshore in another foreign country called a (FAPT). The route you take will depend on how much protection means to you, why, and what State you live in.

The Cook Islands Asset Protection Trust was created in the 1980s. Since then, it has remained the Gold Standard for Asset Protection around the world. The reason is because it is simply the best home court advantage. The Cook Islands statutory do not recognize any other jurisdiction’s court orders and, the statute of limitations in the Cook Islands is only one year, making it very difficult for a creditor to file their lawsuit on time. What ‘statutory non-recognition’ means is that any U.S. court judgment is completely worthless in the Cook Islands. The offshore trustee will tell any creditor with another country’s judgment that their judgment is not recognized in the Cook Islands. The person suing you would have to start all over and sue you in the Cook Islands, assuming that the claim is made within the one year statute of limitations, and they would have to prove their case by the highest legal standard in the world: the murder standard “beyond a reasonable doubt.” The plaintiff (person suing you) also would have to front ALL the court costs including flying in a judge from New Zealand. And if they loose, they pay your legal fees, which they most likely will by having to prove the case “beyond a reasonable doubt.”

In the U.S. we also have an asset protection trust called a Domestic Asset Protection Trust (DAPT). They were created 10 years AFTER the Cook Islands. They were originally started in Alaska, and since then roughly 17 other states have enacted some form of Self settled Spendthrift legislation. The benefit of DAPT’s are that they are less expensive than there purely foreign counter parts, but the downfall is that they fail on effectiveness, cost and control. Sadly, DAPTs will give you a false sense of security. Recently, a pattern in court rulings has been recognized where DAPTs are being pierced and their choice of law clause is being ignored.

The foundation of the U.S. legal system is the U.S. Constitution, which has the “full faith and credit clause.” This means that every State must give full faith and credit to the judicial proceedings and court orders of each and every State. These are just few recent high-profile cases where the courts disregarded the DAPT jurisdiction: In re Huber (2013), Dhal vs Dahl (2015) and Toni 1 vs Wacker (2018). The problem is residents of one state are using the asset protection of other states like Nevada, which they are not a resident of. This will not work. This is what happened in Kilker v. stillman (2012). A CA resident set up and funded a NV DAPT. He was sued 4 years later, and the CA court disregard the choice of law clause because he was not a resident of NV. The case was upheld in the Court of Appeals. What the asset protection take away from these cases mean is that the only true gold standard of asset protection that has withheld over 40 years of challenges has been the Cook Island Asset Protection Trust. Even against super creditors like the IRS.

Now, most people do not need a purely foreign asset protection trust. For most, this is just going to be over kill. And DAPT, though weakened, does have benefits, such as reasonable costs and less IRS reporting disclosures.

The good thing is that you can actually combine the best of both worlds. You can have the flexibility of a DAPT with the strength and power of the Cook Islands in reserve by using a “Bridge Trust.”

The Bridge Trust was created over 30 years ago. You are using a (FAPT) Cook Island Trust and connecting two countries together with a bridge. Then you simply cross the bridge from the U.S. to the sanctuary of the Cook Islands if or when you are ever in need.

Like all Asset Protection Trusts, the Bridge Trust is an Irrevocable tax neutral grantor trust. The trust is also a Self Settled Spendthrift trust. What this means is it is created by you, for you, as your own beneficiary. And since it is a grantor trust, you still retain some of the powers in the trust. Why you want the trust to be irrevocable is that if you are ever challenged and the judge orders you to bring the assets back to be collected on, you can’t. And you cannot be held in civil contempt for not being able to comply. For the purposes of IRS reporting and disclosures, the Bridge Trust is considered a domestic, not foreign trust, because it is specifically drafted to meet the two-part test of USC section 7701. The Bridge Trust does not require foreign IRS tax filings or asset disclosures, and the trust costs and annual maintenance fees are lower compared to fully foreign offshore trusts.

In short, if the Bridge Trust provides the flexibly of a DAPT and the strength and power of the Cook Islands for your asset protection.

