Voltaire once wrote, "I was never ruined but twice--once when I lost a lawsuit, and once when I won one." Many business owners and high-net-worth clients know the feeling. Exorbitant legal costs, unpredictable juries, and skyrocketing insurance premiums are making it increasingly difficult to protect assets from potential lawsuits.

For example, about 50% of all physicians will be sued for malpractice at least once. Over half of these suits will seek damages exceeding $1 million, with a median award of over $500,000, according to the U.S. Department of Justice. In 2001 alone, plaintiffs won nearly half a billion dollars in medical malpractice cases, with almost a third of individual jury verdicts topping $1 million.

While medical malpractice insurance provides some protection against patient lawsuits, it's often insufficient or unavailable. Many big carriers have withdrawn from states with histories of high jury awards, such as West Virginia, Pennsylvania, and Florida. Others are refusing to insure certain medical specialties such as emergency medicine, obstetrics, and plastic surgery. Even the physicians who can obtain insurance often cannot afford coverage that protects them completely against large jury verdicts.

And physicians aren't the only ones at risk. Business owners, corporate executives and directors, accountants, financial advisers, and ironically even lawyers themselves are increasingly in the crosshairs of aggressive plaintiff attorneys looking for deep-pocketed defendants. How can financial advisers help their clients avoid a potential litigation nightmare? One option is to establish a self-settled asset protection trust (SSAPT).

As their name implies, SSAPTs are irrevocable trusts wherein the settlor and beneficiary are the same person. "These trusts are created when you place assets into an irrevocable trust for your own benefit," explains Scott Leonard, a CFP and president of Leonard Wealth Management in Redondo Beach, Calif. "The assets are then shielded from creditors in certain foreign and domestic jurisdictions, provided that you appoint an independent trustee and comply with other legal requirements."

OFFSHORE OPTIONS

Although foreign asset protection trusts (FAPTs) have been around for decades, they've increased in popularity as litigation expenses and perceived inequities in the U.S. legal system have prompted many clients to look offshore for protection. In fact, several foreign jurisdictions have established favorable asset protection laws specifically to attract U.S. capital, including Nevis, Cook Islands, Maldives, Belize, Bahamas, Bermuda, Isle of Man, Guernsey, and Jersey.

Creating a FAPT is fairly straightforward. "You first need to pick a country with favorable trust laws and debtor protections, such as the Cook Islands or Nevis," explains Alan Eber, an attorney in Encino, Calif., who specializes in asset protection strategies and offshore planning. "Then choose a reputable independent local trustee, prepare the necessary trust documents, and transfer title of the assets to the trust."

The assets themselves do not necessarily need to be held in the trust jurisdiction, however. In fact, Eber recommends holding them in a bank located in a debtor-friendly country other than where the trust is located, to further shield them from potential creditors.

Because FAPTs are administered offshore, they provide U.S. settlors with many advantages. For example, because U.S. courts lack jurisdiction over a foreign trustee, they can't order the trustee to distribute trust assets. Rather, to collect on a judgment entered against a settlor by a U.S. court, a creditor must have the judgment executed in the jurisdiction where the trustee resides.

Unfortunately for creditors, jurisdictions that cater to U.S. clients rarely recognize judgments in favor of foreign creditors. Instead, the creditor must file suit in the trust jurisdiction and litigate the settlor's liability all over again.

Even then, the creditor may be out of luck. Most well-crafted FAPTs include a "flee clause" allowing the trustee discretion to move the trust to a new country. Unless the creditor is successful in getting the "flee clause" invalidated, the trustee can literally move the trust from country to country, keeping ahead of the creditor and forcing him or her to file multiple lawsuits in multiple jurisdictions with little hope of success.

Further, because most FAPT jurisdictions are in remote locations, the financial burden of prosecuting a lawsuit there can be enormous. Hiring local attorneys who often don't work on a contingency basis, complying with local court requirements, and traveling across the globe to provide witness testimony and attend hearings is a daunting task, even for sophisticated creditors. Robert Mintz, an asset protection and estate planning attorney in Oceanside, Calif., and the author of several books on asset protection planning, says that's the big draw: "They create a huge psychological and financial deterrent to most potential litigants."

Foreign jurisdictions also have shorter statutes of limitations for creditor claims than most U.S courts, as well as heightened standards of proof. This is particularly helpful when determining whether a settlor fraudulently conveyed assets into a trust to delay, hinder, or defraud potential creditors.