Can a Trust Protect Assets from a Lawsuit?
In a word, yes. Certain kinds of trust can protect assets from lawsuits. An asset protection trust, for example, can protect you from a lawsuit, but most living trusts do not. It is important to note that one must also draft the trust properly and associate it with the appropriate jurisdiction. Moreover, it generally must have a trustee who is not a spouse, a close relative, controlled employee or agent of yours.
Here is an analogous question. Can vehicles drive fast? Yes, certain kinds can. Race cars, properly built, tuned and fueled, can drive faster than most other vehicles. Most farm tractors, on the other hand, while great for their suited purposes, are not on the fast end of the scale. In other words, if speed is your goal, choose the right vehicle. If asset protection is your goal, choose the right kind of trust.
The Lawsuit Threat
It’s no secret that the U.S. is the most litigious country on the planet. The nation also has the highest number of lawyers, with roughly one attorney for every 240 residents. How many TV commercials have you seen where lawyers hawk their ability to file lawsuits and obtain “compensation” for minor injuries? You are not immune. When aimed at you, you could lose everything you’ve worked so hard for over the course of your life via frivolous litigation. That’s frightening.
People seek out offshore trusts for all sorts of reasons. Protecting their assets from lawsuits is often a prime motivator. While trusts can protect assets from lawsuits, not every type of trust offers lawsuit protection. A revocable trust, such as a living trust, will not fill that bill. This is because creditors can step into our shoes and invoke your power of revocation. That is not the case with a properly drafted irrevocable trust.
When a trust is irrevocable, that means it does not readily permit alteration. That does not necessarily mean no changes are possible, but much depends on the trust terms and the way one drafts it. For asset protection purposes, however, the settlor – the party funding the trust – and beneficiaries cannot make changes without going through the trustee. The trustee’s responsibilities include trust oversight and account management. In a revocable trust, the settlor commonly also serves as trustee. That is not the case with most irrevocable trusts that provide asset protection.
Keep in mind that, by law, creditors can do the same things a debtor can do. For example, in a revocable trust, the settlor is allowed to change beneficiaries whenever they choose. Legally, it is possible for a creditor to sue a settlor. If successful, a judge can have the creditor declared the beneficiary and receive trust assets to pay the debts. An irrevocable trust limits what the settlor can do compared to a revocable trust, but it also limits the rights of the creditor and the judge.
So, the secret is to set up the trust to your liking right from the beginning. Fortunately, if your circumstances change your trustee can make the needed and legally acceptable alterations. Sure, most of us like control. However, if you have full control of the trust, that means the judge and your creditor can obtain full control as well. Since you are the one setting it up the way you want in the first place, if you want true control, set up an irrevocable trust.
Who Needs Lawsuit Protection?
Ask who needs lawsuit protection, and most people might answer physicians concerned about malpractice awards. Alternatively, they might refer to real estate developers worried about potential legal issues, or other high-net worth individuals in high-profile, litigation-prone careers. The truth is that anyone can face a lawsuit at any time. That is, if they have accumulated substantial assets, they need to protect them. The “deep pockets” theory in law means going after the individual or entity most able to pay, even if they have little to do with the lawsuit circumstances. You may need lawsuit protection even if you do not have substantial assets, but are at risk of losing your home or otherwise face mounting debts.
Keep in mind, a contingent fee attorney has just as much sympathy for you as a pack of lions has for the baby gazelle. You are just the next meal. An acrimonious divorce, a car accident, a business dispute or a number of other circumstances leading to litigation can happen to anyone. Few, if any, are immune.
Lawsuits After Death
Death is a certainty, but just because you are no longer among the living does not necessarily mean your estate won’t face lawsuits. An asset protection trust allows you to leave your assets to those you choose. On the other hand, it helps prevent someone to whom you did not want to leave assets from receiving them. Suppose there is a close relative from whom you are estranged. Naturally, they will not be a beneficiary of your trust. If you live in a country with forced heirship laws, or are a resident of the state of Louisiana, you cannot disinherit kin via a will or trust. However, if your trust is located in a foreign jurisdiction that does not recognize forced heirship, the disgruntled relative cannot prevail in a lawsuit against the trust to become a beneficiary.
Insurance is Not Enough
Many people believe purchasing sufficient insurance should obviate the need for an asset protection trust. In some instances, that may not prove true, such as during a divorce. You also don’t know what “sufficient” might mean. Under ordinary circumstances, perhaps a couple of million dollars in insurance might protect you. If the circumstances are extraordinary – suppose a former employee accuses you of sexual harassment, out of the blue. The policy you thought would protect your assets turns out to have given you a false sense of security. Insurance companies write policies with the primary aim of protecting themselves, not you. Therefore, many unsuspecting insured parties who thought they had protection were surprised with, “your policy doesn’t cover that.” There is a better way to protect your assets, and that is via an asset protection trust.
