by Barry S. Engel, Esq. FOI, Engel & Rudman, P.C. Englewood, Colorado, USA

Asset Protection Trusts (or "APTs" as they have become known in the vernacular) have of late been the subject of many an article, APTs have also been the topic of much discussion at professional conferences in the US, the UK, Continental Europe, offshore financial centres ("OFCs"), and elsewhere. As a result there appears to be no lack of familiarity with APTs conceptually, to whom they appeal, why they appeal to persons of means, when APTs should and should not be used, and the like. The biggest issue, and the issue which to date has yet to have been dealt with in published form to any great extent, is whether APTs "work". This is the subject of this article.

First the word "work" must be defined by reference to whether a particular client would have been better off had he or she not earlier engaged in asset protection planning through an APT. In the opinion of the author, the ultimate goal of asset protection planning can be considered to have been realised if the client weathers a legal storm at least moderately better than he or she otherwise would have in the absence of any planning. The experiences of the author have, however, far surpassed this standard.

Approximately thirty of the several hundred APTs with which the author has been involved have been subjected to some form of a challenge subsequent to the planning being completed. In all cases but one the client weathered the storm substantially better than he or she would have in the absence of any planning, far surpassing the "moderately better" standard referenced immediately above.

Before turning to the facts of some of the successful and more engaging outcomes, the reader is no doubt more interested in the "all but one" case rather than with the others. This one case can, however, be disposed of relatively easily by noting its rather egregious facts including various misrepresentations by the client which came back to haunt the client in various ways, and where litigation was filed within forty-eight hours of the ink drying on the client's documents. Shortly following funding the plaintiff successfully had the APT's assets blocked by the court.

Several years have passed since then and the parties still continue to hammer away at each other while the blocked assets, which were dedicated by the court to the parties' separately incurred and future legal fees, living allowances and payments on mutual obligations, have been reduced to a fraction of their original size.

The many variables which exist under any given plan prevent, in all fairness, one from making blanket statements to the effect that "APTs work" or that "APTs do not work". These many variables include: (i) the facts peculiar to a given client's situation; (ii) the goals of the client and the manner and extent to which they are or can be incorporated into the design of the APT; (iii) the skill with which the APT was crafted; (iv) the nature of the asset or assets transferred to the APT; (v) the skill with which the APT is attacked; (vi) the skill with which the APT is defended; (vii) the thoroughness and protectiveness of the APT's applicable law; (viii) whether the opposing party is acting for a government body; (ix) whether any criminal sanctions may result from the trustees or others involved exercising certain options they would otherwise be free to exercise if the litigants were all private parties; (x) the law of the forum court; and (xi) any biases or the bent of the presiding judge.

APTs have achieved the ultimate goal of protecting the subject assets even when variable (i) above was not particularly favourable. As written by one American litigator with the dubious task of defending the interests of an APT settled by an individual who happened to be less solvent than he in fact thought he was, "the case I had

involving an APT convinced me that these are very effective tools. Even under the most unfortunate and difficult circumstances, the APT stilt caused tremendous headaches for the creditor and ultimately resulted in a settlement for less than the full amount... owed [which] I consider... to be a substantial benefit for [the client]."

To the extent any battle over the APT's assets is forced into the court of the country whose law is designated as the APT's applicable law, then the risks attendant to variables (x) and (xi), which are among the most dangerous variables, are either reduced or eliminated altogether.

While it is true that the facts of the two cases mentioned thus far involved situations wherein the APT concept was abused, in the author's view it is quite telling that these are the only plans out of the several hundred on which the author has worked which have involved any such abuses. The fact that the potential for abuse exists is not a reason for planners to stand shy of APTs. To do so would be akin to arguing that OFCs with laws designed to protect the privacy of their bank depositors should abolish these laws simply because the possibility for abuse exists.

As with any other planning tool the attributes, which make APTs attractive also, make them subject to being used for the wrong reason. While the potential for abuse does not justify tossing the baby out with the bath water, it does provide sufficient reason for all persons involved with APTs (whether onshore or in OFCs) to know their clients and their clients' financial affairs and agendas. This is certainly a familiar theme to the offshore industry, which now should be ideally situated to ferret out the good from the bad and the ugly.

Having hopefully provided some insight into and perspective on the efficacy of APTs generally, the reader should take interest in the following fact patterns:

Case No. 1. Dr. A was an uninsured practising physician who was referred to the author's firm by his attorney who also happens to be an APT client of the author's firm. Within months of Dr. A's APT being completed his attorney informed the author's firm that Dr. A had recently and unexpectedly been named as one of several defendants in a nuisance suit wherein it was alleged that Dr. A and a host of others had committed malpractice. The attorney stated he had advised the plaintiff's legal counsel that Dr. A's assets had been protected, and a token settlement offer was extended. After confirming that Dr. A's assets were indeed protected and that Dr. A was uninsured, Dr. A's settlement offer was accepted. The plaintiff continued to pursue the claim, but only against the other named defendants.

