What Happened to Domestic Asset Protection Trusts?
Few providers still promote a traditional domestic asset protection trust. Why the DAPT alternatives fall short, and what a proper offshore trust changes.
It seems that few providers nowadays still promote traditional Domestic Asset Protection Trusts.
Instead, the options for consumers seem to be either:
- Set up a proper offshore trust.
- Set up a modified version of a domestic trust.
Two Options for Consumers
Consumers who choose option 1, a proper offshore trust, typically work with a jurisdiction such as the Cook Islands, Nevis, or Belize. They then hire a trustee in one of these jurisdictions, such as Atlas Trust Company.
Consumers who choose option 2 are often presented with either a third-party trust, such as a Hybrid DAPT, which names someone other than the client as a beneficiary, or a successor trustee trust, such as the Bridge Trust®, which claims it can convert to an offshore trust upon an event of duress.
Promoters of these “DAPT alternatives” often claim their style of planning “fixes the problem” of domestic trusts. Under close scrutiny, however, these claims don’t hold up. Let me explain.
The Problem With a Domestic Trust
The “problem with a domestic trust” is that a U.S. court can simply disregard the trust and order the trustee to pay out the assets to a creditor. A third-party trust changes the beneficiary, but it still leaves the trustee in the U.S., under the jurisdiction of a U.S. court. Calling the structure a “hybrid” doesn’t change that.
A successor trustee trust, which is designed to replace the trustee upon an event of duress, takes a different approach that in theory could solve the issues with a domestic trust. However, this structure relies on a foreign trustee approving the client twice: once when the trust is established, and again when the foreign trustee takes an active role. At that second stage, the foreign trustee conducts its own due diligence, and it can always reject the client, regardless of any earlier commitment.
Once a lawsuit or the threat of a lawsuit arises, trustees become apprehensive about stepping in and accepting the role, potentially leaving the trust under the jurisdiction of the U.S. court system. And even if the trustee accepts, opening a foreign bank account for a trust tied to an active or threatened lawsuit can be far more problematic, since the bank conducts its own due diligence as well. This is not just a theoretical risk; it has actually happened before.
For a detailed explanation of why we do not consider these structures advisable asset protection planning, see our analyses of Domestic Asset Protection Trusts, the Hybrid DAPT, and the Bridge Trust®.
What a Proper Offshore Trust Changes
A proper offshore trust does require annual tax compliance reporting. In exchange, it removes the vulnerability every domestic structure shares: a trustee who must answer to a U.S. court. No modified domestic trust, however it is marketed, can offer that same peace of mind.
A proper offshore trust is irrevocable, requires an independent trustee, carries ongoing costs, and cannot be used to defeat a known creditor. And if you’ve read about offshore trusts that supposedly “failed,” see our review of those cases.
The reality is that individuals who want authentic asset protection don’t rely on modified domestic structures or late-stage transfers. Instead, they set up proper offshore trusts in advance of any litigation.
Frequently asked
Frequently asked questions
In our experience, few providers still promote a traditional domestic asset protection trust on its own. Consumers are generally offered either a proper offshore trust or a modified domestic trust marketed as a "DAPT alternative".
A U.S. court can disregard the trust and order the trustee to pay the assets to a creditor, because a U.S. trustee is under that court's jurisdiction.
Generally not. Naming someone other than the client as a beneficiary changes the beneficiary, but the trustee is still in the U.S. and under the jurisdiction of a U.S. court.
A trust designed to replace its trustee with a foreign trustee upon an event of duress. It relies on a foreign trustee approving the client twice, when the trust is set up and again when the foreign trustee takes an active role, and at that second stage the trustee conducts its own due diligence and can reject the client.
Yes. A proper offshore trust requires annual tax compliance reporting to the IRS, which is part of its ongoing cost.