Asset Protection Trusts
So, what is an asset protection trust? An asset protection trust is run by a trustee or trustees. Such trusts are irrevocable and include spendthrift clauses. The latter means a creditor cannot attach assets of the beneficiary of the trust before those assets, such as real estate, securities, or cash, are distributed to the beneficiary.
That is another advantage of an asset protection trust. You can put almost anything of value into it. This includes including bank accounts, art, antiques, jewelry, precious metals, etc. The list is endless.
Domestic Asset Protection Trusts
While many asset protection trusts are located offshore, Domestic Asset Protection Trusts (DAPTs), can also provide some protection from creditors. But DAPTs are not available to all U.S. residents. Currently, just 17 states permit DAPTs, which are irrevocable and have independent trustees. These states are:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
There are circumstances where creditors cannot access DAPT assets, but much depend on state law. In some states, certain creditors may access a DAPT, including a former spouse. Other states may permit tort creditors to access DAPTs. This is especially the case when the DAPT is established after the incident that triggered the lawsuit. A doctor facing a malpractice lawsuit might create a DAPT for the purpose of shielding assets. However, if state law concurs, a plaintiff might collect a judgment from the DAPT if doctor established the trust established after the alleged malpractice took place.
Some believe that because they are domestic trusts, DAPTs are is somewhat easier to set up than offshore asset protection trusts. But the fact is DAPTs still leaves asset owners more vulnerable than foreign trusts. Much more vulnerable. Here is the problem. Let’s say that the DAPT works well for a bank account when you live in the particular state that offers these trust. The trouble is, if you live in a non-DAPT state, holding your account in such a trust could mean a court would allow a creditor to seize it. DAPTs might work well in some situations, but the truth is you never know what life is going to throw at you. You don’t want to find out after the fact that a DAPT was insufficient protection.
Offshore Trust Benefits
US judges have jurisdiction over domestic trusts. That is not the case with an offshore trust. That is, the judiciary of that particular country oversees trusts established in that country.
When considering an offshore trust, look for a country whose laws are adverse to creditors. For example, in Cook Islands, Nevis and Belize, asset protection trusts are granted speciﬁc immunity against the judgments of foreign courts or claims based on the law of any foreign jurisdiction. This holds true in many offshore trust jurisdictions, making them top choices when it comes to protecting assets.
The Travel Factor
Many offshore trusts require creditors to travel to that country and adjudicate their cases as per that nation’s laws. If your asset protection trust is located in the Cook Islands, situated in the South Pacific Ocean northeast of New Zealand, any creditor trying to obtain your assets must travel to the Cook Islands. That means a 14-hour trip from New York, including two stops. Then they must go through the Cook Island judicial system. For that, the creditor must hire a Cook Island lawyer. The odds of the creditor successfully gaining access to a Cook Island’s trust assets are slim to none. After all, the legislature drafted the trust laws for the purpose of asset protection from lawsuits.
Statute of Limitations on Fraudulent Conveyance
A fraudulent conveyance transfer is not the same as fraud. The former is a civil issue, while the latter is a crime. Instead, a court may associate a so-called fraudulent conveyance with putting assets into a trust in order to protect those assets from potential creditors. When researching offshore trusts, look for those with short statutes of limitations for fraudulent conveyance. Most offshore jurisdictions have a statute of limitations of just one to two years, but some, like Belize, offers virtually instant protection from fraudulent conveyance claims.
The Cook Islands trust can protect assets very quickly. They happen to have a one to two year fraudulent conveyance of assets statute of limitations. That is, the creditor has one year to file a lawsuit in the Cook Islands from the time the trust is formed and funded. Alternatively, it is two years from the underlying cause of action, or the event that triggered the lawsuit. Thus, by the time one litigates the case domestically, when the plaintiff gets around to pursuing a lawsuit in the Cook Islands, the statute of limitations will likely have expired.
To be clear, that doesn’t mean it does not protect assets for one to two years. It just means that after one to two year the courts will reject hearing a fraudulent conveyance claim. Moreover, the burden of proof lies with the creditor. Among the many things the creditor must prove within that one-year time limit is that the trust was created simply for the purposes of defrauding not just any creditor, but that creditor in particular.
Burden of Proof
The Cook Islands and Nevis use a “beyond a reasonable doubt” standard in deciding such cases, much as the US does in criminal trials. In most US civil matters, the standard is “preponderance of evidence.” So offshore trust jurisdictions are inherently defendant-friendly. In some countries, such as Nevis, anyone losing in court must pay their own court costs and the creditor typically must post a large bond before even bringing a lawsuit. Moreover, there is no contingency fee system for attorneys, as there is in the US.
Does a trust protect assets from lawsuits? Yes, when you choose the right kind of trust; especially an offshore trust. Thus, when factoring in all the time, effort, expense, and the unlikelihood of achieving their goal, few creditors will attempt to pursue assets held in offshore asset protection trusts. Even if they do, they will likely wind up with a big legal bill with nothing to show for it. So, such a structure is one that can help you keep what you worked so hard for, safe and secure.
For more information on setting up an asset protection trust, please complete the consultation form on this page or utilize one of the phone numbers above.