If you’ve been searching for a way to keep your wealth safe from creditors and other threats, you’ve probably heard about asset protection trusts. These trusts, which can be set up both domestically and overseas, are widely considered some of the strongest asset protection tools. Like any tool, there are advantages and disadvantages to using these trusts.
In this article, we’ll explain the pros and cons of asset protection trusts by taking a closer look at the domestic and offshore versions:
Domestic Asset Protection Trust Pros and Cons
A domestic asset protection trust is a type of irrevocable trust based in the United States that is used to keep your wealth safe from lawsuits. Currently, 17 states allow for the creation of domestic asset protection trusts, and the quality of each state’s trust laws varies significantly.
Here are a few of the advantages and disadvantages of domestic asset protection trusts:
Domestic Asset Protection Trust Pros
- Flexible structure: States that have asset protection trust laws on their books allow you to set up the trust as the settlor and also be its beneficiary.
- Easy access to trustees: Since you live in the same country as the trustee, you can expect they’ll be available during your business hours. You can also meet with them in person without taking a long flight.
- Decent asset protection: If you live in a state that has asset protection trust laws, the trust you create will make it harder for a creditor to take your assets after a lawsuit. To break through the protections of a trust, your creditor will have to prove that the money you’ve transferred into the trust should have gone to them instead.
Domestic Asset Protection Trust Cons
- Vulnerable to U.S. court rulings: U.S. courts have jurisdiction over domestic trusts and trustees. We have repeatedly seen results-oriented U.S. judges successfully order the forfeiture of domestic trust assets.
- Affected by rulings in other states: Even if you choose to set up your trust in a state with strong protections like South Dakota or Nevada, you can’t guarantee that those states’ favorable laws will protect you. For example, if you establish your trust in South Dakota but get sued in a California court, the ruling from California will be applied to your South Dakota trust. This is true even if the ruling goes against South Dakota laws.
- Minimal case law history: The final big disadvantage of domestic trusts is that the oldest laws on the books are from 1997. Most states have much newer trust laws, and very few jurisdictions have a well-established case law history. A U.S. judge can easily make a ruling that cuts through the protections offered by a domestic trust.
Offshore Asset Protection Trust Pros and Cons
Offshore asset protection trusts are irrevocable trusts that are set up outside of the United States. These trusts have been around since the mid-1980s, and are widely considered the strongest form of asset protection available.
Here are a few of the advantages and disadvantages of offshore asset protection trusts:
Offshore Asset Protection Trust Pros
- Proven to be effective: Offshore asset protection trusts in jurisdictions like the Cook Islands and Nevis have capably defended assets against creditors for decades. Case law in these jurisdictions has shown time and again that a trust settlor’s assets are safe from creditors, claims, and divorce.
- Beyond the reach of local courts: Since these trusts are located in overseas jurisdictions, local court rulings have no power over them. If a lawyer or creditor wins a case against you and attempts to use the judge’s ruling to claim your assets, they won’t have any luck. Your trustee will simply tell the creditor that they need to try a new case in the jurisdiction where the trust is located.
- Duress clause: Offshore trusts can include a duress clause, which allows a trustee to deny your request for funds if they can tell that the request was made under duress. Specifically, this ensures that when a judge demands that you withdraw funds from your trust, you can comply with the order while still keeping your money safe.
- Flexible access: When you’re not under duress, you can access the funds for yourself. Just ask the trustee, and they will send you any requested funds.
- Control over trustees: If you don’t like what the trustee is doing, you can fire them and hire another without penalty.
- Built-in estate planning: These trusts allow you to name your children, spouse, or any other party as a beneficiary. When you die, any named parties will receive the trust-held assets you left to them.
Offshore Asset Protection Trust Cons
- Cost: They cost more than domestic trusts and are better suited for people with a lot of assets to protect.
- Setup: You will need to provide more due diligence, such as a notarized copy of your ID, proof of address, and a professional reference letter.
- Unfamiliarity: They require you to deal with financial institutions and trustees living in a foreign country. There are measures in place to ensure that trustees manage your assets properly, but some people still find the prospect unnerving.
- Efficacy varies by jurisdiction: Not every offshore asset protection trust is equal. OAPTs outside of the Cook Islands, Nevis, and Belize have weaknesses that can undermine your asset protection strategy.
Let Asset Protection Planners Find the Wealth Defense Strategy That Works for You
Every asset protection tool carries some advantages and disadvantages. The key to a successful plan is finding the one where the pros outweigh the cons for your unique situation. Thankfully, the team at Asset Protection Planners is here to help you find the wealth defense strategy that works for you. We’ve set up asset protection trusts for decades and can quickly determine which kind of trust is best suited to your needs.
Schedule a free consultation with us to start safeguarding your wealth today!
