TaxConnections


 

Should You Still Use a Foreign Asset Protection Trust? Maybe – A Very Qualified Maybe



Hale Stewart, Tax Advisor

Over the last few months, I’ve documented a series of cases where courts forced grantors of a foreign asset protection trusts to disgorge assets despite placing this fund into a “bulletproof” offshore structure. Those who continue using FAPTs offer the following rebuttals to the case law.Over the last few months, I’ve documented a series of cases where courts forced grantors of a foreign asset protection trusts to disgorge assets despite placing this fund into a “bulletproof” offshore structure. Those who continue using FAPTs offer the following rebuttals to the case law.

First, offshore trust proponents point to the unsavory character of the grantors in the case law. This is entirely accurate; the cases involve people convicted of fraud, securities laws violations and other crimes. The implication of this observation is that a client using a FAPT who isn’t a criminal would stand a better chance of surviving a creditors attack. This argument is unconvincing. The case’s judicial reasoning was made independent of the facts, instead resting on public policy.

Second, offshore trust promoters argue that these cases largely involve “super-creditors” (primarily government agencies) who used their statutory powers to achieve a result unavailable to non-governmental actors. This is also unconvincing, largely for the reason given above: courts ruled against debtors based on public policy. Judges did not want to be seen as allowing debtors to “have their cake and eat it, too.” This conclusion could just as easily be reached for a private actor.

Third, offshore trust proponents note that these decisions occurred long past the point when most other creditors would have given up or settled. This is a good argument. The FAPT failures (as I call them) occurred at the end of 7, 8 and 10-year cases, largely undertaken by government agencies whose goal was to make victims whole. This explains why they were more than willing to engage in protracted and complex litigation. It’s distinctly possible that private creditors would have settled these cases long before the government actors.

And this is a key takeaway. FAPTs failures only occurred after extensive, complex and extensive litigation. Not all creditors will pursue a debtor this aggressively, opting instead to settle for a lower dollar amount. But the tables aren’t exactly pro-debtor either, because, should a creditor take aggressive action, he can refer to the FAPT failure cases to eventually force a debtor to repatriate funds.

So, should you still use FAPTs? Only as the very last piece of an asset protection plan. And then, only with a smaller percentage of the client’s assets – probably 25% at the most.

Have a question? Contact Hale Stewart

Your comments are welcome!

Mr. Stewart has a masters in both domestic (US) and international taxation from the Thomas Jefferson School of Law where he graduated magna cum laude. Is currently working on his doctoral dissertation. He has written a book titled US Captive Insurance Law, which is the leading text in this area.

He forms and manages captive insurance companies and helps clients in international tax matters, US entity structuring, estate planning and asset protection.

Leave a Reply

Your email address will not be published. Required fields are marked *

TaxConnections