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Asset Protection Planning: Foreign Asset Protection Trusts (“FAPTs”)

Posted by attorney Jeffrey Matsen

A. Introduction and Overview

A FAPT is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor. One of the greatest advantages of the FAPT is the fact that, by its very nature, any legal attacks against its assets are transferred abroad to a different legal system. The FAPT is generally much more expensive to set up and create than a domestic trust and requires a certain willingness on the part of the Trustor to deal with offshore jurisdictions and trust entities. The FAPTs’ greatest value is for asset protection planning well in advance of any potential creditor problem. Moreover, many times FAPTs are only used when the client already has some international connections and networking. Recent cases have emphasized the need for careful planning in the structuring of the FAPT if it is to be legally efficacious and successful in meeting the purposes and objectives of the trustor.

B. Purposes and Advantages

Although some clients may have concerns about involving offshore trust entities in the asset protection and estate planning process, a properly established FAPT provides a much more substantive degree of asset protection than a domestic trust. Normally, it is more expensive and it requires more sophisticated and competent advisors because of the increased legal and tax complexities involved. The major advantages and purposes of the FAPT are set forth below:

  1. No Comity of Law in Foreign Jurisdictions:

Most foreign jurisdictions do not recognize US judgments. This may force a trial de novo on the merits under the laws of the foreign situs trust in order for the creditor to impose liability on the trustor and reach the assets of the FAPT. Obviously, the fees and expenses of this trial de novo and the burden of having to select offshore counsel can be substantial. Moreover, the FAPT jurisdiction, generally, requires plaintives to employ attorneys who are licensed in that jurisdiction.

  1. More Favorable Law:

Most foreign situs jurisdictions require that the burden of proof in challenging asset transfers to a FAPT is always on the creditor and does not shift to the trustor. Moreover, many foreign jurisdictions impose a higher standard of proof upon civil litigation plaintiffs such as the “beyond the reasonable doubt" standard. This is in sharp contrast to the “preponderance of the evidence" principle utilized in US domestic civil cases.

  1. Statue of Limitations:

The FAPT legislation of many jurisdictions establishes a statute of limitations for challenging asset transfers to an FAPT that begins to run on the date of transfer. . This is contrary to US law where the statute may begin to run from the date the transfer is “discovered" by someone with a claim against the trustor. Additionally, the statue of limitations of many FAPT jurisdictions is much shorter than the typical four year statute found under US law.

  1. Fess and Expenses Litigating in Foreign Jurisdictions:

Manifestly, it is going to be much more expensive and inconvenient to prosecute a claim offshore. Think of the inconvenience of having to pursue a claim out of state and then multiply that by two to three times the cost to pursue the matter in a foreign jurisdiction. Many foreign jurisdictions prohibit contingency fee arrangements forcing the claimant to finance a litigation process entirely on his/her own. Creditors may think twice about having to deal with a completely different legal system out of the country and, this unfamiliarity, plus the additional expanses and costs, and the entire uncertainty with respect to the process, adds a substantial element of protection to the FAPT.

  1. Non Asset Protection Purposes:

The FAPT may assist the trustor in achieving several other objectives and planning goals independent of asset protection planning. Traditional estate planning issues such as the orderly transfer of property at death, the avoidance of probate, the strengthening of spendthrift provisions, greater privacy than under US law, the management of offshore assets and businesses and premarital planning can all be addressed by FAPT.

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