By Stephen Speiser, Esq.
June 2024
The vehicle of choice for many high-net-worth families engaged in offshore asset protection planning is the international asset protection trust (“IAPT”). The principal reason IAPTs are popular is because the trust can lawfully hold assets outside the jurisdiction of the United States where they are beyond the reach of U.S. creditors. In addition, IAPTs can be used as a multi-generational estate planning tool in which the settlor of the trust (i.e., the person who creates and funds the trust) can be a principal beneficiary of the trust during their lifetime1.
While the assets of an IAPT are typically held for safe keeping by reputable trustees and bankers in Switzerland and elsewhere, the trusts themselves are formed in, legally governed by, and operate out of, some of the most highly protective asset protection jurisdictions in the world. Among the more popular of these offshore jurisdictions are Belize, Nevis, and the Cook Islands which have long recognized the validity of IAPTs.
- Although several U.S. states have recently adopted “Domestic Asset Protection Trust” laws which allow the settlor to also be a beneficiary of the trust, caselaw challenging DAPTs prove they simply don’t work as an asset protection vehicle. Click to read “The Folly of Domestic Asset Protection Trusts”. ↩︎
Benefits of Using An IAPT
While the trust statutes in these three jurisdictions vary to some degree, they all provide legal protections that are not otherwise available in the United States:
U.S. Judgments Not Recognized. Under international law, no foreign nation is bound by U.S. law, except by treaty. This is the essence of offshore asset protection. IAPTs are simply immune from U.S. law. One reason Belize, Nevis and the Cook Islands are popular IAPT jurisdictions is because there are no treaties which obligate them to recognize a U.S. judgment. This means a U.S. judgment is unenforceable against an IAPT.
Fraudulent Transfer Laws. There is really only one legal claim a creditor can successfully bring against an IAPT — a fraudulent transfer claim — and these claims often fail because it is far more difficult to prove a fraudulent transfer in an IAPT jurisdiction than in the U.S. The term “fraudulent transfer” comes from English common law and is not “fraud” in the common sense of the word. It is merely a civil remedy that allows a creditor to recover assets transferred by a debtor. In essence, a fraudulent transfer is a transfer of property to a spouse, friend, family member, third party, trust, or other legal entity that is made or undertaken to shield that property from the claims of creditors. These transfers usually occur in the wake of a significant liability event (e.g., a fatal auto accident) or in anticipation of being sued for a large sum of money. People often begin moving assets around once they see the handwriting on the wall. It’s human nature. For asset protection attorneys, fraudulent transfers are the bane of domestic planning because transfers made to an asset protection structure can be set aside by a court. It takes careful planning and a high degree of skill on the part of legal practitioners to avoid running afoul of fraudulent transfer law, and one can never be certain of how a judge will rule. In the United States, the burden of proof required to establish a fraudulent transfer is much lower than in foreign asset protection jurisdictions, and it is this difference that makes IAPTs a powerful asset protection tool.
In the U.S., a creditor need only prove their claim by a “preponderance of the evidence” which means that a creditor need only show that it is more likely than not that a fraudulent transfer occurred, requiring a mere 51% or greater probability. In an IAPT jurisdiction, however, a transfer of assets to the trust can only be challenged by proving actual fraud “beyond a reasonable doubt.” In the U.S., “beyond a reasonable doubt” is only used in criminal cases, where the evidence presented must be so strong that it leaves jurors firmly convinced of the defendant’s guilt, with no reasonable doubt remaining in their minds. The rationale for such a high standard in U.S. criminal cases is that “it’s better to let nine guilty people go free, than to convict one innocent person.” For these reasons, it extremely difficult for a U.S. creditor to meet the higher burden of proof and prevail on a fraudulent transfer claim in foreign asset protection jurisdictions. Another reason it is often difficult for creditors to prevail on a fraudulent transfer claim has to do with the statute of limitations applicable to such transfers, which is much shorter in an IAPT jurisdiction than in the U.S.
Statute of Limitations. In IAPT jurisdictions, a creditor will only have 1 or 2 years from the date of transfer in which to bring a claim (the exact timeframe will depend upon the specific IAPT jurisdiction). If the creditor fails to file a fraudulent transfer claim within that time, the claim is forever barred. Since lawsuits in the United States typically take years to wind their way through the courts, the statute of limitations may pass before the creditor even becomes aware of the existence of the IAPT. By contrast, the statute of limitations for fraudulent transfer claims in the U.S. is 4 years from the date or transfer, or 1 year from the date of discovery, whichever is later. This means that in the U.S., a creditor who was unaware of a transfer has 1 year from discovery of that transfer in which to file a claim, even if the transfer occurred more than 4 years ago.
Other Legal Requirements. There are also high bars to filing a lawsuit in an IAPT jurisdiction. Local rules require that the plaintiff post a bond as a pre-condition to filing a lawsuit and pay the defendant’s legal fees should they lose the case. The bonding requirement in Belize, for example, is one-half the amount of the claim, which in a high dollar case could require a multimillion-dollar bond. Further, contingent fee arrangements are prohibited in IAPT jurisdictions, which means the creditor must hire a licensed attorney in that foreign jurisdiction and pay a substantial legal retainer in advance as well. These requirements and costs alone are often sufficient to dissuade a creditor from filing a lawsuit in a foreign jurisdiction.
Beneficiaries. As discussed in “The Folly of Domestic Asset Protection Trusts”, the assets of the DAPT will not be protected from the claims of creditors if the settlor is also a beneficiary of that trust. With an IAPT, however, both the settlor and their family can be beneficiaries and lawfully receive distributions from the trust.
Trustee Protections. With a U.S. trust, the trustees are subject to U.S. law and must therefore comply with court orders directing them to turn over trust assets. With an IAPT, however, the trustees are not U.S. citizens, are not subject to U.S. laws, and are not bound by the orders of a U.S. judge. In fact, a foreign trustee would be prohibited under the terms of the trust and the statutes of the IAPT jurisdiction from complying with such a court order. Further, in the event a U.S. judge issued an order directing the settlor to instruct the trustees to turn over IAPT assets, the trustees would be duty bound to ignore those instructions because they were not the voluntary wishes of the settlor but, rather, were the product of legal duress. This discretionary power is an important protection because it allows a U.S. settlor to fully comply with a court order, sign whatever legal document is required of them, and thereby avoid contempt of court charges.
The foregoing is but a brief list of the superior benefits and protections afforded by an IAPT. It also bears repeating that the trust assets themselves need not be held in the IAPT jurisdiction. Under a “Swiss Hybrid Trust” structure, trust assets can be held safely in Switzerland or wherever else the settlor of the trust wishes, while at the same time a creditor would be forced to litigate their claims in whatever asset protection jurisdiction is designated in the trust agreement. So, for those who wish to achieve the highest level of asset protection for their stocks, bonds, cash or other liquid assets, an international asset protection trust offers a unique and powerful solution.
For a Confidential Consultation
Click Here to Schedule a Complimentary Call
