A foreign asset protection trust can land your client in jail. A domestic one could get him an audience with the U.S. Supreme Court. And the private wealth advisor who fails to mention either to the client just might get slapped with a lawsuit. Yes, the arcane world of asset protection trusts is bristling with danger as well as opportunity. An APT allows an affluent individual who satisfies certain conditions, known as the settlor or grantor, to place a portion of his wealth beyond the reach of creditors while remaining a trust beneficiary. Fear of losing wealth to divorce or lawsuit is the primary reason affluent clients create one of these self-settled trusts.
The domestic and foreign genres share certain similarities, but also have specific pros and cons. Which is better for the client thus depends on his unique needs and goals. Advisors therefore need to be conversant in both types-literally.
"It is incumbent upon the financial planner to include the use of domestic and foreign trusts in the asset-protection discussion with the client, and to keep notes reflecting what was discussed," says New York estate-planning attorney Gideon Rothschild, a partner at Moses & Singer LLP. Otherwise, if the client later loses wealth that could have been shielded, he may be able to sue the advisor for malpractice, Rothschild opines.
But it isn't every client who wants an asset protection trust, says Jane Bernardini, a partner at Anchin Block & Anchin LLP, accountants and consultants in New York. Common turn-offs include situations that require sharing control with a new, unfamiliar institutional trustee, or in which money needs to be relocated to another state or country.
APT Basics
Like
any asset protection technique, this one is no lock. "Nobody can build
a bullet-proof box around assets," says Tom Hakala, managing director
at Wilmington Trust FSB in New York. Experts therefore recommend
employing multiple asset protection tools, not just one.
The objective with the trust is to erect hurdles that make getting at the assets so difficult that creditors will be willing to settle. Fast. Consider a well-known CEO who has north of half his wealth in a family limited partnership. "We are considering putting the partnership interests in two different asset protection trusts in two different jurisdictions so that anybody who comes after the client would have to fight legal battles on multiple fronts," says attorney Duncan E. Osborne, a partner at Osborne, Helman, Knebel & Deleery LLPin Austin, Texas.
All jurisdictions, foreign and domestic, mandate that the transfer of assets to the trust can't leave the grantor insolvent, says Hakala. The purpose of the transfer can't be to evade or defraud present or foreseeable creditors, nor may the transfer be made after an event has occurred that could give rise to a claim. That would be a fraudulent conveyance. Every jurisdiction has its own statute of limitations clock that typically starts running at trust funding. During that time-e.g., two years for Cook Islands trusts, three years for a Utah trust-the property can still be attached by creditors.
Advisor Beware
Planners
have to be careful here, too. "I have seen advisors get into hot water
because they knew, or should have known, that the trust was being set
up for the purpose of avoidance of creditors. That's conspiracy to
commit fraud," says attorney Rick Rein, a principal at Schwartz Cooper.
As head of the Chicago law firm's international asset recovery group,
Rein goes after money in asset protection trusts- and advisors, when
necessary.
In some instances, either the law or the trustee (to protect itself) may require the grantor to sign an affidavit of compliance with fraudulent conveyance and solvency laws. Some practitioners view such a document as comfortable evidence that they are not helping the client engage in fraud-but not Osborne.
"I do my own due diligence before I'll set up a trust for someone. Advisors should, too," Osborne says. "I talk to the settlor's bankers and accountants to verify the solvency-calculation numbers and also try to determine whether there are any contingent liabilities. If there has been an event that could give rise to a claim, who was hurt and how badly. You have got to make sure that someone isn't trying to create the trust because of an existing or foreseeable problem, he says.