June 27, 2017

Learning Asset Protection – Part II (with webinar) Asset Protection Trusts (APTs)

In Part I of this asset protection newsletter series, I discussed the use of the primary domestic asset protection tool, i.e., a multi-member Limited Liability Company (LLC).  If you didn’t read that newsletter, please click here to do so.  If you were not able to attend the webinar during which asset protection expert Jim Duggan, JD, MBA, covered the A, B, Cs of domestic planning, please click here to view/listen to it on recording.

Part II in this series will focus on the use of Asset Protection Trusts (APTs) as asset protection tools.  To view/listen to the record webinar on Asset Protection  Planning Part II, please click here to view.

Let me get right to it─what is an APT?fundamentally, it’s a trust just like any other trust with which you are probably already familiar.  An APT has the following players:

Grantor – The person who sets up and funds the trust; Beneficiary – The person who will eventually benefit from the money in the offshore trust;  Trustee – The person who oversees the assets in the trust to make sure the wishes of the grantor are carried out (this includes investment philosophy and distributions while the grantor is living and upon death).

Who typically is the primary beneficiary of an APT?the grantor. 

Who typically is the trustee of an APT?—the grantor.

In essence, an APT tries to act like an Irrevocable Trust (IT) for the benefit of the grantor. If this makes little sense to you, I can understand why. The reason ITs work for asset protection purposes is because money is given away, the grantor no longer owns the asset, and is not the beneficiary. Therefore, if the grantor is ever sued, assets properly given away to an IT cannot be reached by creditors.

APTs are NOT irrevocable trusts. They are trusts set up with specific language to prevent creditors from getting their hands on the money. It’s quite creative to have legislation stating that you can move assets to a trust for your own benefit and not have those assets available to your creditors. 

Offshore APTs (OAPTs)─Why do they work?—let me explain the power of an OAPT by simply going through an example. Assume Dr. Smith has $1 million in a domestic brokerage account. He is worried about getting sued by his patients so he transfers the money to an OAPT.  He is the grantor and the primary beneficiary.  He is also a “co” trustee. The other co-trustee is an international corporate trustee that has no nexus/connection to the U.S.

While the “seas are calm” (no lawsuit is currently filed against Dr. Smith), he has total control of the money to invest it as he sees fit and spend it as he sees fit. 

Now assume Dr. Smith gets hit with a mega lawsuit. As soon as the lawsuit is filed, he isimmediately dropped as a co-trustee of his trust. He is still the beneficiary of the trust, but he has no legal authority to remove money from the trust. The only person/entity that can authorize the removal of money from the OAPT is the international trustee. And, by the way, the trust document states with specificity that the international trustee shall NOT recognize U.S. judgments and will not distribute money to a beneficiary who has a lawsuit filed against him or a judgment entered against him? What does that mean?  It means that, when the patient who sued Dr. Smith receives a $5 million verdict and sends a copy to the international trustee, the trustee must ignore it

The laws of several countries specifically state that U.S. judgments are NOT enforceable. This allows the international trustee to ignore orders from U.S. courts.

How does Dr. Smith get access to his money?  He will get access to his money when the lawsuit is over and settled.

To date, no OAPT has ever been broken.  These are the best asset protection tools clients have at their disposal.

What about domestic APTs (DPATs)?—in theory, they are supposed to work the same way as an OAPT.  What’s the problem though?  The client’s money is in the U.S. and subject to the power of U.S. courts.

The laws are clear. They state the money in a DAPT is not available to creditors of the grantor/beneficiary.  Having said that, I DO NOT recommend DPATs.  Why?

I think that in a bad fact pattern, the laws in the states that have DAPT legislation could be ignored. Ignored? How can that be? The full faith and credit clause demands that the laws of one state be respected and enforced by other states. That’s true, but there can be conflicts of law that rear their ugly head.

Imagine the following fact pattern: Car driver lives in Michigan and has $2 million in a DPAT set up in Nevada. The driver gets drunk at a bar in Michigan and on the drive home runs into a minivan with mom, dad, and three minor children. Mom and dad are killed, and the three children are seriously injured. They go to court and the children receive a judgment for damages in the amount of $5 million.  The car driver had $1 million in auto liability coverage (most of which will be used to pay the medical bills). 

The children ask the court to order the defendant to turn over the money in the DPAT (a trust he set up to thwart creditors and where he is the beneficiary of the trust).

What is the judge (who is a locally elected official) going to do? Is he going to tell the children and really his entire community that voted him in as a judge that the money is not available because the state of Nevada allows these disgusting DPATs? The state of Michigan doesn’t have similar legislation and doesn’t recognize DPATs as viable structures.

In my opinion, the judge is going to issue an order to have the money in the Nevada DAPT turned over to the children. Now what? Nevada is supposed to enforce orders issued by courts in other states.  Is the Nevada court going to honor the Michigan order?  Who knows. 

What I do know is that the first handful of cases to test these laws are going to spend an absolute fortune on legal fees with the initial round of litigation as well as the multiple appeals that will take place. It is for this reason that I do not recommend DAPTs.    

Summary—OAPTs are the most powerful asset protection tool at a client’s disposal.  If you are dealing with or want to deal with affluent clients, you really need to learn about these tools.  

Attorney Duggan will not only be going over the A, B, Cs of OAPTs and DAPTs he will be going over multiple case studies that illustrate how various types of domestic and international structures can be integrated to provide clients with the best asset protection plans. I’ve seen the PowerPoint presentation, and some of the slides are awe inspiring.