The way this asset protection structure works is with LLC's created to hold your real estate and other assets that may be a cause of a potential liability, anything that has a motor, or has a key or can go boom. Next, an Asset Management Limited Partnership (AMLP) is created that acts as your asset holding company. The AMLP holds the bulk of your assets like cash, stocks, bonds, and receivables. All your LLCs are going to be held inside the AMLP. You are the general partner of the AMLP. This gives you control / use and enjoyment of the assets in the holding company.

The final step is the asset protection Trust. The Bridge Trust is going to be the minority limited partner of the AMLP, this is the non-controlling interest, but it is the ownership interest of the AMLP. This separates “ownership” from “use and enjoyment.” The Bridge Trust owns the AMLP and the assets, while you enjoy the use of the financial assets minus the liability.

Then either two things happen. Either you die, at which point your assets distribute as defined in your revocable living trust. Or, should there be a crisis (lawsuit), the Bridge Trust is triggered, and the assets cross the bridge to the safety of the Cook Islands. You are removed as the trustee, and the offshore trustee takes over with the trust protector looking over the offshore trustee. When the threat is resolved, the assets transfer back domestically with no penalty or IRS problems since the trust is a grantor trust.

The name of the game of asset protection is being proactive. Getting the system set up and in place before it is needed. Before you are being attacked.

Start with something. Even if just a traditional LLC. Then as you grow and hit that $1 MM net worth mark, and or have a high-risk profession like a doctor, dentist, business owner, or your investing and cash flowing with equity then you scale up to stronger forms of protection. Find lawyers that special in asset protection, not just dabble in it or do it on the side. Vet that attorney, ask for references in the exact planning you are looking for, and if they have been challenged, and those results.

Remember, Gross value is vanity, net is sanity and cash is king; and its not a matter of what you have but what you keep. 

Now, a big question and new concept for people learning about asset protection trusts and domestic (DAPT) and FAPT and the hybrid Bridge Trust (BT) is the concept of a ‘Migration Provision.’ What is this, and how can an Asset Protection trust be a FAPT yet classified as a DAPT? And no its not new. Its been in existence for over 30 years. 

So the way a FAPT can meet the criteria to be classified as a DAPT yet still keep the power and strength of a Cook Islands Asset Protection trust is through what asset protection attorneys call a “migration provision.” We are maintaining compliance with IRS section 7701 known as the ‘court’ test and the ‘control’ test.

In the case of the Court Test, offshore trusts can be drafted so that the U.S. and a foreign jurisdiction supervise the trust. In the event of a legal crises, the trustees have the option to allow the trust to migrate to the foreign jurisdiction. Only at the time of migration does the trust become a foreign trust for asset protection purposes. This is done by dropping compliance with IRS 7701 and the trust is now purely a FAPT.

The same type of migration provision applies for the Control Test as well. During times of normal operation, a U.S. trustee (you) can act with respect to trust assets without any consent from a foreign trustee. In the event of a crisis, i.e. a lawsuit that threatens trust assets, a resolution by the trustees can effect a migration of the trust to the control of foreign trustees. (You) are no longer named as trustee while the trust is Foreign.

The Bridge Trust is unique. It is a FAPT, but the IRS classifies it as a DAPT, so long as IRS compliance is maintained. It’s not offshore until it’s needed to be. And you want that. So it is more flexible. You get the benefit of both a domestic and foreign Trust together. Being classified as domestic keeps down unnecessary IRS asset disclosures and filing. And it’s cheaper on annual maintenance cost.

If you ever are attacked and you and your attorney decide that it is in your best interest to have to trigger the bridge and cross it to the offshore jurisdiction, you already have the foreign option available in your back pocket. You would drop the domestic components of the trust and the trust is then purely foreign until the threat goes away. At that point, you would have to make the additional IRS FAPT disclosures and the maintenance cost would increase, while purely foreign.

Another great question to think of and ask is: “Does crossing the bridge o fa BT create a fraudulent transfer? The question really is, does waiting until after the threat has materialized to cross the bridge create a fraudulent conveyance? Lane Kawaoka of Simple Passive Cash Flow asked this question and I was so happy that he did I started asking it for other people who did not think about asking it. After all, fraudulent transfer arguments are a big tool the other party will try to argue. 

