Foreign asset protection trusts gained in popularity as more and more people lost faith the American legal system.
Many people came to realize that, as Lenny Bruce once said, "In the Halls of Justice, the only justice is in the halls."
Anything and everything you do can get you into a lawsuit. When that happens, you get lost in a legal system which is a Kabuki dance of lawyers who are focused on billing the heck out of every case, judges who are merely lawyers in black robes, and juries which are not your peers.
Most people have their major encounter with the legal system when they get a divorce. It's a bitter taste that never goes away.
As people realized that one lawsuit could wipe out the rewards of a life time of hard work, they looked to their professional advisers to come up with a solution.
The answer by the professionals who defend wealth was creatively utilizing a foreign protective trust.
As the demand for these protective vehicles grew, more and more offshore jurisdictions adopted specific legislation which gave assurance that assets place in a trust can be protected in that jurisdiction.
A number of states in the United States saw that the foreign asset protection jurisdictions were garnering an increasing amount of U.S. business and fees, and those states wanted at least of piece of the action.
Out of the thousands of asset protection cases that were litigated in the U.S. there were some decisions where a court found, one way or another, for the creditor over the debtor.
To counter this, a few states, such as Alaska, enacted better asset protection trust law. It started to look like that domestic trust planning to protect assets from lawsuits — and possibly divorce — could be a viable alternative than having to go offshore for legitimate wealth protection.
Unfortunately, Congress and a bankruptcy court created a major problem.
A recent bankruptcy case arising out of Alaska puts the viability of domestic asset protection trusts in serious question.
In Battley v. Mortensen, there was no question that the settlor of the Alaska trust was solvent. This means that fraudulent conveyance was not at issue.
What the court focused on was the application of the new bankruptcy law section dealing with self-settled trusts within 10 years of a bankruptcy.
There are two important lessons that everyone with money should take from this:
First, that nobody's property is safe when Congress is in session.
Second, that a foreign trust in the right offshore jurisdiction is not subject generally to any U.S. judgments.
To be absolutely clear, a U.S. person should not think that a foreign trust will help in either hiding assets or evading tax. Money laundering is also a no-no.
Clearly, this Alaska bankruptcy decision tells us that protective trusts in the U.S. are once again subject to significant legal risk, while offshore trusts regain an edge in protecting your assets from the uncertainties, and fear, of the U.S. legal system.
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