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.
Blake Harris · Florida Bar #86486, Colorado Bar #459424 min readIt seems that pretty much nobody now days promoting traditional Domestic Asset Protection Trusts - at least not authentically.
It seems the options for consumers are either
- Set up a proper offshore trust.
- Set up some mutilated version of a Domestic Trust.
Two Options for Consumers
For consumers who desire to pursue option #1 they will typically work with a jurisdiction such as Cook Islands, Nevis, or Belize. They will then hire a trustee in one of these jurisdictions such as Atlas Trust Company.
For consumers who desire option 2, they will often be presented with either a third party trust which names someone other than the client as a beneficiary or a successor trustee trust which claims to be able to 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. However, under close scrutiny these claims don’t hold up. Let me explain further.
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 the U.S. court.
A successor trustee trust, which is designed to allow the trustee to be replaced upon an event of duress takes a different approach which in theory could solve the issues with a domestic trust. However, this type of structuring relies on a trustee approving a client both at the time the trust is established and again at the time the foreign trustee takes an active role.
Once a lawsuit or a threat of a lawsuit arises, trustees become apprehensive of stepping in and accepting the trustee role potentially leaving the trust still under the jurisdiction of the U.S. court system. This is not just a theoretical risk but an actual occurrence which has happened before.
What a Proper Offshore Trust Changes
While a proper offshore trust does require annual tax compliance reporting, it also gives a special peace of mind which can’t be found by a domestic trust which has been mutilated to appear as though it is not actually a domestic trust with all of the inherent vulnerabilities of a domestic trust.
The reality is individuals who want authentic asset protection don’t rely on mutilated 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 trustee approving the client both when the trust is set up and again when the foreign trustee takes an active role, and trustees can become apprehensive about stepping in once a lawsuit or threat arises.
Yes. A proper offshore trust requires annual tax compliance reporting to the IRS, which is part of its ongoing cost.