Ironclad Protection From Lawsuits

What I Saw on a Recent Visit to the US…

Recently I drove from Fort Lauderdale to Palm Coast, Florida. It’s a four-hour trip on the I-95. Pines, palms, and scrub are the main residents along much of this stretch.

That means more space for billboards… an alarming number of which are dedicated to personal injury attorneys bragging about the six- and seven-figure awards they get for their clients.

I’ve written frequently about the usefulness of foreign trusts to hold property outside the US or Canada. A properly structured trust can help you avoid estate and probate issues anywhere in the world and can even save on your taxes.

But one thing I don’t talk about much is the way an asset protection trust (APT) in a foreign country can help you with legal issues. As all those billboards attest, the US is one of the most litigious countries on the planet, and no one is safe from lawsuits.

The concept of a trust is straightforward. It’s a separate legal entity that you create, into which you transfer assets. Depending on the nature of the trust, those assets then become totally separate from you as an individual. You can still use and benefit from them, but they’re not yours anymore. Such assets don’t form part of your estate if somebody sues you. A properly created trust set up before an incident that gives rise to a lawsuit is an impenetrable shield.

But that doesn’t stop people from trying. Trial attorneys are constantly looking for loopholes to get at assets held within US trusts. And even if they can’t get at them, the prospect of years of litigation means many trust-holders settle with litigants anyway.

Foreign asset protection trusts are a different story. Any country that practises the common law descended from medieval England provides for trusts. Some such countries, principally small island nations, have specialised in creating laws that make such trusts almost impossible to attack.

Consider the Cook Islands, an independent nation in the Pacific associated with New Zealand. Forty  years ago an enterprising US attorney approached the government proposing to create a legal code that would make the Cook Islands the world’s premier legal home for APTs. He succeeded, and that’s precisely what the Cook Islands is today. Here’s why.

In the US, every state has its own laws governing trusts. Some set a high bar to attack trust assets. Even then, judges commonly order that trusts preserve assets pending the outcome of litigation. That can take years. During that time, any benefits paid to the target of litigation can be seized as soon as they’re handed over. That’s what forces many targets of lawsuits to settle, even if they’re innocent.

Consider what happens if your assets are held in an APT in a place like the Cook Islands.

The Cook Islands doesn’t automatically enforce foreign judgments, so the litigant would have to file suit in their court system. That means going before a Cook Islands judge and convincing them that there’s a case under Cook Islands law. And as soon as an APT is faced with a lawsuit, it automatically goes into protection mode. The trustee is legally forbidden to transfer any assets to a litigant even if a judge orders them to. So even if the person bringing the lawsuit wins the case, they could wait decades for payment.

So when a litigant approaches a US attorney and says they want to sue a Cook Islands trust, the latter will probably decline to take the case. The chances of success are small. The cost of litigation is enormous. Even a favourable court ruling doesn’t mean they’ll be made whole.

This is why people in professions like medicine commonly create Cook Islands trusts at the start of their careers. Once word gets around that their practice, home, bank accounts, and other personal assets are legally owned by a trust in the middle of the Pacific Ocean, lawsuits just don’t happen.

Many people assume they don’t need this kind of protection, or that a US trust will provide it.

But my mantra is better safe than sorry. And don’t forget about the peace of mind you’ll get knowing that nobody in their right mind would sue you in the first place.