Case No. 2. Mr. B is an individual who, as the owner of vast real estate holdings, had a general concern with the potential of a toxic waste problem with one of his holdings. He had no reason to believe and otherwise did not know whether any of his property was in fact contaminated. Some time subsequent to his planning being completed Mrs. B filed divorce proceedings. A property settlement was reached which, according to Mr. B's counsel, was substantially more favourable than that which would have resulted had Mr. B not implemented his planning.

Case No. 3. Mr. C is an entrepreneur who had a penchant for making deals happen. In his own words, he could not stop "finding deals and making money". His track record was soured by a general partnership with which he was involved and which had incurred a substantial liability. Mr. C not only lost most of his hard earned wealth, but he lost his drive and ambition as well since he knew his future successes would only serve to fund his financial problem. 

By diverting future business opportunities to an APT prior to their ripening into assets and thus avoiding any fraudulent conveyance issues, he was able to control future business undertakings in his capacity as president of a company underlying the APT, and to accumulate new wealth free of his particular difficulty which ultimately caused him to file for bankruptcy protection. The new wealth accumulated in the APT remained protected and Mr. C's discharge in bankruptcy was granted.

Case No. 4. Dr. D was besieged with groundless and frivolous lawsuits immediately following a negative expose on local television. Simply put, an excess of contingency fee-based plaintiffs' counsel saw an opportunity to extract money from Dr. D by subjecting him to the hazards of litigation and the high costs of defending himself. Not all cases were insured.

Those that were insured caused his malpractice premiums to soar, and as a result he ultimately left his practice. After a few years of fighting the legal battles a colleague of Dr. D's who is an APT client of the author's firm referred Dr. D to the author.

Dr. D's assets were protected to the extent permitted under applicable fraudulent conveyance law, given his situation as it then existed, given the extent to which he remained solvent after funding his APT, and given the extent to which he otherwise provided for his various contingencies.

Dr. D then fired his battery of defense counsel and skilfully proceeded to negotiate an end to each of his remaining malpractice suits, all of which Dr. D was able to settle for $2,500.00 or less.

Case No. 5. Messrs. E, F and G made the decision to separate their personal assets from their business activities through settling and funding APTs at a time when their business was current on all its obligations, was cash rich, and there was no reason to believe that they would be called upon with respect to the personal guaranty they each had signed and on which they were each jointly and severally liable. Moreover, each settlor remained solvent immediately following his transfers.

The APTs were thus funded so as not to run afoul of applicable fraudulent conveyance law. A few years later reversals in their local economy as well as with respect to their business started a slow downward spiral which culminated in assets of their APTs being pursued overseas.

This pursuit proved unsuccessful and the creditor ultimately agreed to a global settlement which was on a substantially discounted basis. No settlement payment was required of or was made by any of the APTs involved.

Case No. 6. Mr. and Mrs. H were referred by their litigation counsel at a time when they were being sued. The plaintiff had elected its remedies and was suing Mr. and Mrs. H directly on a promissory note, rather than proceeding with foreclosure of the property which secured the note and then moving against Mr. and Mrs. H to collect any resulting deficiency.

The plaintiff was interested in the H's substantial liquid and relatively liquid assets which, once attached and executed upon, would have subjected the H's to a rather hefty capital gain tax. The H's goal was not to leave the plaintiff unpaid; rather, it was to direct the plaintiff away from their liquid and relatively liquid assets, and thus steer the plaintiff toward the real property which secured the indebtedness.

The assets to be protected were transferred to an APT. Applicable fraudulent conveyance law was not violated given the H's intent and in that Mr. and Mrs. H remained solvent following the transfers. The APT protected the subject assets in that the plaintiff was forced to look to the real property which secured the obligation; the liquid assets the H's desired to retain remained protected.

APTs have a number of advantages when compared to home country trusts in the asset protection context, and it is principally due to these advantages that they "work". These advantages include:

(i) Compared to a home country trust, APTs are far less likely to be an automatic defendant in litigation against the settlor;

(ii) The impact the foreign element will have on the opposing party's decision regarding how far to go in pursuit of trust asset; and

(iii) The trust law of certain jurisdictions is ultimately more protective than is the trust law of all other jurisdictions.

The temptation to conclude that APTs do not work merely because it may be that some percentage of challenges over time may have less than satisfactory results for the APT must be resisted.

It would of course be impetuous for someone following a commercial airline disaster to proclaim that man cannot fly, although one may thereafter understandably have a fear of flying. Similarly with respect to APTs.



Seminars & Events:

April, 2017 - CELESQ
“An Asset Protection Planning Primer for Estate Planning, Tax and Creditors Rights Lawyers”
Live Web Cast
May 31 – June 1, 2017 - 

SOUTHPAC TRUST OFFSHORE PLANNING INSTITUTE CONFERENCE 2017, “Asset Protection in a Changing World” (31 May 2017) and “Questions & Answer Panel on Industry Challenges to Asset Protection Structures” (1 June 2017)
Las Vegas, Nevada


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Barry S. Engel