Asset Protection Trusts – Information for Beginners
Imagine one legal tool that can protect most or all of your assets from lawsuits. One of the most effective strategies for protecting assets is the asset protection trust. One may effectively use an asset protection trust to shield wealth from creditors when properly established in the right jurisdiction. A person establishing this type of trust can also is it for estate planning to transfer assets to descendants upon one’s passing.
Those in high-liability professions, such as doctors and lawyers and those in the real estate profession will find asset protection trusts especially useful. The United States is becoming an increasingly litigious society. Asset protection trusts are an important consideration for any wealthy individual looking to protect what they have worked so hard for.
We discuss the following:
- Asset Protection Trust Basics
- Offshore Asset Protection Trusts
Then we discuss the following offshore asset protection benefits and terms in detail:
- No Recognition of Foreign Judgments
- Financial Privacy
- Ability to Wholly Own an LLC
- Access to Assets Under Legal Duress
- Estate Planning
- Asset Protection Trusts Uses
- Asset Protection Trust Structure
Asset Protection Trust Basics
Wealthy people have long used trusts to protect their assets. Asset protection trusts are self-settled spendthrift trusts. In an asset protection trust, one individual may act as both the settlor of the trust and a trust beneficiary. This allows individuals to use trusts to protect their own personal assets. They may also use the trusts to protect assets that they wish to give to beneficiaries.
Asset protection trusts work by putting the control of the distribution of assets held by the trust into the hands of the trustee. In some jurisdictions, the settlor may act as a co-trustee. This means that the settlor can control distributions of assets made to the beneficiaries. However, the trustee must always be in control of distributions made to the settlor. This works to protect settlors and beneficiaries by shielding the assets held within the trust. Settlors and beneficiaries cannot control distributions made to themselves. As a result, creditors cannot demand that the settlor or beneficiary turn over assets held by the trust.
Asset protection trusts are offered in a number of jurisdictions around the globe. Asset protection trusts settled in the United States are often referred to as domestic asset protection trusts. Domestic asset protection trusts are offered only in certain states. These states include Nevada, Delaware, and Alaska, among others. While domestic asset protection trusts can provide asset protection, they are still subject to the rulings of US courts.
For example, asset protection trust law in Nevada, for example, may state that holding assets in the trust protect them from lawsuits. However, a results-oriented California judge may set aside the laws of another state and order them turned over to your legal opponent.
There is a much more effective alternative; the offshore asset protection trust. Offshore asset protection trusts, such as those located in the Cook Islands, Nevis, or Belize, provide significant advantages over domestic asset protection trusts. Please read below.
Offshore Asset Protection Trusts
Many wealthy individuals are choosing to avail themselves of the significant advantages provided by offshore asset protection trusts. Quite simply, US courts do not have jurisdiction over foreign trustees. A US judge says, “Give me the money.” In the foreign jurisdiction such orders fall on deaf ears. The following are some of the many benefits which offshore asset protection trusts provide.
No Recognition of Foreign Judgments
The most significant benefit of offshore asset protection trusts is that many favorable jurisdictions do not recognize foreign judgments. Domestic trustees are bound by US law. If they are facing contempt of court if they do not release assets following a civil judgement, they will most certainly turn them over. Offshore trustees, on the other hand, are not bound by US court orders. In fact, some preferable jurisdictions such as the Cook Islands and Nevis take their protection a step further. In these jurisdictions, we insert a special clause in the trust we call the “duress clause.” With the duress clause, trustees are legally bound to refuse to release assets when a settlor is asking for the under legal duress. That is, when the settlor is not asking for them under his or her free will. To pursue a judgement against the settlor of an offshore trust, creditors must usually have the case re-adjudicated.
It is unlikely that a creditor will be able to reach the assets held within an offshore trust even if a case is filed abroad. Many jurisdictions only allow creditors to seize assets in proven cases of fraudulent transfer against a particular creditor within a particular time frame. Fraudulent transfer occurs when the settlor of a trust transfers assets to the trust with the expressed intent of delaying or defaulting on creditors. The burden of proof is on the creditor to show that assets were transferred with the willful intention of defaulting on them specifically (i.e. not just any old creditor, but that one in particular). The creditor must also prove that transferring those assets made the settlor insolvent. Doing so would require access to difficult-to-obtain financial documents. Since the trustee will not comply with foreign court orders, those documents are often beyond the reach of opposing counsel subpoena power.
Moreover, once the litigation in US courts subside, the statute of limitations often bars the lawsuit filing in the foreign jurisdiction. Even of one’s opponent beats the clock and timely files the case abroad, there are nearly insurmountable barriers to reaching trust assets. An example is that in the Cook Islands and Nevis, one would have to prove beyond a reasonable doubt that the assets were place in the trust with the intent to defraud the creditor bringing the suit. Being there are a multitude of reasons for establishing the trust, we have never seen such a case supported against our clients. The bottom line is that we have never seen a client lose assets placed in a Cook Islands or Nevis trust that we have established.
