FAPT vs. DAPT: The Comparative Advantages of Trust Asset Protections

When planning a will, estate, or trust, protecting assets from taxation is a primary concern. Today, U.S.-based estate planning investors have the option of offshore or onshore trust formation. Rooted in the English common law traditions of wealth and property protections, the offshore tax-exempt Foreign Asset Protection Trust (“FAPT”) of trusts in Belize, the Cayman Islands, Cook Islands, Isle of Man, or Luxembourg is a customary “institution” dating several centuries. For U.S. high net worth investors, offshore trusts remain an option for the protection of vital financial assets, yet the benefits of offshore tax-exemption can also be found domestically, in the statutory trust provisions of some states.


Offshore Protections, Still Reporting Obligation

There have been rule changes to offshore investment since President Trump’s tax reforms of 2017 insofar that failure to file a Foreign Bank Account Report (“FABR”) with the Internal Revenue Service (“IRS”) on a foreign bank account or $10,000 or more, is no longer subject to “delinquency” penalties. Transfer of wealth to a FAPT account for purposes of tax-exemption, does not entitle the account holder universal immunities from legal penalty, however. If an offshore trust account is called into question by a court, the establishment and transfer of assets to the account will be reviewed to determine if the amount qualifies for sentencing under federal fraudulent conveyance rules.


Onshore Trusts, State-by-State Rules

Onshore Domestic Asset Protection Trusts (“DAPT”) have become increasingly popular in the past several years. Sixteen U.S. states have enhanced legislative asset protections within their trust statutes. For example, Wyoming has increased trust protections through enactment of limited liability company (“LLC”) reforms similar with Bermuda’s offshore statutory provisions. Although not all states like New York offer the same protections, estate planning individuals can elect to transfer bank or brokerage accounts, or other investments and properties to a trust in another state, providing that at least one of the trustees resides in that state. Under New York law, SCP § 207. Lifetime trusts; jurisdiction and venue, the trust holder is permitted to maintain management authority over their assets, and the trustee qualifies the trust entity in the jurisdiction of formation by carrying out at least some minimal specified accounting or administrative function.


Ask an Estate Planner

The protection of financial assets from taxation for the future benefit of family members is one of main reasons that high net worth individuals transfer their wealth to an offshore banking institution. Since the implementation of trust protections in the form of LLC in many states, investors have the option to form a vital trust at home. By transferring financial assets to an onshore trust LLC or to an offshore trust, an estate holder will exempt beneficiaries from future taxation. A licensed attorney at law experienced in the rules of estate and trust planning can assist a client in making the right decision about trust formation in the interest of protecting their assets for future generations.


New York Estate Law Firm  

Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule a consultation about an estate-related trust planning matter.  


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Basic Steps in Creating a Trust: Part One


Basic Steps in Creating a Trust: Part Two

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