The answer is that a conveyance occurs with the change of ownership to the assets. When the Bridge Trust crosses the bridge there is NOT a change in ownership, since the Bridge Trust already owns the assets previously held in the U.S. Therefore, by definition, crossing the bridge does not qualify as a ‘conveyance’ and hence would not be a fraudulent conveyance. Perhaps the more important question is, what would happen if a court did determine that crossing the bridge was a fraudulent conveyance anyway? I would look at what the impact on the trust assets would be, and once the Bridge Trust becomes a FAPT, any challenge to this would have to be heard in the High Court of the Cook Islands. Therefore, the effect would be that even in the case where a judge made such a determination, the Bridge Trust would still be effective.

You have the legal and ethical option to move you assets offshore if that tactical advantage calls for it. But not the obligation to do so.

The Bridge Trust is firmly planted in both the U.S. and solidly planted in the Cook Islands. When you cross the bridge, there is no conveyance or change in ownership. No U.S. Court has ever ruled that the creation of an Offshore Trust is in any way illegal or immoral. But the courts have in fact ruled that the trusts were established “for the legitimate purpose of protecting family assets.” Reichers vs. Reichers, No. 21833-94. There are very few cases where a plaintiff has actually tried to extract assets out from a Cook Island Trust. And in Every Case, they failed to force an extraction. If and when the Bridge is triggered, the Offshore Trust that was pre-established gets triggered, and the Cook Island Trustee, takes over as trustee. Still no conveyance of any assets since it is the Bridge Trust that owns the assets.

@Brian Bradley

I like the concept of a bridge trust to reduce the day to day cost until needed. However my concern is if the trust owns US based assets, it does not matter where the trust resides as a judge may completely bypass the trust and order a seizure of the reachable US assets.

And if you have foreign assets to protect, then is it worth having them owned by a US based trust and not directly by a foreign one?

I understand your comment, but it is not correct. A judge has no control or say over a FAPT in the Cook Islands. They cannot bypass anything since they have no authority or control. Even the IRS and FEC and SEC could not even accomplish that. And they tride and failed every time. See the cases below.  If the trust is needed to be triggered, and cross the bridge, and you are facing a large enough lawsuit that it makes sense to trigger it, you will not care about the actual property, but the "cash/equity" in it. That is what you protect when you are talking about asset protection of any asset. You ability to live and pay bills and maintain your life. You would then strip all the equity out of it and it is now protected by the Cook Islands. A judge has no authority or control over that. That decision would be made before a judge would have time to "freeze" any domestic assets or transfer. Litigation takes a long time. Any asset owned in the US can be protected with a DAPT and a FAPT. It is a matter of control. If under a lawsuit, you want to place the assets in the direct protection of the FAPT, not domestic. If just Domestic, they can be frozen or seized since it still is under the control and jurisdiction of the US Court and judge. A FAPT is specifically used to hinder a judges ability to try to bypass the trust. The DAPT portion of the trust would no longer have any assets in it, they migrated and the transfer would be done, to the FAPT portion of the trust, and the offshore trustee would already automatically be triggered, and nothing the US judge can do about it. This has been well established in case law with some very famous cases like US vs. Grant, SEC vs Slow, The Anderson case. For over 40 years judges and courts have been frustrated by the power of the FAPT, but they even admit their is nothing they can do about it. These were all super creditor government cases where they could not even reach the assets once in the Cook Islands. This is why the Cook Islands Trust has always remained the world global standard. But, it is not needed, until it is needed. You keep it in reserve. You trigger it tactically when the timing makes sense. But if you were to trigger it, you would not care about the actual real estate itself, but the cash and equity in it. When creditors have nothing to collect they will come to the negotiating table very fast. And cases get settled very cheep. Pennies on the dollar. Over 30 years we have drafted over 3,000 of these, and had to trigger over 100, and a judge has never been able to do anything about it. Every attorney and firm realizes once it is triggered they get nothing. and so settle, very favorably for the client with the trust. And if you look at it in an asset protection standpoint, if the assets are safe in the Cook Islands, and not in the hands of the person suing you or the governments hands, you are now better of with it, and you DO NOT move the assets back until the case is fully settle. 

