A Foreign Asset Protection Trust (FAPT) — also called an offshore asset protection trust — is a specialized trust created under the laws of a foreign country to protect assets from future creditors and lawsuits.
These trusts are typically established in jurisdictions with strong debtor-protection laws, such as:
- Cook Islands
- Nevis
- Belize
- Cayman Islands
Foreign asset protection trusts are among the most aggressive — and most complex — asset protection strategies available.
How Does a Foreign Asset Protection Trust Work?
A Foreign Asset Protection Trust is:
- Irrevocable
- Created under foreign law
- Managed by a foreign trustee
- Designed to shield assets from U.S. court judgments
Here’s how it generally works:
- You transfer assets into the offshore trust.
- A foreign trustee manages the assets under that country’s laws.
- If a creditor obtains a U.S. judgment, they must pursue recovery in the foreign jurisdiction.
- Many offshore jurisdictions have strict laws that make it extremely difficult for creditors to seize trust assets.
These jurisdictions often:
- Do not recognize U.S. court judgments automatically
- Have short statutes of limitation for fraudulent transfer claims
- Require creditors to meet very high burdens of proof
What Types of Assets Can Be Transferred?
Assets commonly placed in offshore trusts include:
- Investment accounts
- Cash
- Business interests
- LLC ownership interests
- Intellectual property
Often, U.S. assets are first transferred into a domestic LLC, and then the LLC membership interest is placed into the offshore trust.
Why Do People Use Foreign Asset Protection Trusts?
Foreign asset protection trusts are typically used by individuals with significant liability exposure, such as:
- Physicians
- Business owners
- Real estate developers
- High-net-worth individuals
- Professionals in litigation-prone industries
The goal is to create a strong deterrent against lawsuits and creditor claims.
Key Benefits
Stronger Creditor Protection
Certain offshore jurisdictions provide stronger statutory protections than most U.S. states.
Deterrent Effect
The complexity and cost of pursuing claims overseas often discourages creditors.
Estate Planning Advantages
Depending on structure, assets may also be removed from your taxable estate.
Important Risks and Considerations
Foreign asset protection trusts are not for everyone. They involve:
- High setup and maintenance costs
- Complex legal structuring
- Ongoing reporting requirements
- Strict IRS compliance (including foreign asset reporting rules)
- Increased scrutiny in bankruptcy cases
Failure to properly report foreign trust structures can result in severe tax penalties.
Additionally:
- Transfers must be made before any creditor issues arise.
- Courts can unwind fraudulent transfers.
- Bankruptcy courts have broad authority in certain situations.
Timing is critical.
Are Offshore Trusts Legal?
Yes — when properly structured and fully disclosed, foreign asset protection trusts are legal.
However, they must:
- Comply with U.S. tax laws
- Follow foreign jurisdiction requirements
- Be established for legitimate asset protection planning
They cannot be used to hide assets or evade taxes.
Offshore vs. Domestic Asset Protection Trusts
A Domestic Asset Protection Trust (DAPT) is created under certain U.S. state laws.
An offshore trust is created under foreign law and may offer stronger statutory barriers to creditor claims — but with greater complexity and cost.
The right choice depends on:
- Level of asset exposure
- Risk tolerance
- Asset value
- Compliance comfort
- Long-term planning goals
The Bottom Line
A Foreign Asset Protection Trust can provide some of the strongest asset protection available under the law — but it is a sophisticated strategy designed for high-risk, high-asset individuals.
It requires careful legal planning, full tax compliance, and proactive structuring well before any legal threats arise.
If you are concerned about asset protection and want to explore advanced planning options, speaking with experienced counsel is essential to determine whether an offshore trust is appropriate for your situation.
