Bulletproof trust example

What Is a Bulletproof Trust?

Is there such a thing as a perfect, bulletproof trust? Or is the term merely an exaggeration to market expensive trust plans that do not accomplish what the promoters promise?

A trust is a legal arrangement in which a trustee holds the grantor’s assets for the benefit of a beneficiary. A trust becomes bulletproof when it allows a judgment debtor to fully protect their assets from a judgment creditor. A bulletproof trust also prevents a court from using fraudulent transfer remedies against transfers into the trust.

Revocable Living Trusts are Not Bulletproof Trusts

When most of our clients say they have or want a trust, they are usually referring to a living trust for estate planning. A Florida living trust is an estate planning trust that allows you to use your assets during your lifetime and ultimately transfer them to designated people upon your death. A living trust avoids probate, maintains the privacy of your assets, and manages your affairs in case of incapacitation.

A living trust is a revocable trust. A revocable trust in Florida can be changed or revoked while you are alive and competent. You, the trustmaker are the beneficiary of your living trust during your lifetime. Other family members typically become beneficiaries after your incapacity or death.

Living trusts are a type of self-settled trust, which means a trust where the trustmaker is also a trust beneficiary. Florida law does not afford self-settled trusts any asset protection benefits. Assets you transfer to your living trust or other self-settled trusts remain your personally owned assets for tax purposes and many legal purposes, including debt collection and asset protection.

Therefore, there is no revocable estate planning that is a bulletproof trust.

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Some Irrevocable Trusts Provide Better Asset Protection

A trust you set up for the benefit of another person is not self-settled because you, the trustmaker, are not a beneficiary. Trusts established for another person that cannot be revoked or amended (so-called irrevocable trusts) provide some asset protection.

Irrevocable Discretionary Spendthrift Trusts

Many people establish irrevocable trusts for the benefit of other family members, such as their children or spouse. Properly designed irrevocable trusts can effectively protect the beneficiary children or spouses from their own creditors.

There are two provisions of an irrevocable trust agreement that are important for asset protection.

The first provision is known as a “spendthrift clause.” This clause prohibits a beneficiary from assigning their beneficial interest either voluntarily or involuntarily. The spendthrift provision prevents a court from ordering the transfer of their beneficial interest in the trust to the beneficiaries’ creditors. However, some courts have ruled that spendthrift trust provisions are ineffective against the IRS or claims for alimony and child support.

The second necessary asset protection provision in an irrevocable trust concerns discretionary distributions. Rather than the trust agreement requiring the trustee to distribute to each beneficiary their proportionate share of trust income, the discretionary trust makes all income or principal distributions discretionary. It is within the trustee’s discretion to distribute or withhold all income and principal distributions to one or more beneficiaries. A beneficiary’s creditors cannot legally force an independent trustee to make discretionary distributions of money that would become collectible by the beneficiary’s creditors.

An irrevocable discretionary spendthrift trust is almost bulletproof against the beneficiary’s creditors. Florida statutes provide that these trusts protect the beneficiary’s interest even if the beneficiary serves as trustee over their share of a discretionary trust.

Super creditors, such as the IRS or family law judges, may penetrate an irrevocable spendthrift trust. Still, they may not acquire a lien on or force distributions from a property-drafted discretionary trust.

A Florida discretionary spendthrift trust will not protect you if you establish the irrevocable trust for your own benefit. Such a trust would be deemed “self-settled.” Self-settled trusts are denied asset protection.

If someone else, such as a parent or partner, establishes an irrevocable spendthrift discretionary trust for your own benefit and transfers their own assets into the trust, your beneficial interest in such trust is “bulletproof” from your typical civil judgment creditors. Also, there are Florida cases that hold that you, the beneficiary of the third party’s trust, can add your own assets to specific versions of this trust without the trust being deemed self-settled.

Fraudulent Transfers to an Irrevocable Bulletproof Trust May Be Reversed

Most irrevocable spendthrift discretionary trusts are effective, but they are not bulletproof because of fraudulent transfer issues and remedies. A fraudulent transfer refers to a debtor’s transfer or conveyance of a non-exempt asset to a third party, including a trustee of a trust, to delay or hinder a judgment creditor’s ability to levy on the asset to collect a judgment. Fraudulent transfer remedies are expressed in Florida Statute 726. The statute gives a judgment creditor the choice of either undoing a fraudulent transfer or obtaining a money judgment against the transferee (recipient) for the value of the asset transferred.

