Recently, Jonathan E Gopman and Isabella Avila wrote about Domestic vs Offshore Asset Protection Trusts in the LISI Asset Protection Planning Newsletter #451 highlighting the serious risks associated with the use of such trusts, and Domestic Asset Protection Trusts in particular. I have written this article not as a commentary but as a basic introduction to this strategy and its application in estate planning for protecting assets from potential future creditors during your lifetime. 

What Is an Asset Protection Trust?
Asset Protection Trusts are irrevocable trusts designed to insulate assets from future creditor claims and legal judgments. APTs fall into two broad categories:
-- Domestic Asset Protection Trusts : Established under specific US state laws; and 
-- Offshore Asset Protection Trusts : Set up in jurisdictions outside the US, such as the Cook Islands, Nevis, Bermuda or Jersey.

Key elements of Domestic Asset Protection Trusts
DAPTs leverage state statutes that allow settlors to also be beneficiaries. When structured correctly, DAPTs must include:
-- An irrevocable trust structure; 
-- An independent trustee ; 
-- Absolute trustee discretion over asset distributions; and 
-- Flexibility for the settlor to receive distributions. 

Despite their appeal, DAPTs face significant legal challenges:
-- Full Faith and Credit Clause: Courts in non-DAPT states may ignore asset protection provisions; 
-- Bankruptcy Code: Transfers into a DAPT can be voided for up to 10 years if deemed fraudulent or made in anticipation of creditor claims; and 
-- Legal uncertainty: US case law frequently exposes DAPTs to attacks, and defense costs can easily run into hundreds of thousands of dollars, making even “wins” financially burdensome. 

Example: In the 2013 In re Huber, 493 B.R. 798 , an Alaska DAPT was ultimately unraveled by federal bankruptcy court, with assets lost and substantial litigation costs incurred. 

Offshore Asset Protection Trusts
OAPTs operate beyond US reach, established under debtor-friendly foreign laws and managed by independent trustees abroad. Their advantages are clear:
-- Assets are moved outside US jurisdiction, making seizure by domestic courts extremely difficult; 
-- Foreign laws sharply restrict creditor access, even government agencies struggle to penetrate these trusts; and 
-- Typically, OAPTs allow continued influence without legal ownership or control, enabling estate planning flexibility. 

Case studies:
United States v Grant, 2008 WL 2894826 : The US government spent years and millions trying and failing to seize assets in Bermuda and Jersey trusts; and 
FTC v Affordable Media, LLC, 179 F.3d 1228 After years of litigation, an offshore trust settled with the government, retaining much of its corpus. 

OAPTs consistently deliver stronger protection and lower lifetime litigation costs than their domestic counterparts, especially in high-stakes scenarios for UHNW families. 

Constitutional and federal law implications
DAPTs are vulnerable to constitutional issues that can undermine state-level protections during interstate or federal litigation. Bankruptcy and fraudulent transfer statutes can also jeopardize trusts retroactively. Offshore trusts, meanwhile, rely on foreign courts – which rarely enforce US judgments or constitutional challenges, further strengthening asset protection.

Should you choose domestic or Offshore Asset Protection Trusts?
Here’s a practical checklist for UHNW clients considering asset protection strategies:

-- Nature of risk: Are threats mainly domestic or global ?
-- Jurisdictional exposure: Do beneficiaries or assets reside or operate abroad?
-- Timing: Is the planning proactive, or are creditors already on the horizon?
-- Desired level of protection: Is bulletproof protection required, or is some US exposure acceptable?
-- Cost sensitivity: Can the client afford costly litigation and appeals, or prefer certainty with upfront structuring costs?
-- Complexity and control: Is the client comfortable with foreign trustees and reduced direct control?
-- Bankruptcy/tax concerns: Is the estate likely to face IRS or bankruptcy scrutiny?

The bottom line for UHNW families
For most ultra-HNW clients, there are effective alternatives to asset protection trust without the time, expense, administrative complications and risk, from insurance to split interest trusts. If, however, these alternatives do not work, the case law shows that offshore asset protection trusts remain the safest option for shielding significant wealth.

Domestic trusts come with litigation risk, ambiguous outcomes, and often staggering defense costs.

Early planning is key: Last-minute asset protection efforts usually fail: timing and proper structuring matter more than ever. For more insight into asset protection trusts, please see Gopman and Avila’s excellent newsletter. For more insights, follow my Forbes column for actionable guidance on estate planning.