Asset protection trusts are strongest financial protection planning tools against creditors, lawsuits and judgments. An asset protection trust can also help deter a lawsuit before it even begins as well as make for favorable outcomes of settlement negotiations. As a personal wealth protection tool, or an estate planning vehicle, these types of trusts are where you’ll find the most peace of mind for your financial future.
What is an asset protection trust? Here is an in-depth definition as well as an explanation of what they do. Typically what makes an “asset protection trust” different from another kind of trust, is that it is a “self-settled” spendthrift trust. This means that you are the settlor and the beneficiary with a certain amount of control over how the trust assets are used. Trust settlors fund the trust while the beneficiaries benefit from trust assets. The trust is its own separate legal vehicle that can own property, bank accounts or just about any type of asset, including investment accounts. Cash, stocks and bonds, real estate, personal possessions, collections, automobiles and personal property are all types of assets that can be transferred to a trust.
When assets are placed into a trust, they are separate from the settlor, therefore if the settlor is sued, only the individual’s personal assets can be pursued. Even the trust assets that are being distributed to the beneficiary are off limits through protective provisions (legal language) in the trust deed. This means that the benefit of the trust assets are not up for grabs to creditors, court orders or available to satisfy judgments.
The legal mechanics of properly established and maintained asset protection trusts have been tested in courts with consistent success.
Establishing an Asset Protection Trust
When you decide to place your assets into a protective legal structure, the most important decision will be “where?” This is when you choose what legal jurisdiction to establish a protective trust. The legal jurisdiction is essentially choosing the laws that your assets are protected by. This decision is primarily deciding between domestic or offshore.
Domestic Asset Protection Trusts – “The next best thing to an offshore trust.” Several states have enacted asset protection trust statutes offering the most flexible asset protection trust laws in the United States – DAPTs can be setup quickly and easily.
There are pros and cons to both and deciding which is right for you should be done with a qualified and experienced planner. Domestic trusts are slightly less expensive to set up with an entire asset protection plan. However, the biggest downside is that your assets are still within the US legal system which place them under the risk of court orders, federal bankruptcy laws and various state laws. Domestic AP trusts are also new and lack the case law demonstrating protection in the event of a devastating lawsuit or judgment. Asset protection trust laws in the US are adopted by many states, with Nevada leading the way, and are very flexible.
Offshore Asset Protection Trust
Offshore trusts are “the strongest legal tool available, period.” When you need absolute financial protection, from just about anything, an offshore asset protection trust is practically the only legal vehicle that is judgment proof and not subject to US court orders.
Such trusts, specifically the Cook Islands asset protection trusts are the holy grail of personal financial protection. There is nothing stronger in the world at safeguarding liquid assets from just about an legal threat. When you place your assets into a protective trust outside of the US legal system your trustee is not compelled to respond to your local court orders. This is where judgment-proof peace of mind asset protection comes from. These trusts are so strong that none have been pierced by US court orders alone.
In order to pursue assets held in a foreign trust, your legal opponent must pursue the assets in the foreign jurisdiction using foreign legal counsel – a costly and time consuming legal hurdle. This is the greatest form of lawsuit deterrence money can buy – that also provides substantial legal leverage to pursue a favorable outcome or minute settlement. Backing this up are tight statutes of limitations on challenging transfers of assets to the trust. One year is the shortest statute of limitations that a foreign trust can provide, when properly set up by an experienced professional. But even if the trust is established and funded within that time period, substantial protection remains. Offshore trusts are more costly, however afford the most protection available for liquid assets.
In a properly structured asset protection plan, the trust is one component. A bank account and an LLC, or other business entity, are used as part of a well-rounded plan. Investment and banking accounts are managed according to carefully drafted trust provisions and as an additional control instrument a Limited Liability Company can control financial accounts and the organizational structure allow the settlor (you) to be company manager giving day-to-day control over the assets. These types of structures are advanced and will depend on your trust jurisdiction laws. The most flexible and control-granting solution while the waters are calm is a comprehensive trust plan involving an LLC and private bank account. Then when things get choppy, the trustee can step in and provide the needed protection.
When using a limited liability company as part of an APT plan the trust is drafted with special provisions which delegate management roles and responsibility. Under normal circumstances the manager of the LLC (which could be you) controls most of the trust activity including the financial accounts and investment management – in times of legal duress the management of the LLC transfers to the trustee who follows provisions and manages trust assets until the legal storm has passed.
Asset Protection Trusts and Estate Planning
Asset protection planning is best implemented before the need arises as an Estate Planning initiative. However asset protection can be performed at any time. Assets are protected and properly distributed to you or loved-ones through legal vehicles and careful planning. A trust can be structured so that it provides estate planning and avoids the expensive and lengthy probate process. Estate taxes can also be minimized.