Overview

Asset Protection Trusts, with many of the same features as the typical offshore trust, can now be created in the state of Delaware. Effective July 1, 1997, Delaware has enacted new trust legislation which allows individuals to legally shelter assets from potential creditor claims without the cost and complexity usually associated with the offshore structure.

The significant benefits available under the Delaware law must be understood in the context of the prevailing U.S. law and the asset protection strategies which are currently available.

For at least the last five hundred years, creditor friendly English and American common law and statute have severely restricted the ability of an individual to shield his personal assets from either existing or future creditors. Existing and known future creditors are protected by laws against fraudulent transfers. Future potential creditors have benefited by laws in every state making most trusts inconvenient or useless as vehicles for safeguarding personal assets.

For example, many individuals use a revocable living trust to create a variety of estate planning advantages such as probate avoidance and estate tax minimization. However, these trusts provide no protection of assets from claims by potential creditors. In the event of a lawsuit assets in these trusts can be seized by a successful claimant. Similarly, if an individual creates an irrevocable trust in which he has the right to distributions of income or principal all of the assets are available to satisfy a judgment. The only type of U.S. trust which will protect assets is a trust in which the individual retains no power to revoke the trust and no ability to receive any distribution of income or principle. In essence, the assets must be effectively gifted in order to achieve the desired protection. In our experience we have encountered very few clients willing to irrevocably part with all of their possessions to protect against a future unknown event.

In order to solve this dilemma, attorneys specializing in asset protection often recommended the use of trusts created under the law of a jurisdiction other than the Untied States, such as the Cook Islands, the Bahamas or other offshore financial centers. These countries, recognizing the need to allow for asset protection accompanied by greater flexibility, enacted laws which specifically permit an individual to serve as both settlor and beneficiary of a trust. An individual establishing a trust in one of these jurisdictions can be a beneficiary of the trust and all of the assets will still be protected by law from any potential claim.

Because of these progressive laws and the desire to accomplish asset protection goals the popularity of the offshore asset protection trust has grown significantly within the past few years. Estimates by the Treasury Department state that thousands of offshore trusts with ten of billions of dollars have recently been formed.