The Financial Bulletproof Vest
As a medical professional, you may need a financial bulletproof vest to safeguard your assets and shield you from the assaults of potential creditors who can place your assets “at risk.” Litigation has exploded in the United States and any individual with deep pockets in a high risk occupation, such as a medical professional, is a likely target. Even with the advent of tort reform, courts and governmental agencies have expanded the definition of liability, thereby increasing the likelihood of money judgments against medical professionals.
The economic realities of today’s medical practice environment require that all medical professionals consider various methodologies available for the preservation of their wealth and protection of their assets. The offshore-based Asset Protection Trust (the APT) has become the vehicle of choice when protecting assets and preserving a medical professional’s wealth. Many attorneys and financial planning professionals consider the APT to be the ultimate bulletproof vest for the protection of assets against claims of creditors.
After considering the jurisdiction in which the professional resides, marital status, and other factors, the conclusion is often that the APT is the strongest method to protect the professional’s assets. Medical malpractice insurance premiums have consistently increased to the level where they are cost prohibitive for many professionals. At the same time, however, something is needed, as competent plaintiff counsel has become increasingly more successful in seizing the assets of medical professionals. Also, certain non-tort liability creditors such as banks, finance companies and the like, are increasing their claims against medical professionals, which further exposes assets to seizure.
The APT affords protection (notwithstanding fraud and other considerations) against such creditors by permitting the professional to legally protect assets and enhance investment portfolios, while at the same time providing for an efficient, systematic estate plan that considers various estate tax saving devices and the overall estate planning objectives of the professional.
Before addressing the creation and maintenance of an APT, it is important to understand its components and nuisances. Ordinarily, an APT is a trust established outside of the jurisdiction of the United States. The Trust is normally US income-, estate- and gift tax-neutral. The APT is not a United States federal income tax avoidance device; rather, for purposes of US income taxes, the APT is structured as a Grantor Trust. The medical professional creating the APT, who is also known as the Settlor, reports all worldwide income on each year’s federal income tax return, including interest, dividends and the like, earned by the APT. The APT incorporates all of the available United States federal estate tax minimizing techniques that include utilization of the “marital deduction” and the unified credit shelter trust. The Settlor must comply with certain US Treasury Reporting and Compliance requirements. Failure to meet US Treasury reporting requirements can result in adverse tax consequences and potential assessment of possible penalties.
The mechanics of the Settlor creating and maintaining an APT are relatively simple. The assets of the APT are maintained for the medical professional’s benefit by the offshore Trustee. The Trustee is an experienced trust company existing in an offshore jurisdiction and is fully familiar with the jurisdiction’s asset protection laws. The Trustee should not have offices in the United States in order to better insure that the Trustee is not subject to the jurisdiction of United States courts and potential claims of United States creditors.
The Settlor designates a financial consultant (which, in some instances, can be the Settlor) who consults and advises the Trustee on investing the assets held in the APT. The Settlor and the Trustee will also agree upon and designate a custodian bank or other financial institution to hold the assets for safekeeping in the name of the APT, subject to investment instructions from the financial consultant. In some instances (although it is generally not recommended), it is possible for the APT to maintain assets in the United States until such time as a claim is made against the Settlor, which may provide additional comfort to the Settlor, based on the fact that the assets maintained by the Trust may be kept in a US institution.
The Settlor also appoints a Trust Protector. A Trust Protector has long been utilized in British trust law and many offshore-based intermediaries between the Trustee and the Settlor, in the event a claim has been made against the Settlor. Once a claim has been made, the Settlor cannot give any instructions to the Trustee. The Settlor is then protected against being ordered by a United States court to instruct the Trustee to pay a judgment creditor. At that point, the Protector, subject to previously agreed upon instructions from the Settlor, can direct the actions of the Trustee.
A properly drafted and established APT is designed to take advantage of the laws of offshore jurisdictions which do not recognize United States debtor-creditor laws or judgments, rendered by the United States courts. Moreover, APTs are subject to the strict secrecy laws of the foreign jurisdiction. In fact, disclosure of information concerning the APT to creditors and others is prohibited by the laws of the offshore jurisdiction. The Trustee in the offshore jurisdiction will not voluntarily disclose any information to a creditor. Unless a creditor is willing to go through an expensive court process in the offshore jurisdiction in order to attempt to obtain information about an APT the Trustee must remain silent. Additionally, there is no guarantee that the creditor will prevail. The offshore jurisdictions forbid the dreaded “contingent fee,” thereby increasing both the creditor’s costs and risk.
