12 FOCUS ON TRUST INFORMATION


much has been written about asset protection trusts (apts) over the course of the past few years.

Someone seeking to learn about APTs will find there is no shortage of available information. In fact, the amount of information available may almost be too much for the person who desires to gain only a basic understanding of the how’s and why’s of APTs.

As such, this article has been prepared to provide the reader through a question and answer format with a basic overview of the APT as a planning tool.

What is an APT?
First and foremost, an APT is a trust. What is a trust? A trust may be simply defined as an arrangement whereby title to property is divided into legal title and beneficial title.

The trustee (that is, the person who is to administer the trust for the benefit of its beneficiaries) receives the legal title.

The beneficiaries (that is, the persons who are to benefit under the trust arrangement) receive the beneficial title.

The concept of a trust is certainly nothing new, having its roots in practically 1000 years of English history. Trusts achieve a number of planning goals, including the protection of the assets held in trust.

One may accordingly be tempted to state that all trusts are therefore APTs. However, making this statement is somewhat like saying that

since all surgeons are physicians, all physicians must be surgeons. Just because all trusts preserve assets does not mean that all trusts are APTs.

An APT is a trust created (or "settled") by a person who has as one oihis or her principal planning goals the protection and preservation of the assets to be settled in trust. In fact, it would be fair to state that under an APT, the preservation of the property is likely to be at least as important a goal of the settler as benefiting and seeing to the well-being of the beneficiaries - which is not necessarily the case with all trusts. In this sense at least, not all trusts are APTs.

Why would one be motivated to settle an APT?

Different factors motivate different persons to settle an APT.

By definition, the settler of an APT has the desire to protect the subject property from risks to which tne property would otherwise be exposed.

Protecting assets from lawsuits can lead to controversy

 

These risks include: (i) lawsuits or other legal process; (ii) laws which restrict the ability of an individual to freely dispose of his or her property on death (known as "forced heirship laws"); (iii) political strife; (iv) social instability. Where one lives, has assets or conducts business no doubt has a large impact on which of these factors is of greatest importance. Thus, one who lives in or is about to do business in the US may be motivated by the concern of one day being sued, while one who lives in a civil law jurisdiction (such as those found in Continental Europe) may be motivated by a desire to control who receives his or her assets on death and in what proportions.

Finally, persons resident in a jurisdiction such as Hong Kong may have a concern with the jurisdiction’s political future. The concept of protecting assets from lawsuits and other legal processes (such as asset freezes or forfeitures) is one which has stirred a fair amount of controversy.

The controversy subsides when those who raise a concern with creditors being defrauded understand that while it certainly would be problematic to protect against matters pending, threatened or expected, it is completely permissible - and indeed sensible - to protect against the unanticipated problems of the future.

Saying that only people who are being sued or are threatened with a suit are interested in asset protection planning is much like saying only a person whose house is on fire would be interested in a policy of fire insurance and APTs are the best available policy.

Protecting assets from lawsuits can lead to controversy

And just as fire insurance must be acquired before the fire or even the first spark, an APT must be settled before the financial fire or even the first spark. Indeed, planning though an APT must be undertaken before the matchbook is in the adversary's hands.

 What are some applications of the APT?

APTs have many uses, some (if which include a means to:

• Replace or supplement liability insurance, whether professional malpractice, tail, errors and omissions, or directors' and officers' liability coverage.

• Allow individuals to comfortably go bare or to reduce their coverage to a lower level, particularly when they are of the view that a large insurance policy serves as a magnet for litigation.

• Cover periods of time during which there is a lapse in professional or other coverage or during which or for which no coverage is available (eg certain environmental risks).

• Provide back-up coverage: (i) recognising that many policies of insurance have many exclusions and as such are quite porous: and (ii) recognising that the insurer itself could suffer economic reversals of its own and therefore be unable to perform financially when a claim is made.

• Protect against risks which can arise from the activities of a professional or a business person which are outside of the profession or the business (eg the physician who owns a small interest as a general partner in a real estate general or limited partnership is exposed to 100% of the partnership's liabilities).

• Allow persons domiciled in a "low litigation" country to protect their assets from legal exposure prior to undertaking professional or business activities in a "high-litigation" country.

• Avoid forced heirship provisions of the settler's home jurisdiction.

• Acquire and rebuild new or future wealth free from past or current problems.

• Reduce one's financial profile and increase the level of their financial privacy so as to discourage suits.

• Avoid or supplement a

prenuptial agreement. Isolate or segregate wealth into various pockets so that not all is exposed when a guaranty is to be executed or

when a particular transaction is to be undertaken.

• Protect one's retirement plan benefits.

• Accomplishing all that a typical revocable living trust accomplishes, but of course achieve the additional goal of protecting assets during the client's life time. Thus, the trust avoids probate, provides privacy, functions as a will substitute, can provide the necessary disability planning, and the like.

• Enhance one's strategic position regarding negotiations with present creditors: however, this application must only be implemented with skill and extreme caution so as to avoid fraudulent transfer implications.

• Protect an anticipated inheritance

• Protect the proceeds from the sale of a business or a professional practice, in that a seller may be concerned that a buyer may feel with hindsight that too much was paid for the business or practice and the claim misrepresentations were made in an attempt by the buyer to later recoup a portion thereof.

• Protect against liability exposure under federal and state environmental legislation.

Do asset protections trusts work?

The word "work" must be defined by reference to where a particular client would have been had he or she not earlier engaged in asset protection planning through an APT.

Planners should not stand
shy of the
APT Concept

 

In the opinion of the author, the goal of asset protection through an APT 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 to date have, however, far surpassed this standard.

What variables determine whether an APT will work?

The many variables which exist under any given plan prevent 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 Grafted: (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 a governmental instrumentality; (ix) whether any criminal sanctions would 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.

Does not the potential exist for APTs to be abused?

The author is aware of only two cases where the APT concept was abused by a settlor. 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 - or out of I lie many thousands of cases whicn have been handled worldwide - which have involved any such abuse and which have come to his attention.

The fact that the potential for abuse exists is not a reason for planners to stand shy of APTs, for to do so would be akin to arguing that offshore financial centres with laws designed to protect the privacy of their bank depositors should abolish these laws simply because these laws have from time to time been abused.

As with any other planning tool, the attributes which make APTs attractive also make them subject to being used for the wrong reasons.

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 offshore) to know their clients and their clients' financial affairs and agendas.

This is certainly a familiar theme to the offshore industry which, at this point in time, is quite able to separate the good" from the bad.

Barry S. Engel is a principal of Colorado-based law firm, Engel & Rudman

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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Contact Information

Barry S. Engel
Email: info@engelreiman.com