FAPTs and Malpractice Insurance

As discussed in previous articles, Domestic Asset Protection Trusts (DAPTs) have become a popular malpractice insurance protection technique by estate planning attorneys. While many states have adopted DAPT statutes, there still remains some uncertainty as to how DAPTs will hold up against adverse bankruptcy court decisions and constitutional claims (e.g., Conflicts of Law - Full Faith and Credit Clause claims).

DAPTs are “domestic” or “locally” established trusts established for the benefit of the grantor to provide malpractice insurance for physicians. Prior to the widespread use of DAPTs, many high net-worth individuals and persons concerned about credit claims often transferred assets to offshore trusts, or Foreign Asset Protection Trusts (FAPTs), in an attempt to avoid creditor claims as an insurance for malpractice.

FAPTs are trusts governed by a foreign jurisdiction and for the following reasons may provide solid malpractice insurance protection (this is not an all-inclusive list):

  1. Many countries prohibit foreign judgments from being enforced within their country.
  2. Foreign countries usually do not extend comity (i.e., the principle that one jurisdiction will extend certain courtesies to other nations) to U.S. judgments. U.S. courts and U.S. creditors may find it difficult to enforce a U.S. judgment in a foreign country.
  3. Even if the foreign courts grant jurisdiction, it will be very difficult to compel the Trustee of a FAPT to honor a U.S. judgment and pay a U.S. creditor.
  4. Foreign law firms (and U.S. law firms for that matter) usually do not take on civil litigation matters on a contingent fee basis. Therefore, creditors desiring to sue or enforce a judgment in a foreign country will need to advance the legal fees to litigate in the foreign country.  For many creditors, the cost of litigating in a foreign jurisdiction may exceed the actual damages, or the creditor may not have the financial wherewithal to enforce its claims in the foreign country.
  5. Some countries may not have statutes prohibiting fraudulent transfers, hence making it more difficult to enforce a U.S. claim/judgment in the foreign country.
  6. Some countries have short statute of limitation periods. The statute of limitation period is the time in which a claimant must bring a claim against another. If the statute of limitation period is short, then creditors may miss the opportunity to recover against the debtor.

While it maybe difficult for creditors to enforce their claims against assets held in a FAPT, some people may find that FAPTs may not provide an appropriate malpractice insurance or asset protection technique for their current situation. Examples:

  1. Many states have enacted very attractive DAPT statutes, which make it easier for people to keep their assets close (i.e., in the United States).
  2. U.S. bankruptcy courts may not look favorably on debtors with FAPTs. Some bankruptcy attorneys claim that debtors with FAPTs and seeking relief from a bankruptcy court are often denied bankruptcy protection.
  3. There is a risk that debtors with FAPT, who appear in a bankruptcy court, may be targeted for civil and criminal bankruptcy fraud, due to the impression of evading creditors and entering into fraudulent transfers in order to defraud creditors.
  4. The movement of large amounts of money to and from the United States may trigger an investigation by the FBI and/or Department of Homeland Security. The movement of the funds may create the impression of illegal activities, such as money laundering, funding terrorism, or fraudulent transfers, etc.
  5. U.S. citizens with foreign financial interests in or signatory authority over at least one financial account located outside of the United States, where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year, must report such financial interests to the Internal Revenue Services (IRS) using IRS Form TD F 90.22-1 (FBAR). Income associated with such foreign financial interests must be reported on the taxpayer’s individual income tax return, specifically Schedule B - Parts I, II & III. The FBAR is an informational form/report and no tax is imposed on the filing of this form. However, failure to file an FBAR and/or report such foreign income on a tax return will result in substantial delinquent taxes, penalties, interest, and possible criminal prosecution for the intentional failure to file and report such financial interests and accounts.

More on medical malpractice and asset protection

Next> Understanding voluntary disclosure and offshore bank accounts as you protect your foreign assets

More> Medical Malpractice Insurance: A simple primer to answer the question of whether to insure or not insure

More> Medical Malpractice: Looking at a few strategies to protect your medical practice from claims

More> Medical Malpractice Claims: Choice of Entity and Separate Business Functions: Choosing the right type of business entity can be a crucial first step when designing your asset protection strategy

 

About the Author: Steven Nofar is licensed in Michigan as an Attorney and Certified Public Accountant. Mr. Nofar practices primarily in the areas of estate and tax planning, business succession planning, asset protection, charitable gift planning and tax controversies with federal, state and local taxing authorities. Mr. Nofar’s clients range from small to large business owners and span across the U.S., Europe, Asia, and the Middle East.  If you need additional information or clarification related to this article, please contact him at 248-335-5000 or at This email address is being protected from spambots. You need JavaScript enabled to view it..

Disclaimers:

For Educational Purposes Only. This information is being provided for educational purposes only. There are no assurances that the laws or recommendations will achieve user’s desired goals in any or all circumstances.  Laws change frequently and vary from location. Therefore, you should always consult with a qualified attorney, accountant, or other expert for assistance.

Circular 230 Disclaimer. Treasury Department Regulations require us to inform you that unless we specifically indicate otherwise, any tax advice in this communication including any links, or attachments cannot be used to avoid any penalty that may be imposed by federal tax law nor to promote or market to another party any matters covered herein.

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