APTs can provide additional safety features, which protect assets from creditors’ attack. These include, but are not limited to, “flee,” “anti-duress,” and “spendthrift” provisions. The “flee” provisions authorize the Trustee to change the location of the APT to another offshore jurisdiction and automatically change the Trustee in the event a US judgment creditor attempts to bring an action against the APT. The Trustee is under no duty to disclose to any creditor that the “flee” provisions have been implemented. Obviously, these provisions have a chilling effect on a creditor’s collection efforts, as the creditor has no idea where in the world the new Trustee is located. “Anti-duress” provisions normally prohibit the Trustee from making any distributions (directly or indirectly) from the Trust to any creditor of the Settlor. “Spendthrift” provisions further prohibit the Trustee from making distributions from the Trust for the benefit of any creditor of any beneficiary of the Trust, including beneficiaries who are the spouse or children of the Settlor.
The APT also incorporates an estate plan, which distributes assets to certain named beneficiaries upon death. If a spouse or minor child is to receive assets, the assets can be maintained and administered in Trust for the benefit of such beneficiaries in accordance with the Settlor’s desires. If, at the time of the Settlor’s death, there are no outstanding claims against the Settlor, the Trust can provide that the assets are to be brought on-shore to be administered by a US-based trust company or distributed directly to the beneficiaries.
The flexibility of an APT is instrumental in wealth preservation planning. Until a claim has been made against the Settlor, the Settlor remains in control of the investment of the assets held in the APT and its distributions. The Trustee will follow the instructions given to it by the Settlor or the financial consultant and the Settlor may at any time, amend the terms of the APT, reallocate the Trust’s investment portfolio, or even terminate the Trust and repatriate the assets.
Based on burgeoning use of the APT, more and more jurisdictions throughout the world are adopting the combined secrecy and asset protection laws necessary for effective wealth preservation planning. Among the better known jurisdictions providing these laws and having outstanding banking and communications facilities are the Bahamas, Bermuda, Gibraltar, the Cayman Islands, the Turks & Caicos Islands, and the Cook Islands. Anyone interested in utilizing an APT must first seek competent United States counsel to, among other things, assist them in the determination as to the use of an APT, the creation of the corresponding trust documents, coordination with the Trustee and Protector, and to provide essential tax planning and compliance. The Settlor should also meet with the offshore Trustee and Protector prior to the implementation of the Trust in order to agree upon and finalize the investment policies and instructional protocols.
Although the APT is one of the best ways to protect wealth and preserve assets, it is important and necessary that the Settlor comply with federal and state laws concerning the transfer of assets, including but not limited to the Uniform Fraudulent Conveyance Statute. In light of fraudulent transfer statutes, proper pre-planning for an APT is critical. In fact, the greater the amount of time from the establishment of an APT to the filing of a claim against the Settlor, the stronger the likelihood that the creation/funding of the APT will not be considered a fraudulent conveyance by state or federal courts. As additional protection for the APT, most of the offshore jurisdictions utilized in APT planning have enacted very short time periods for the statute of limitations on fraudulent transfers.
Even newly graduated doctors, who have never been sued or have no notice of any contemplated lawsuits, are excellent candidates for an APT. Professionals should consider creating an APT shortly after graduation, so that if a lawsuit or claim is instituted in the future, the assets in the APT will not likely be subject to avoidance based on fraudulent transfer laws.
All medical professionals, whether established practitioners or recent graduates, should consider the APT in combination with other wealth preservation and estate planning techniques, such as the limited exemptions under federal or state laws that restrict a creditor’s seizure of certain assets. However, one must always be aware of the limitations of these federal and state exemptions. For example, although the law of the state where the professional resides or the common law may provide that property jointly held with a spouse is exempt from the claims against the professional’s individual creditors, an untimely death, matrimonial problem or failure to properly transfer assets to a joint account may irrevocably destroy an asset protection plan. Moreover, a court may freeze assets until it determines proper ownership of the jointly owned asset or existence of any fraudulent transfer issues. Unfortunately, this places assets at needless risk and exposes the professional to court costs and unnecessary attorney’s fees.
In conclusion, The APT may be viewed as placing roadblocks between the Settlor and his assets and his creditors. The utilization of the APT forces a normally unwilling United States creditor to travel to a foreign jurisdiction and commence the necessary lawsuit process all over again, without first being able to ascertain whether the creditor will even be able to collect against the Trust. This form of roadblock encourages early negotiations for the settlement of a claim or judgment. Once a creditor is made aware of the existence of an APT, he often realizes that the collection process will be long, drawn out, expensive and, most important, uncertain. As one can imagine, contingent fee lawyers have been known to shy away from defendants whose assets are in an APT, as many of these foreign jurisdictions do not allow attorneys to litigate cases on a contingency fee basis.
The APT is a vehicle that must be considered by all medical professionals, as it provides the flexibility and protection that one needs while the professional’s assets grow and remain protected from future judgment creditors.