Foreign Asset Protection Trusts will protect your assets. If you put your assets into a FAPT, creditors cannot retrieve your assets from the trust directly. However, the creditor can retrieve the assets indirectly if he can convince the judge that you are able to retrieve the assets yourself. If the court does so and you refuse, you could face being imprisoned for contempt of court. In order to avoid having this happen, you would have to leave the U.S. to avoid jurisdiction of U.S. courts.

Unfortunately, this is the downside to using FAPTs as asset protection tool and it may dissuade you from using it. In fact, a number of planners, in fear of losing a sale, fail to reveal the practicability of FAPTs.

An FAPT is an offshore trust formed in an offshore jurisdiction that has specific trust and procedure laws designed in thwarting creditors of trust settlers. The laws result from a business decision by the jurisdiction to attract trust business and trust assets. Essentially, the FAPT jurisdiction will not recognize U.S. judgments, and the courts of the jurisdiction are predisposed in protecting trust assets from creditors. Allowing creditors to invade trust assets would kill off the offshore business in the country the jurisdiction resides.

Offshore trusts are nothing new. In fact, they have been used for years to shield assets and income from creditors. Beginning in the 1980’s, a new era of “off shoring” began when some island nations offered themselves as “tax havens” where business people (especially in the U.S.) could divert to avoid taxation. But, changes in the U.S. tax code and defeats in court ended this. This is when one of these countries specializing in offshore trusts, the Cook Islands in the south pacific, designed a trust statute which would defeat claims of creditors of settlor/beneficiaries.

When these new trust statutes came about, many lawyers wrote articles extolling the benefits of FAPTs. They said that judges in the U.S. would be unable to find trust settlers in contempt for failure to obey an order to repatriate their assets. They also stated that, if creditors wanted to get the assets, they would have to take their fight to the courts in the Cook Islands. However, for political and legal reasons, no asset protection trust would be broken.

Seeing this, other small countries having offshore jurisdictions quickly followed suit. Thus began the competition among these small countries and island nations of who could enact the most debtor friendly laws.
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