Trusts have been around for thousands of years. Trusts are routinely used to provide for family members' lifestyles, charitable donations, and advanced tax planning and estate planning, as well as to merely avoid the probate process. Basically, trusts are like a corporation in that they are both legal entities that do things and have certain legal benefits. A corporation could be established for the purpose of manufacturing widgets. The corporation is governed by its management who makes decisions and spends money based on the corporation's purpose (to make widgets and, perhaps, earn a profit while doing so). A trust is established by a "settlor" who can be a person like you or me, or the settlor can even be a corporation, partnership, or other business entity (e.g., some corporations establish trusts for their employees' pensions, executive bonuses, etc.). The trust is established and governed by what is called a trust deed. This document sets out who the settlor is, who the beneficiary(ies) will be, the terms of how the trust is to be administered, and which jurisdiction will govern the administration of the trust. You could establish a trust to pay for your nephew's lifestyle, including his health, education, maintenance, and support. You would control the terms of the trust. You could even be the trustee. Since the governing jurisdiction of the trust has a major impact on trust governance, you would choose thoughtfully which jurisdiction you want to govern the trust. You could live in Texas and desire for Texas law to govern the trust, or you could live in Texas and dictate that Delaware law will govern the trust. You could live in Texas (or in any other state) and dictate that the laws of another country govern the trust and determine who can get the trust's assets in case of a dispute!
Suppose you establish a trust for your nephew. The trust will have a "spendthrift" or "anti-alienation" clause in it that says that if your nephew is sued and a judgment is rendered against him, the person who won the lawsuit cannot seize any assets of the trust. That's good, especially if your nephew is a poor driver, has a gambling problem, is not very good in business, can't manage his financial affairs, or may someday get a divorce and you don't want your money that you intended to benefit your nephew to be handed over to your nephew's ex-wife. The same analysis applies to your creditors too. Suppose that after you established a trust for your nephew that you had a terrible car wreck wherein you were sued and found liable for the deaths of two people and for the future medical bills and lost wages of a permanently disabled passenger who was riding in the car you hit. The people who sued you and who have a judgment against you cannot seize the assets in the trust that you established for your nephew. The concept is that the creditor who won his lawsuit ("judgment creditor") cannot seize any assets that are not owned by the person whom the creditor successfully sued ("judgment debtor"). If you sue me and I cannot afford to pay the judgment, you cannot seize assets belonging to Bill Gates, even though he can easily afford to pay it. You can only seize what I legally own. Assets that are held in a trust are owned by the trust itself and are not owned by the person who established the trust or who transferred the assets into the trust, even though the person who established the trust or who transferred the assets into the trust (the settlor) may dictate when, where, and how the assets in the trust are to be spent. (I realize this seems like a distinction without a difference, but, trust me, this is for your protection.)
[Sidebar: For you legal eagles out there who are thinking, "No, the assets are technically owned by the trustee who must manage the assets in accordance with the trust deed," please note that in the United States you would be correct; i.e., a yacht would be transferred to a trust by Joe Client by having the yacht's title document reflect a transfer from "Joe Client" as seller to "Joe Client, trustee of the Client Family Trust under trust agreement dated 01- 02-2007" as buyer. However, in many foreign jurisdictions, a trust is actually an independent legal entity just like a corporation is in the United States -- and offshore asset-protection trusts are, for obvious reasons, located in such jurisdictions.]
