Did you know that there’s one legal tool that can protect most or all of your assets from lawsuits? It’s an asset protection trust! When properly established, these trusts can defend your wealth from lawsuits, divorce, debts, and countless other financial threats.
Here, we’ll explain exactly what asset protection trusts are and how they can help you achieve financial security in an increasingly litigious world:
- Offshore Asset Protection Trusts (OAPTs)
- Defining the Key Terms and Parties of an Asset Protection Trust
- Asset Protection Trust Definition
- How an Asset Protection Trust Works
- Domestic Asset Protection Trusts (DAPTs)
Defining the Key Terms and Parties of an Asset Protection Trust
Before we dive into the details of asset protection trusts, let’s define some of the key terms and parties associated with them:
- Self-Settled Trust – Self-settled trusts are a type of trust set up by a settlor for their own benefit. These are commonly used for asset protection.
- Settlor – The person who establishes a trust is known as the settlor or grantor. Asset protection trust professionals use these terms interchangeably.
- Trustee – A trustee is a person or company that manages the assets within a trust. Trustees are bound by the laws of the trust’s jurisdiction and must adhere to the rules laid out in the trust agreement.
- Custodian – A custodian is a person who can veto trustee decisions and even replace trustees whom they believe are acting against the interest of the settlor or beneficiary.
- Beneficiary – Anyone who receives benefits, such as a monthly distribution or inheritance, from the trust is a beneficiary. Common examples of beneficiaries include family members, charitable organizations, and, in the case of asset protection trusts, the settlor.
- Trust Agreement/Deed – Trust agreements, also known as trust deeds, are documents that name each of the key roles and establish trustee powers.
- Irrevocable Trust – An irrevocable trust is a type of trust that cannot be easily altered directly by the settlor. Asset protection trusts are always irrevocable to prevent creditors from accessing them. After winning a judgment, creditors can take any assets the settlor can easily access. So, by stripping the settlor of their ability to withdraw assets from the trust at will, irrevocable trusts prevent judgment creditors from doing the same.
- Third Party Trust – Third-party trusts are a form of trust establishedby a settlor for the benefit of another party. It is often used to set up an inheritance for the settlor’s children, spouse, or a charitable organization.
Asset Protection Trust Definition
An asset protection trust (APT) holds cash, real estate, personal property, and other items of value. Assets held inside an asset protection trust are not legally considered to be property of the trust beneficiaries or settlor. Thus, it can protect them from being seized by creditors. These trusts are always irrevocable and can be established domestically or offshore.
How an Asset Protection Trust Works
Once a settlor places assets in an APT, they no longer legally own those items. Instead, that ownership transfers to the trustee. If the settlor loses a lawsuit and their judgment creditor demands they hand over the assets in the trust, the settlor can say, “That’s not within my power.”
Domestic Asset Protection Trusts (DAPTs)
Domestic asset protection trusts are established within the settlor’s country of residence (such as the United States). They are overseen by a domestic trustee and are bound by the laws of the state or country where the settlor established them. Here we will focus on U.S. asset protection trusts.
The general requirements for states with DAPT legislation are as follows:
- The trust must be irrevocable.
- At least one trustee must be a resident of the state.
- If the trustee is a corporation, it must be authorized to conduct business in the state.
- Some of the trust assets must be within state borders.
As the settlor, you don’t need to be a resident of the state where you set up your DAPT. However, the more ties you have with the home state of your DAPT, the better it will look during a lawsuit.
DAPT Challenge
Unfortunately, domestic trusts have a major drawback: they’re subject to U.S. court orders. A results-oriented judge in California, New York, Florida, or Texas may not care what Nevada’s statutes say about your trust. As a result, we often see them turn trust assets over to the creditor.
The United States’ legal system operates under the principle of judicial reciprocity. Put simply, every state must enforce the rulings made in another state. So even if your Nevada DAPT should protect you from creditors, it’s vulnerable to rulings made in states that don’t have trust-friendly laws.
Thanks to judicial reciprocity, we’ve seen domestic trusts fail time after time. Fortunately, a DAPT isn’t your only option.
Offshore Asset Protection Trusts (OAPTs)
Offshore asset protection trusts offer all the protections of a Nevada DAPT, plus one powerful feature: they aren’t beholden to U.S. laws. OAPTs exist within independent nations with their own laws. Many of these countries will not automatically enforce a judgment or charging order issued by a U.S. or other foreign court.
If your creditor wants to access the assets from your offshore asset protection trust, they will typically be required to mount another trial within the foreign country. This is the case even if your creditor has already won a judgment against you in a U.S. court.
Fortunately, most creditors won’t go through the trouble of starting a new trial offshore. The process is prohibitively expensive, and the laws are stacked in favor of trustees rather than creditors.
Benefits of Offshore Trusts
While the main benefit of offshore trusts is the ability to refuse foreign judgments, that’s not the only reason they’re superior to DAPTs. Some other benefits of OAPTs include:
- Estate planning – Offshore trusts, in the most favorable countries, have no rule against perpetuities. This allows them to remain operational indefinitely. As such, it allows settlors to plan their estates across several generations.
- Short statute of limitations for fraudulent conveyance – Creditors use fraudulent conveyance claims to try and breach the protections of a trust. Many OAPT jurisdictions, such as the Cook Islands and Nevis, have short statutes of limitations for these filings. Creditors have only one to two years from the cause of action to bring forth fraudulent conveyance claims. Some jurisdictions, like Belize, go even further by making it impossible to file one of these claims.
- Financial privacy – Trustees of offshore asset protection trusts can refuse to comply with subpoenas and deposition orders from U.S. courts. This helps ensures that sensitive financial documents, which likely contain the settlor’s name, never end up in the public record. Furthermore, most offshore jurisdictions only require a settlor to register the trust’s name, the name of the trustees, and the date of the trust deed, not their own name.
- Ability to wholly own an LLC – Offshore trusts can own an LLC. The settlor can be the LLC manager, which allows the settlor to directly access trust-held assets. If the settlor gets sued, transferring LLC management to their trustee re-establishes the protections offered by the offshore trust.
- Access to assets under legal duress – When a settlor is in legal trouble, trustees can pay bills on their behalf. This ensures that the settlor keeps their house, car, and other assets that require monthly payments, even if the settlor’s accounts are frozen.
Set Up Your Asset Protection Trust with Help from Asset Protection Planners
Now that you have a clearer picture of what an asset protection trust is, consider setting one up for yourself to keep creditor’s hands off your money!
If you’re ready to set up an ironclad OAPT, call Asset Protection Planners! Our firm has set up Cook Islands trusts for over 30 years, and haven’t seen a creditor breach a single one.
Make your appointment today to protect your assets from lawsuits, creditors, debts, and more!
