Benefits of Domestic Asset Protection Trusts
Domestic asset protection trusts come with their set of benefits, including lower maintenance costs, local trustees, fewer tax filings, and reduced federal disclosure requirements. Additionally, they tend to attract less suspicion than their offshore counterparts.
The Achilles Heel of Domestic Trusts
However, certain cases have exposed a critical vulnerability in domestic asset protection trusts rooted in Article IV, Section 1 of the US Constitution. This clause states that every state must respect the “public acts, records, and judicial proceedings” of all other states. In practical terms, a judgment in one state must be recognized by all others. This contrasts with offshore trusts that can disregard foreign judgments.
Practical Challenges and Efficacy
Unfortunately, the efficacy of domestic asset protection trusts has often been undermined by US courts. Local law can override the stated law of the trust, reducing the effectiveness of the domestic trust. What may be a strong protection in one state can be easily breached in another due to this constitutional requirement.