Since you know that creditors cannot seize assets that you do not own (hold legal title to) and assets in a trust would not be owned by you -- you now have a great idea. You will establish a trust for yourself in the United States to protect your own assets from anyone who might win a lawsuit against you! Unfortunately, in the United States such a trust (known as a "self-settled trust") will not protect any of your assets from any of your creditors. This is true because in most states the law simply does not allow any protection from one's own creditors, and in those states any provisions in a trust that purports to protect the settlor's assets from the settlor's creditors are void and ignored by the courts. There are a handful of states, like Alaska and Delaware, among others, that changed their laws to allow self-settled trusts. Wonderful, you think -- I will choose Alaska law to govern my trust. Not so fast. I hate to tell you this, but there is no case law that tells us that such trusts really work. The problem is that the law (in Alaska, for example) was designed to protect Alaska residents from lawsuits filed by Alaskans being heard in an Alaska court. Moreover, if you read the preamble to these laws, the legislature states that the purpose or "legislative intent" for passing the law was for very technical estate planning and tax purposes concerning completion of gift transfers, etc., and NOT to be a wholesale asset-protection provision (even though that is how some trust companies market their services). Even in a case where a local Alaska resident is sued by a fellow Alaska resident in an Alaska court, it is still possible for a creditor to attack the trust as a fraudulent transfer, sham, or some other "pierce the veil" type of attack and be allowed to seize the trust assets. The real weakness in any domestic self-settled trust anywhere in the United States is that the U.S. Constitution requires that all states give "full faith and credit" to all other states' final court judgments, and the provisions of our Constitution trump and prevail over any conflicting state law under the Constitution's "supremacy clause." Without turning this website into a legal treatise on Constitutional law (causing a non-lawyer reader's eyes to bleed), suffice it to say that if you want to protect your own assets from your own creditors, you simply cannot have the trust located in the U.S. or otherwise subject to any U.S. court of law. For all you happily married guys out there, you may be thinking that you will establish a trust for your wife, and she can establish one for you . . . that will not work either (sorry, but I do like the way you think).
Besides, even IF one day the laws change nationwide in the U.S. to allow you to set up your own trust to protect your own assets from your own creditors -- WHY would you EVER want your trust located in the U.S. where the trial lawyer who is suing you is licensed to practice law, where the rules of evidence and the burden of proof are in his/her favor (not yours), where judges use their own "legal reasoning" to arrive at an outcome they want instead of applying the law that the legislature enacted, and where a jury with a collective IQ of 90 will determine the outcome? No thanks. Even if that day ever comes (which I doubt), my assets and my clients' assets will be just fine remaining in a Cook Islands asset-protection trust -- thank you very much.
So, how can you legally protect your own assets from you own creditors? You set up the trust in a country that allows self-settled trusts and provides full protection of trust assets regardless of who the creditor is. You establish the trust in a country that does not recognize any judgments from the United States. Simply stated, you go offshore! There are many fine jurisdictions that not only allow you to protect your own assets from your own creditors, they want your business! The premier jurisdiction for many reasons for asset-protection trusts is the Cook Islands. The Cook Islands were the original jurisdiction that passed the first modern progressive asset- protection legislation and have remained in the forefront of having the strictest and most protective trust legislation in the world. [Sidebar: For clients living in community property states, another advantage to the Cook Islands trust laws is that they preserve the "community property" characterization. This means that when you die, both your estate and all of your wife's assets get a "step up" in tax cost basis which helps lower any income tax on the subsequent sale of property. However, just because the property may be "community property," the assets in the trust are NOT subject to any divorce court judge's property division determination. If the assets were legally yours when you transferred them into the trust, then they are protected from your creditors (including the possibility of your ex-wife being one of them).]
Non-recognition of judgments. Here is how jurisdiction works: Suppose you are driving down the freeway in Dallas, Texas and you are pulled over for speeding by a state trooper (and assume that you drive like I do and you are guilty as charged). A strange thing happens as you sign the citation -- you notice the citation is an Alabama citation, and as you look closely at the officer, you realize he is an Alabama state trooper! You respectfully smile and hand the citation book back to the nice officer, and he hands you the ticket and tells you "y'all betta slow it down, now -- ya hear" (from personal experience I know that our Texas state troopers also speak in a similar manner). You thank the officer for his assistance (after all, he is just trying to help keep you safe). But why are you not concerned about having to pay for the ticket? The trooper was a real state trooper, wasn't he? You were really speeding, weren't you? The answer lies in the fact that Texas does not recognize or enforce Alabama speeding citations written by Alabama troopers while they are within the State of Texas.