Therefore, if you transfer non-exempt assets to an irrevocable spendthrift trust for the benefit of third parties (children, partners, etc.) in an apparent effort to protect your assets from a present or future judgment, a court may reverse the transfer and compel the trustee to convey the property back to you. Then, the assets would become subject to your creditor’s collection. Or, your creditor may seek a money judgment against the trustee for the value of the property you put in the trust.

The same issue applies to trusts established for your benefit by someone else. If the trustmaker had their own creditor concerns, their transfers to an otherwise protected discretionary spendthrift trust for your benefit could be undone through the trustmaker’s creditors’ fraudulent transfer remedies.

Fraudulent transfer statutes and creditor remedies prevent an otherwise protective irrevocable spendthrift discretionary trust from being considered a bulletproof asset protection tool.

Reviewing a domestic asset protection trust to see if it is bulletproof

Domestic Asset Protection Trusts are Not Bulletproof

Some states have enacted statutes that provide asset protection to self-settled irrevocable spendthrift trusts. These state laws provide that an irrevocable spendthrift discretionary trust protects all beneficiaries from creditor attack even if one of the beneficiaries is also the person who formed the trust and transferred their own assets to fund the self-settled trust. These self-settled asset protection trusts are called domestic asset protection trusts or DAPTs.

DAPT legislation typically requires that a trustee be located in the DAPT state and that the trust own significant assets in the DAPT state. DAPT statutes are designed to create business for domestic trust companies and bring additional money into the DAPT state. Also, most DAPT agreements include an independent trust protector with certain powers to move the trust jurisdiction to another state or foreign country or to make protective amendments to the trust agreement.

Because Florida law is antithetical to self-settled protected trusts, the state does not have a domestic asset protection trust statute. Utah, Delaware, Alaska, and Nevada seem to be the most popular DAPT jurisdictions.

We believe that DAPTs are not a bulletproof solution for Florida clients for several reasons.

First, the collection of a Florida judgment against a Florida resident debtor is conducted under Florida law. If a Florida debtor has transferred assets to an out-of-state domestic asset protection trust, the judgment creditor could argue that Florida law, where the judgment and debtor as situated, applies to the debtor’s interest in the DAPT—not the law of the DAPT state. Because of Florida’s strong policy against self-settled trusts, a Florida court may apply Florida law to the foreign state DAPT and find that DAPT assets are subject to attack as self-settled trust assets.

Also, the debtor’s transfer of his non-exempt assets to his foreign state DAPT remains subject to fraudulent transfer allegations. If a Florida court found that the DAPT was established and funded with non-exempt assets to hinder and delay creditors, or if the transfers rendered the debtor insolvent, the court could order the assets put back in the debtor’s individual name as a fraudulent transfer remedy. Or, the court could issue a judgment against the DAPT trustee for the amount of the transferred assets.

A DAPT trustee, even located in another state, could still be subject to the jurisdiction of U.S. courts, so the trustee would likely comply with the fraudulent transfer remedy.

Offshore Cook Islands Trust

A Cook Islands trust is a self-settled foreign asset protection trust established in the Cook Islands with a Cook Islands trustee company. It works because of protective provisions in the Cook Islands International Trusts Amendment Act of 1989, which includes protection from creditors of self-settled trusts. This law provides the best asset protection while still giving the trustmaker client privacy and sufficient flexibility for asset management.

A Cook Islands trust requires a trustee in the Cook Islands. But the U.S. client may be involved as an additional investment trustee to reserve the right to manage the trust assets. There several experienced, reputable, and competent trust companies in Cook Islands who you may select as the offshore trustee. Cook Islands law imposes compliance regulations, including adequate insurance requirements, on their trustee companies.

As in the case of U.S. domestic asset protection trust, some trust assets must be located in or invested through the Cook Islands Trustee. Trust assets may include financial securities, cash, or membership interests in domestic or foreign limited liability companies.

