Foreign trusts are vastly superior to Domestic Asset Protection Trusts. The term “foreign trust” usually means a trust that is governed by the laws of a foreign jurisdiction. This means that the foreign jurisdiction’s laws apply to the trust and the enforceability of the trust’s spendthrift clause.
All foreign jurisdictions that compete in the asset protection market allow self-settled trusts to be an effective shield against creditors (although we rarely draft even foreign trusts to be self-settled). This is similar to the U. S. states that allow self-settled trusts. However, foreign trusts are superior because they are not subject to the Full Faith and Credit or Supremacy clauses of the U.S. Constitution as are U.S. states. As such, a foreign jurisdiction is not required to enforce judgments issued by a U.S. court whereas U.S. states must do so. Further, the foreign jurisdiction’s law will be applied and not the law of a U.S. state.
For example, in foreign asset protection jurisdictions, creditors have the burden of proving a fraudulent conveyance beyond a reasonable doubt, an impossible standard to meet. Additionally, in foreign jurisdictions, the statute of limitations for bringing a fraudulent conveyance action is not only short, but it also begins to run on the date of the transfer, not the date the transfer is “discovered,” as is the case in U.S. jurisdictions.
The costs associated with obtaining or enforcing a U.S. judgment will result in protracted and expensive litigation, including hiring counsel in the foreign jurisdiction to litigate or enforce a creditor’s claim. These costs will motivate a creditor to settle a claim for pennies on the dollar.
Finally, our clients are consistntly surprised to find out that foreign trusts are usually less expensive to set up and administer than DAPTs.
Here are the most commonly used structures in asset protection. Click each to learn more.