I recently was speaking with a family regarding estate planning and asset protection. This family’s situation was a little bit unique. The husband was a physician, a surgeon to be specific, and his wife was a school teacher. They have two children, one is 10 and the other is 14. As we began to discuss their estate planning concerns, the topic turned to that of asset protection. As it turned out, this client had concerns about medical malpractice lawsuits being made against him in the future. Although he had never been the defendant of a medical malpractice lawsuit and didn’t know of any that may be filed in the near future, he had seen colleagues of his being sued in the past. This family had a concern of their personal assets being at risk due to a medical malpractice lawsuit.
During this conversation, this family inquired about Offshore Trusts and whether they could shield some of their assets from creditors in this manner.
Many, many years ago, Offshore Trusts were seen as a common way for the wealthy and for those in high risk professions, to shield their assets from potential future creditors. However, this is no longer the case. There is a long history of cases where the assets of Offshore Trusts have been accessed by creditors and courts of various other jurisdictions. There are several cases dating all the way back to 1993 which have shown Offshore Trusts to be invalid and not able to provide complete asset protection. For example, In re Colburn from the Virginia Bankruptcy Court in 1992 held that the debtor would not receive a bankruptcy discharge, and was accused of bankruptcy fraud, for not disclosing an offshore trust on his bankruptcy petition. In the case of In re Brooks, a 1998 Connecticut bankruptcy case, held that the Offshore Trust would be disregarded and the assets of the Offshore Trust was seized by the court. Also, in the cases of SEC v. Bilzerian and In re Lawrence, these two cases show instances where the individual was actually jailed for not bringing the assets back from the Offshore Trust and into the United States. These are just a few of the many cases that show that Offshore Trusts are usually not the best way to structure your assets.
In addition, Offshore Trusts MUST be disclosed on a bankruptcy petition. A few of the cases I mentioned above, as well as Section 548(e) of the Bankruptcy Code clearly provide that this is a requirement. Also, Section 548(e) of the Bankruptcy Code as the language “similar devices.” This is usually interpreted to mean that transferring assets to a trust, with the purpose to hinder, delay, or defraud a creditor, will be held invalid by the bankruptcy court. It would appear that when a Trust is established whose sole purpose is for asset protection, Section 548(e) will provide an ability of the Bankruptcy Court to seize the assets of that Trust.
Also, Offshore Trusts have a terrible reputation of being associated with criminal activity and unethical conduct. As such, whenever an Offshore Trust is found, it raises a red flag, and the case law certainly shows that they may not be effective in protecting offshore assets.
Finally, Offshore Trusts are extremely expensive. The costs can range from $20,000 to well over $50,000 to set up, and that normally doesn’t include the annual fees to the international trust companies that can exceed $10,000 to $20,000 or more per year. Also, the tax filing and disclosure requirements of having an Offshore Trust can be quite cumbersome and expensive.
For those looking for sound asset protection strategies, they should look toward such strategies as the Tennessee Investment Services Trust (TIST) or a Special Power of Appointment Trust (SPA Trust).
The Tennessee Investment Servtices Trust, or TIST for short, is a creation of the Tennessee Legislature in establishing Domestic Asset Protection Trusts (DAPT) for Tennessee residents. In order for a TIST to qualify, a third party must be trustee and take legal title of the trust assets. What this means is that you, as the owner, will no longer have a legal claim to the assets. The trust and the assets you contribute to the trust cannot render you insolvent. This means that you cannot transfer everything you own to this trust. However, you can set out the terms of the management and distribution of the assets, and can even remove the Trustee and prevent distribution of the assets from the trust. Finally, you as the owner of the assets and settlor of the TIST, you must execute an affidavit stating that the transfer of the assets will not make you insolvent, you are not intending to defraud any creditor, there is no pending or threatened legal actions against you, and you do not contemplate filing bankruptcy.
Another option for those concerned with asset protection may be a Special Power of Appointment Trust (or SPA Trust for short). This is an irrevocable trust, where you are the settlor (meaning you transfer the assets to the trust). However, you cannot be a beneficiary or a trustee of this trust. This means you will release legal title to any assets that you transfer to this trust. Although, a SPA Trust does not carry with it the Affidavit requirement and prohibition against making transfers that will render you insolvent as the TIST does have. In addition, you retain a Special Power of Appointment which allows you name a Trustee of the SPA Trust and direct that Trustee to name you as the beneficiary of the trust at a later date.
These two options are more attractive than Offshore Trusts as both of these options do not have the long history of court challenges to the validity of the trust and invading the trust assets. In addition, these trusts do not have court cases challenging them in Tennessee. Although, this may change in the future, as we are yet to see a court case in Tennessee challenging TISTs or SPA Trusts. However, for the time being, these are sound asset protection vehicles when it comes to protecting your wealth and planning your estate.
If you have questions about asset protection strategies, please give us a call at (615) 472-2482 to schedule an initial consultation where we can discuss your options and the correct asset protection legal strategy for you and your family.