A Cook Islands Trust Is Almost Bulletproof

Although no debtor is ever totally judgment-proof and no trust is 100% bulletproof, the Cook Islands trust comes closest to achieving these goals. A Cook Islands trust has several advantages over both a Florida irrevocable trust and a domestic asset protection trust settled in a U.S. state with DAPT laws:

  1. The Cook Islands legal system does not recognize U.S. judgments. To obtain an enforceable judgment, a creditor would have to restart a duplicate lawsuit in the Cook Islands.
  2. A U.S. court does not have personal jurisdiction over the Cook Islands Trust or its trustee. A foreign trustee would probably ignore U.S. court subpoenas, orders, and judgments.
  3. If a creditor suspects the U.S. debtor made a fraudulent transfer, the creditor must prosecute the fraudulent transfer action in the Cook Islands and prove their allegations beyond a reasonable doubt. In contrast, U.S. Courts use preponderance of evidence as the standard of proof for fraudulent transfers.
  4. Alleged fraudulent transfers to a Cook Islands trust may not be challenged in the Cook Islands courts two years after the date of the transfer. The equivalent time limit in U.S. courts is four years, or even the life of a judgment in some cases.
  5. Only U.S. bankruptcy courts have proper jurisdiction over assets in Cook Islands trusts, and bankruptcy judges could compel a U.S. bankruptcy debtor to bring back to bankruptcy court assets previously transferred to a foreign trust to remedy a fraudulent transfer.

Is There Such a Thing as a Bulletproof Trust?

No trust is one hundred percent bulletproof. We explain to our typical asset protection client that there is no perfect asset protection plan, and no debtor is truly judgment-proof. The realistic goal of asset protection is to make creditor collection more difficult to improve your position in debt settlement negotiations.

Irrevocable trusts, whether domestic or foreign, can be very effective asset protection tools. A properly drafted irrevocable discretionary spendthrift trust established by a third party for your benefit protects your beneficial interest from your creditors, including the IRS. However, the irrevocable trust may be susceptible to a creditor’s fraudulent transfer challenges regardless of whether the trust is established in Florida or another state with statutory self-settled asset protection trust legislation.

A foreign trust set up in the Cook Islands or similar protective jurisdictions is the closest thing to being a bulletproof trust. Trust assets and the trustee are in a jurisdiction that does not recognize U.S. judgments and court orders. Fraudulent transfer actions must be initiated in the foreign jurisdiction, or a foreign trustee will ignore fraudulent transfer remedies fashioned by U.S. courts.

Yet the threat of a bankruptcy court must be considered in offshore trust planning. A creditor’s involuntary bankruptcy petition could bring offshore assets into a U.S. federal bankruptcy administration. A bankruptcy debtor who ignores a bankruptcy court order to repatriate offshore assets will be subject to civil contempt and incarceration; this has happened in several reported bankruptcy cases.

Also, a federal criminal restitution order may compel the defendant to return offshore trust assets to avoid incarceration. For these reasons, we find it misleading to sell any asset protection trust as an entirely bulletproof trust. A properly designed domestic or foreign trust provides substantial asset protection, but no trust is fully protected from a highly motivated, well-funded, and powerful creditor.

Frequently Asked Questions

How does a bulletproof trust work in Florida?

A bulletproof trust is a type of trust that is impossible for a creditor to pierce to collect on its judgment. No trust is 100% bulletproof, but an offshore trust comes the closest.

What’s the best place to set up a bulletproof trust?

The Cook Islands is widely recognized as the most reputable country to set up an offshore trust. The country has a short statute of limitations period for fraudulent transfers and does not recognize U.S. judgments.

How much does a bulletproof trust cost?

It depends on the type of trust. An irrevocable domestic trust costs between $3,000 and $7,500 for most states. An offshore trust costs between $15,000 and $30,000, which includes first year trustee fees.

Jon Alper

About the Author

I’m a nationally recognized attorney specializing in asset protection planning. I graduated with honors from the University of Florida Law School and have practiced law for almost 50 years.

I have been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal. I have helped thousands of clients protect their assets from creditors.

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