@Mike S.  

Stated another way, Yes, a judge can do anything. It is possible for a court in the U.S. to do almost anything. That is what a judges "practical" authority is and were fighting. The ability to try to do almost anything. This includes invalidating ANY trust. And both a FAPT or a DAPT, and yes, the Bridge Trust. There is simply no way to ensure what a U.S. court is going to do. I do not deny this. Its our legal system. 

BUT, the more important question is, what would the impact be if this happened?

If a good strategy triggered the Bridge Trust into a FAPT, then a U.S. court invalidating it would make virtually zero difference to the effectiveness of the trust. This is for all the same reasons that the FULL FAPT is going to, and historically has, withstood a U.S. Court challenge. So will the triggered Bridge Trust. And like I said legal cases take years to unfold. If triggering, the Bridge Trust into a FAPT is the right move to make, the inherent delays in the U.S. legal system provide more than enough time. The idea that the average plaintiff can just run into court and convince a judge to freeze all your assets before a trial begins is unfounded. We have never witnessed any cases in which that has occurred or a request for such has even been made. I advise clients that if this is a real risk, then they may be the very rare case where beginning with a fully FAPT should be considered. 

For a deeper dive, One of the only rare and very extreme cases I saw was the U.S. vs. Grant case. The husband stiffed the IRS for $36 million, set up a Cook Islands Trust, and then died. The IRS went after the wife 3 times in the Cook Islands and lost each time. And that’s the IRS, the Government, a super creditor who can print money. 

The $36 million is still safe in the Cook Islands and not in the hands of the IRS. Even with their relentless attempts. The IRS was able to get an injunction placed on her. So Mrs. Grant also can’t access the money. So it’s a stalemate. But this was a very rare situation where her trust had a major drafting flaw. She was given the “non-reviewable, sole and complete discretion to remove and replace the Trustee at any time.” Not good! Also, Mrs. Grant made a very big mistake in attempting to transfer a large amount of funds to her son before the case was settled after she just told the court she had no control or power to do this. That opened the flood gates back open to attack her. But even with all these self made problems by Mrs. Grant, she still has possession of the tens of millions of dollars and has a few options to force / negotiate a settlement and to leave her with plenty enough assets to live very comfortably.

But the question begs to be asked. Was Mrs. Grant better off with or without the Trust? Knowing what you know now, would she still have wanted the Trust or not?

@Benjamin A Ersing good question. And @Mike S. I did not mean to forget about the second part of your question regarding foreign owned assets. The quick answer is Yes the Bridge Trust can hold those assets.

To the first part of your question Ben, This system is recommend for people who hit that $1MM net worth mark or are just about to hit it. And net worth is minus liability. That may seem lower then you would expect and surprise you. What we have seen and track over the years is that the threshold at which clients are most interested in protecting their assets is when they have a net worth between $500k - $2.5 MM. And you would expect that number to be more like $5-$10 MM and up. The reason though is that saving between $500k-$2.5 MM is hard to do. It takes most people a lifetime of hard work and commitment. So like anyone interested in asset protection, you are sensitive to risk around that nest egg. And over the years they are becoming more sensitive as lawsuits grow. They realize the shortcoming of LLCs and want the comfort of very strong protection. So the $29k to protect $1MM or more at that point makes financial sense.

Generally you are looking at healthcare professionals (doctors, dentists), business owners, executives with high salaries, and those making a household income of $250k annually + and investing. Or professional investors with cash flow and equity. This is not going to be a system for your new investor of low-income earner. It would not make financial sense. The new investor should start small, with an LLC, then as they grow move into the AMLP, and scale and grow into the Bridge Trust or FAPT.

To the second pat, For the U.S. resident investing in and owning foreign assets I am all for global investing. Even in real estate. Its great diversification, and harder for U.S. creditors to attach. Just pay attention to your tax forms and reporting requirements and bank account disclosures. Talk to your CPA. If the property is held by a foreign corporation with 10% or more U.S. ownership, a foreign partnership or LLC, or a foreign trust or estate, you will need to report that ownership on IRS specific foreign financial asset forms, depending on your reporting threshold. Just understand how the laws and regulations in the OTHER countries also and how it affects your U.S. taxes. Consult your CPA to discuss your situation.

