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Foreign Asset Protection Trust

When you have worked hard your whole life to build significant wealth, you don’t want to see your hard work destroyed by a lawsuit or other legal claims against you or your assets. Fortunately, you may have several options for shielding your wealth. One of them is setting up a foreign asset protection trust in another country whose favorable laws will prevent or discourage creditors from trying to make claims against your assets.

But setting up a legal entity in a foreign country can become a complex process that you should not try to handle alone. Let an Arizona foreign asset protection trust attorney from Pennington Law, PLLC, help you defend everything you have built.

For years, our experienced team has worked hard to provide clients with options to secure their wealth and transfer their estates with minimal cost and frustration. When you turn to us for help, you can expect us to provide you with the necessary resources to make informed decisions about your estate plan. Our dedication to achieving favorable client results has earned us numerous accolades and five-star reviews. As an accomplished military and federal attorney, Andre L. Pennington understands the value of duty and strives to give each client his total effort.

Foreign Asset Protection Trust Turn to Pennington Law, PLLC, for a free initial case evaluation to speak with an experienced estate planning lawyer about whether you should set up a foreign asset protection trust. Our legal team will evaluate your goals and circumstances to recommend the best estate planning tools to help you protect your assets and pass them on to your loved ones.

What Is a Foreign Asset Protection Trust?

A foreign asset protection trust (FAPT) is a type of trust established under the laws of a foreign country to protect a trustmaker’s assets from legal claims and creditors. Trustmakers usually set up FAPTs in countries whose courts do not recognize or enforce judgments from other countries.

A creditor who obtains a judgment in the United States and wants to collect from a FAPT’s assets must file a new lawsuit in the foreign country where the FATP is established. Many foreign countries have short limitation periods for filing claims.

A foreign asset protection trust can shield an individual’s assets from claims such as:

  • State or federal court judgments
  • Personal, medical, or mortgage debts
  • Bankruptcy
  • Division of marital property in divorce
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What Are the Arizona Drafting Requirements for a Foreign Asset Protection Trust?

What Are the Arizona Drafting Requirements for a Foreign Asset Protection Trust

An Arizonan who wants to set up a foreign asset protection trust must follow the requirements for establishing the trust under the laws of the foreign country where they want to set up their FAPT. FAPTs typically take the form of an irrevocable trust, as they can provide more excellent protection than a revocable trust.

In addition, a trustmaker may not use a FAPT to defeat the claims of a specific creditor. If a trustmaker has notice of a claim, they cannot establish a FAPT, as that may constitute a fraudulent transfer of assets if a court finds that the trustmaker set up the FAPT to avoid a creditor’s claim.

Trustmakers concerned about transferring ownership of their assets overseas may have the option of taking advantage of a bridge trust structure. A bridge trust connects a U.S.-based trust or other legal entity with a FAPT. Agreements or legal arrangements connect the U.S. entity with the FAPT, allowing for assets to transfer from the U.S. entity to the FAPT upon triggering a “migration clause.” If necessary, the offshore trustee of the FAPT can take over ownership of the trustmaker’s assets.

Arizona currently does not provide a means of establishing self-settled spendthrift trusts under state law. However, a bill under consideration by the Legislature would authorize the creation of these entities in Arizona.

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Foreign Asset Protection Trust Key Terms

Trust Key Terms

Key terms to know if you want to set up a foreign asset protection trust include:

Irrevocable Trust — An irrevocable trust refers to a type of trust where the trustmaker cannot alter the terms of the trust or terminate the trust without the consent of the trustee or the trust’s beneficiaries. Irrevocable trusts offer greater asset protection and tax benefits than revocable trusts, which give trustmakers more flexibility in managing the trust.

Trustee — A trustee manages the trust assets according to the trust document’s terms. A trust document may specify how a trustee should manage and distribute trust income and assets or give the trustee some discretion.

Beneficiary — A beneficiary receives income and principal from a trust according to the trust document’s terms or the trustee’s discretion if the trust document grants such control.

