As international clients seek privacy and asset protection in an increasingly transparent world, some may consider the traditional off shore jurisdictions such as the Cooks Island. However, there are better asset protection vehicles in the U.S. domestic asset protection trusts, available in a small number of states. The United States has emerged as both a privacy and asset protection “haven” globally, certain laws provide clients an easy to understand and compelling option for obtaining asset protection – bringing both domestic and offshore asset protection strategies together in one trust instrument.

Similar to an offshore asset protection trust, a domestic asset protection trust (DAPT) legally shields assets from third party liability and lawsuits while permitting settlors to retain some control over the trust assets and enjoy a discretionary benefit during their lifetime. Therefore, an individual can establish a DAPT that is fully discretionary, meaning settlors can receive financial benefit from the trust (income and discretionary principal distributions), and protect trust assets from creditor claims and lawsuits, while maintaining control over the investment management function through the directed trust structure.

Current U.S. Trust laws provides a mechanism that provides both domestic and offshore asset protection within one trust instrument. If a judgment is obtained in any action brought against a trustee of for payment, where a foreign court declines to apply the law relative to the asset protection nature of the trust in determining the validity, construction, or administration of such trust, or the effect of a spendthrift provision, the statute clearly indicates that the trust company has no power or authority under U.S. law to recognize or pay the judgment.

Under the statute, the only power granted to the trust company is to resign and appoint a successor trust company in accordance with the terms of the trust instrument and convey the trust property to the successor trustee. Presumably, the judgment obtained would then be returned unsatisfied and the creditor would need to commence the action against the successor trustee.

In this instance, it is important to note that there is nothing in the statute preventing a trust company from transferring the trust and its assets to an offshore successor trust company, properly named in the document, thereby creating a very formidable asset protection strategy utilizing both domestic and offshore asset protection in one trust instrument. By operation of law and under appropriate trust provisions, the trust assets can be transferred offshore only when needed. Until the offshore asset protection is needed, the trust is administered in, and assets are held in the U.S. Therefore, the settlor truly enjoys the best of both worlds by avoiding the negative attributes associated with having a trust administered in an offshore jurisdiction (high costs, unstable governments, potential restrictive access to assets) while availing themself of the protection benefits of an offshore jurisdiction, should the need arise.