For the Asset Protection side of this question, it is depends. Often it’s best to just leave foreign owned assets as it is and not in the trust. However, the Bridge Trust, itself, has no issue holding foreign assets just like an Revocable Living Trust would not, unless of course there is a restriction on the foreign side. We would usually defer to counsel in the foreign jurisdiction instead of trying to answer because we would need more information on that specific foreign asset. Short answer is basically Yes the Bridge Trust can hold those assets but if it should will be something would need to look at on the analysis.

Now, If you are a foreign investor investing in the US you would create a Domestic LLC in the U.S. which would be owned by a special version of the Bridge Trust for foreign resident investors that would be used as an alternative version with NO U.S. Jurisdiction. And for these foreign investors investing in the U.S., they are going to have to pay attention to tax's of their ownership. The income that these foreign investors make on the asset can be subjected to high US Tax rates. So for the foreign resident investor investing in the U.S. talk to a CPA and US attorney before you invest in the U.S. and get your structure properly set up and ownership set up right.

Originally posted by @Brian Bradley :

@Benjamin A Ersing good question. And @Mike S. I did not mean to forget about the second part of your question regarding foreign owned assets. The quick answer is Yes the Bridge Trust can hold those assets.

To the first part of your question Ben, This system is recommend for people who hit that $1MM net worth mark or are just about to hit it. And net worth is minus liability. That may seem lower then you would expect and surprise you. What we have seen and track over the years is that the threshold at which clients are most interested in protecting their assets is when they have a net worth between $500k - $2.5 MM. And you would expect that number to be more like $5-$10 MM and up. The reason though is that saving between $500k-$2.5 MM is hard to do. It takes most people a lifetime of hard work and commitment. So like anyone interested in asset protection, you are sensitive to risk around that nest egg. And over the years they are becoming more sensitive as lawsuits grow. They realize the shortcoming of LLCs and want the comfort of very strong protection. So the $29k to protect $1MM or more at that point makes financial sense.

Generally you are looking at healthcare professionals (doctors, dentists), business owners, executives with high salaries, and those making a household income of $250k annually + and investing. Or professional investors with cash flow and equity. This is not going to be a system for your new investor of low-income earner. It would not make financial sense. The new investor should start small, with an LLC, then as they grow move into the AMLP, and scale and grow into the Bridge Trust or FAPT.

To the second pat, For the U.S. resident investing in and owning foreign assets I am all for global investing. Even in real estate. Its great diversification, and harder for U.S. creditors to attach. Just pay attention to your tax forms and reporting requirements and bank account disclosures. Talk to your CPA. If the property is held by a foreign corporation with 10% or more U.S. ownership, a foreign partnership or LLC, or a foreign trust or estate, you will need to report that ownership on IRS specific foreign financial asset forms, depending on your reporting threshold. Just understand how the laws and regulations in the OTHER countries also and how it affects your U.S. taxes. Consult your CPA to discuss your situation.

For the Asset Protection side of this question, it is depends. Often it’s best to just leave foreign owned assets as it is and not in the trust. However, the Bridge Trust, itself, has no issue holding foreign assets just like an Revocable Living Trust would not, unless of course there is a restriction on the foreign side. We would usually defer to counsel in the foreign jurisdiction instead of trying to answer because we would need more information on that specific foreign asset. Short answer is basically Yes the Bridge Trust can hold those assets but if it should will be something would need to look at on the analysis.

Now, If you are a foreign investor investing in the US you would create a Domestic LLC in the U.S. which would be owned by a special version of the Bridge Trust for foreign resident investors that would be used as an alternative version with NO U.S. Jurisdiction. And for these foreign investors investing in the U.S., they are going to have to pay attention to tax's of their ownership. The income that these foreign investors make on the asset can be subjected to high US Tax rates. So for the foreign resident investor investing in the U.S. talk to a CPA and US attorney before you invest in the U.S. and get your structure properly set up and ownership set up right.

This is very helpful Brian. Greatly appreciate the thorough and thoughtful response. If you don't mind, would love to keep in touch.