Grantor — This is another term for a trustmaker. A grantor sets up a trust by executing a trust document and transferring ownership of assets to the trust.


Pros and Cons of a Foreign Asset Protection Trust

Although foreign asset protection trusts have many benefits, they also have drawbacks or restrictions. Some of the pros of FAPTs include the following:

  • It protects your assets from creditors who hold judgments issued by a state or federal court in the U.S.
  • It allows flexibility in structuring and enables you to keep your assets legally located in the U.S. until you come under threat from a creditor or lawsuit or minimize tax liabilities and paperwork.
  • It allows you to pass on your estate with minimal tax liability and without the need for probate.

However, the cons of pursuing a FAPT include the following:

  • You must disclose foreign accounts and foreign-held assets on your tax returns.
  • You must hire a trustee in the foreign country where you set up your FAPT.
  • There is a risk that the foreign country may change its laws governing FAPTs or begin honoring U.S. judgments.
  • You must set up the FAPT before you come under threat from a creditor or lawsuit, as setting up a FAPT while having notice of a claim may constitute a fraudulent transfer.

What Assets Can Be Protected with a Foreign Asset Protection Trust?

You can protect any asset with a foreign asset protection trust. Common examples of assets that you can place in a FAPT include the following:

  • Real estate
  • Vehicles such as automobiles, boats/yachts, or aircraft
  • Artwork, jewelry, antiques, or collectibles
  • Securities such as stocks, bonds, and treasuries
  • Annuities or insurance benefits
  • Business interests
  • Cash

Foreign Asset Protection Trust vs. Domestic Asset Protection Trust

Foreign asset protection trusts have several critical differences from domestic asset protection trusts (DAPTs). First, while FAPTs are established under the laws of a foreign country, DAPTs are set up under the laws of one of the handful of states that recognize asset protection trusts. DAPTs are governed by state laws, which might be more familiar than foreign laws. However, unlike a well-constructed FAPT, assets in a DAPT remain subject to the jurisdictional reach of state and federal courts in the U.S.

In addition, recent court rulings have rejected the efforts of people outside states that recognize DAPTs from setting up a DAPT in one of those states. Thus, unless a person owns assets located in a state that recognizes DAPTs, they may have difficulty enforcing the protections of a DAPT. Conversely, countries that serve as popular locations for FAPTs have historically upheld the validity of those trusts.

Finally, DAPTs typically have lower costs due to their relative ease of setting up compared to FAPTs. A FAPT requires hiring a trustee and potentially local counsel in a foreign country and may trigger complex IRS reporting requirements.


What Are the Best Foreign Jurisdictions for a Foreign Asset Protection Trust?

The best foreign jurisdictions for setting up a FAPT include countries whose courts do not enforce judgments from other countries. If a creditor takes a judgment from a state or federal court in the U.S. to a foreign country to enforce the judgment against the FAPT’s assets, that foreign court will refuse to enforce the judgment. The creditor must file a new lawsuit in the foreign country to recover against the trustmaker.

Many popular countries for FAPTs also have short statutes of limitations on creditor claims. These countries also have other protective measures for FAPTs, such as requiring a creditor to prove their case “beyond a reasonable doubt” — the standard of proof for criminal cases in the U.S. — rather than the U.S. civil case standard of “preponderance of the evidence,” or requiring creditors who lose their cases to pay the FAPT’s legal fees and expenses. Short deadlines and the cost and risk of trying a case in a foreign country will often dissuade a creditor from trying to collect from a FAPT.

Popular countries for setting up FAPTs include the following:

  • Cook Islands
  • Cayman Islands
  • Jersey
  • Isle of Man

Contact a West Valley Arizona Foreign Asset Protection Trust Lawyer Today

Contact Pennington Law, PLLC, today for a free, no-obligation consultation to speak with an Arizona foreign asset protection trust attorney. We will review the suitability of a FAPT for your needs, including how to select a qualified trustee and the applicable waiting period. Let our experienced legal team help you understand your legal options and assist you with setting up the tools you need to protect your wealth.

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