Non-recognition of official governmental actions (e.g., speeding citations, court orders, or judgments, etc.) are the cornerstone of your being able to completely protect your assets from any court order or judgment that could ever be issued against you or your assets by any judge here in the United States. As far lawsuit judgments go, if you are sued in Texas and a judgment is rendered against you, Texas will enforce the judgment by allowing the creditor to seize whatever assets that you have that state law does not protect. Texas exempts from seizure your homestead (unlimited value), certain qualified retirement accounts, tools of your trade, a burial plot, etc. In Texas, for example, your home could be valued at any amount and the creditor cannot take it or make you sell it (Texas also protects your right to keep up to 120 chickens). Additionally, if you are sued in Texas and a judgment is rendered against you, ALL states in the United States must give full legal effect to the judgment. So, even if you move to Tennessee, the creditor can initiate collections/seizure proceedings to collect what you owe under Tennessee law in order to enforce the full amount of the Texas judgment. Likewise, if you are sued in New York and move to Texas, the New York judgment will be enforced against your assets to the extent Texas law permits. Note that even if New York law permitted the creditor to garnish your wages and to force the sale of your home, the creditor will not have those remedies available to him while you are in Texas (your 120 chickens are also safe in the backyard of your $5 million mansion). God bless Texas!
How does this concept apply to international (offshore) trusts? The Cook Islands are their own sovereign and independent nation. Under their laws, no foreign judgments (foreign to them) against a trust or trustee of an asset- protection trust established under the Cook Islands International Trusts Act are recognized or given any legal effect whatsoever! (Remember the example of the Alabama state trooper writing a ticket in Texas.) The Supreme Court of the United States could render a judgment against you, your offshore trust, or the offshore corporate trustee, print it on the finest paper complete with a wax seal and blue ribbons -- and the judgment is completely meaningless in the Cook Islands. By establishing an offshore trust in the Cook Islands, you can turn any lawsuit judgment against you into Alabama speeding tickets issued in Texas. If the creditor tries to get the judgment enforced by filing it with the courts in the Cook Islands, it will be politely returned to him with a pleasant note that foreign judgments, like ones from the United States, are not recognized or enforced in the Cook Islands. Or, as we like to say in Houston, "That dog won't hunt." Sometimes an ill-informed attorney will try to file a lawsuit in the Cook Islands in an effort to retry the case (to attempt to prove his case in a Cook Islands court that you are liable for the accident, or that you were at fault in the divorce and that your ex-wife deserves to get it all). Under Cook Islands law, even a local Cook Islands attorney is not permitted to attempt to prove these matters! Cook Islands law does not care if you were negligent and found liable in a lawsuit, or if you were at fault in breaking up your marriage (that's why they enacted the asset-protection trust legislation in the first place). Again, the Cook Islands court will return the lawsuit with a polite letter explaining that (1) the attorney in the United States in not licensed to practice law in the Cook Islands and (2) that the lawsuit failed to state any claim upon which relief can be granted (i.e., failed to state any cause of action recognized in the Cook Islands). Once again, that dog won't hunt. Now you know why international offshore trusts are a trial lawyer's worst nightmare! Even if he wins his lawsuit in the U.S., they cannot take your assets that are in your offshore trust. Your assets remain safely tucked away, being invested in whatever investments you choose (stocks, bonds, mutual funds, annuities, CDs, and the like, and the investments can be in U.S. companies or in companies outside the United States). Your assets remain safe and available to support your lifestyle in spite of a lawsuit's judgment, or even in spite of a thousand adverse judgments! You are now what lawyers refer to as being "judgment proof." Should a lawyer be asked to sue someone who is judgment proof, the lawyer knows that, as a lawyer, he will likely never receive a penny in contingency fees for his services, since contingency fees cannot be collected against a judgment-proof litigant. Some people are judgment proof because of poverty, while others are judgment proof because of Total Asset Protection planning. Offshore trusts are the most effective way to protect your wealth. The trustee of your offshore trust should be a corporate trust company. Neither you nor anyone else located in the United States should ever serve as the trustee or co-trustee of your trust. Of course, you still have 100% effective control over the assets in your trust in that if a corporate trustee ever fails to meet your customer- service expectations, you have the right and the power to fire the trustee and to have a new corporate trustee appointed. Also, remember that as the settlor of the trust (the person who established the trust), you have the legal right to indicate and to control 100% how the assets in the trust will be utilized. With an offshore trust, you turn the nightmare of litigation into the trial lawyer's worst nightmare, since, as has been noted, contingency fees cannot be collected against a judgment-proof litigant!
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