While Domestic Asset Protection Trusts (DAPT) can certainly provide asset protection, properly established and maintained Foreign Trust likely will provide a greater level of asset protection.

For purposes of this article, the term “Foreign Trust” refers to a trust governed by the laws of a foreign jurisdiction.  It is critical to use a foreign jurisdiction with the most favorable creditor protection laws.  Jurisdictions such as the Cook Islands (in the South Pacific), Saint Vincent (in the West Indies), and Nevis (in the West Indies) are currently among the best foreign trust jurisdictions. In some, but not all foreign trust jurisdictions, a creditor has the burden of proving that a transfer of the assets to a Foreign Trust was a fraudulent conveyance.  This is made more difficult for a creditor since the burden of proof is the criminal standard of “beyond a reasonable doubt.” Also, there may be no recognition of a judgment rendered in the United States and most Foreign Trusts are not subject to child or spousal support obligations.

Foreign Trusts are not without risks. The risks generally result from poor drafting where, for instance, the grantor in the Foreign Trust retains too much control over the trust assets.  In such instances, courts in the United States have ordered grantors (debtors) to “repatriate the assets” to the United States. Ultimately, unless a creditor has very deep pockets or is an agency of the United States government, it may be too expensive for a creditor to pursue the assets in a Foreign Trust.

Finally, there are certainly tax issues to consider before transferring assets to a Foreign Trust. Properly done, taxes issues related to the transfer can be avoided.

For these reasons, it’s important to understand some of the inherent risks and benefits of a Foreign Trust.