Financial privacy is another important reason that people use offshore asset protection trusts instead of domestic asset protection trusts. The trustees responsible for domestic trusts are frequently deposed or subpoenaed. Domestic trustees are subject to the judgments of US courts. These judgments may include requirements to disclose sensitive financial documents during legal proceedings. Conversely, many offshore jurisdictions consider the settling of trusts a private matter. In some favorable jurisdictions, one does not even need to register the name of the settlor. In these jurisdictions, one only registers the name of the trust, the name of the trustees, and the date of the trust deed.
Ability to Wholly Own an LLC
Another great benefit of offshore trusts is that they can wholly own a limited liability company (LLC). Using an offshore LLC in combination with an offshore trust is one of the best ways to legally protect assets. This is because this multi-entity structure provides two layers of protection which creditors must pierce through in order to attack assets. Plus the settlor can us the LLC as the remote control within the trust. That is, as LLC manager, the settlor uses the LLC to control trust assets while the waters are calm. This structure works in the following way:
The settlor of an offshore trust establishes an offshore LLC. The offshore asset protection trust owns 100% of the membership interest in the LLC. The settlor of the trust places his or her assets to the LLC. For example, they open an international bank account in the LLC’s name. Then the settlor wires funds from his or her US account into the bank account established for the LLC. The settlor serves as the initial manager for the LLC. Under normal circumstances, the settlor can control the assets held by the LLC. In the event of legal duress, however, the trustee (our licensed, bonded international law firm) can step in as LLC manager and protect trust assets. Trustees in favorable jurisdictions will not respond to foreign judgements. As a result, this structure gives control to the settlor when skies are calm, and legally protects assets from creditor claims when they are not.
Access to Assets Under Legal Duress
Trustees cannot make transfers of assets if it is likely that a creditor of a beneficiary or settlor will seize them. They can, however, pay bills for the settlor. They may also pay a trusted friend or relative on the settlor’s behalf. As a result, the settlor has access to the assets held in the offshore trust. At the same time, the settlor’s creditors remain unable to touch the assets.
Offshore trusts are also very popular for estate planning purposes. This is because, unlike many US jurisdictions, a number of foreign jurisdictions have no rule against perpetuities. As a result, settlors of offshore trusts have the ability to plan their estates across several generations. As mentioned above, offshore jurisdictions do not recognize foreign judgements. As a result, offshore asset protection trusts are not subject to your local inheritance laws.
Asset Protection Trusts Uses
Asset protection trusts are able to hold a number of different types of assets. They often hold hold financial instruments such as cash and stock. They can also hold intellectual property. Asset protection trusts may also hold tangible assets. One may hold real estate within an asset protection trust. However, American real estate held in an offshore trust may still be affected by the judgments of United States courts. This is because American real estate is subjected to the laws of the jurisdiction in which it is located. As a result, liquid assets may prove easier to protect for American settlors of offshore trusts.
With real estate employ an equity stripping strategy. First, we place home equity line of credit type of mortgage liens against the property. Then, when the “bad thing” happens, we have a third-party foreign lender purchase the mortgages (or deeds of trust, as it were) and place the proceeds in an inaccessible account in one’s offshore trust.
Assets may be transferred to the trust or the LLC held by the trust at any time. It is best that the settlor transfer assets before anticipating claims on those assets. Doing so could result in claims that the assets have been fraudulently transferred. However, fraudulent transfer or fraudulent conveyance is merely a civil matter in almost all cases, not a civil one. Therefore, doing so after the fact, if need, typically gives a much better result than not doing so.
Asset Protection Trust Structure
The structure of asset protection trust is comprised of three or four roles. The number of roles depends on the jurisdiction where the trust is established. The names of these roles also vary based on jurisdiction and are discussed as follows.
The settlor of a trust is the person who establishes that trust. Asset protection trusts have the ability to be self-settled. This means that the settlor of the trust may act as not only the settlor but also a beneficiary. In some favorable jurisdictions, the settlor may also act as a co-trustee of the trust.
The trustee or trustees are the person or people who hold the title to the assets held in the trust. Trustees are responsible for administering the trust. Trustees are bound by the local laws in the jurisdiction where the trust is held. They are also bound to disregard foreign judgments. In certain jurisdictions, trustees are allowed to act as the managers of LLCs which are held within the trust. This can be very useful for protecting assets if the settlor of the trust finds themselves under legal duress.
In many jurisdictions, the trust custodian role is considered optional. Custodians provide additional security to trusts. They do so by providing checks and balances to the power of the trustee. Trustees may be appointed by custodians. Custodians also maintain the power to veto decisions made by trustees on the settlor’s behalf. Generally, the custodian is a person whom the settlor trusts, such as a family member.
Any person who receives benefit from the trust is considered to be a beneficiary. With asset protection trusts, the beneficiaries of a trust often include the settlor of the trust and/or their family members.
Want More Information?
General Corporate Services, Inc., our parent company, was established in 1906. We are the largest asset protection company in the United States. To establish an asset protection trust or simply to get more information, call us at 1-800-830-1055 or +1-661-310-2931.