Asset Protection Planning
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The definition of an asset protection trust is as follows: An irrevocable trust drafted under the laws of specified jurisdictions that allows the same person be the settlor and discretionary beneficiary of the trust, yet protects the assets from the creditors of the settlor. Asset protection trusts are the most widely used legal vehicles for asset protection planning. When established in the proper jurisdiction, one may use asset protection trusts to effectively protect assets from creditors. They can also be useful to minimize the effects of taxation, divorce, or bankruptcy.
Asset protection trusts are particularly beneficial for those in high-liability professions, such as doctors and developers. Unfortunately, there is no shortage of money hungry plaintiffs looking for an easy pay day. Any wealthy individual who is interested in protecting what he or she has worked so hard to earn should consider establishing an asset protection trust.
What is an asset protection trust? People of means often utilize trusts to protect their assets. Asset protection trusts are trusts which divide the beneficial and legal ownership of assets. A trust’s beneficiaries are beneficial owners of equitable interests in the trust. However, the trustee holds the legal title of the assets, rather than the beneficiaries. The trust deed (document) directs the trustees actions. As a result, trusts enable their settlors to insulate assets from the claims of their creditors legally.
A key provision of asset protection trusts is a spendthrift clause. Professionals incorporate spendthrift language into the trust deed. The original concept is that the trust is created for the benefit of a person who is not able to control his or her spending. As a result, the settlor appoints an independent trustee to direct how the trust uses assets held therein. Today, settlors most commonly use this clause to protect assets from lawsuits. This is because the assets are under the control of the trustee rather than the settlor of the trust. Because the trustee, rather than the settlor is in charge, it generally protects these assets from the settlor’s creditors. When the judge orders the settlor to turn over the assets, the settlor can honestly say, “Sorry judge, I can’t.” Thus, the assets remain safe and secure within the trust.
A number of jurisdictions offer asset protection trusts. 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, such as Nevada, Delaware, and Alaska. When you compare domestic and offshore asset protection trusts, case law repeatedly shows that offshore trusts are more effective. That is, whereas domestic options can provide barriers to creditors, they are still within the reach of local courts.
Offshore asset protection trusts, such as those located in the Cook Islands, Nevis, or Belize, provide significant advantages over domestic asset protection trusts. Simply put, they work. Local judges do not have jurisdiction over offshore trustees. So, the these legal tools effectively tie the hands of your legal opponent.
Several jurisdictions, including the Cook Islands and Nevis, offer significant benefits for those seeking asset protection and financial privacy.
Ability to Wholly Own an LLC
One of the best ways to utilize a trust for asset protection is by forming the trust in conjunction with a limited liability company (LLC). Certain jurisdictions, such as the Cook Islands and Nevis, offer the option for an LLC to be wholly owned by a trust. The settlor of the trust transfers their assets to the LLC. The settlor serves as the manager for the LLC and, under normal circumstances, is able to control the assets. In the event of legal duress, the control of the LLC may be transferred to the trustee. Trustees in favorable jurisdictions are unable to respond to foreign judgments. As a result, assets are protected legally from the claims of creditors.
The most popular jurisdictions for asset protection trusts, including the Cook Islands and Nevis, have no rule against perpetuities. This rule, active in most jurisdictions, limits the possible lifespan of the trust to just a few generations. As a result, the trusts in regions that have removed this restriction can be valuable assets for those looking to plan their estates across several generations. Furthermore, many of the favored jurisdictions do not recognize foreign judgments. This means that asset protection trusts are not subject to foreign inheritance laws.
Foreign Judgments Are Not Recognized
A significant benefit to settling a trust offshore is that most offshore haven jurisdictions do not recognize foreign judgments. If a domestic trustee is faced with contempt of court to release assets following a civil judgment, they will do so or face dire consequences. An offshore trustee, however, is not bound by US court orders. To pursue a judgment against the settlor of an offshore trust, a creditor must usually have the case re-adjudicated. This is because the trustee is only bound by the law of the jurisdiction where the trust was established. Some jurisdictions, such as the Cook Islands, Belize, and Nevis, provide additional barriers to keep creditors from attacking their trusts. These barriers may include requirements that the plaintiff travel to the jurisdiction to file suit. The courts may also charge large fees to open cases in these jurisdictions.
Even if a case is filed, it is unlikely that a creditor will be able to touch the assets held within an offshore trust. In many jurisdictions, the only time a creditor can touch the assets is in a proven case of fraudulent conveyance. The burden of proof is on the creditor to show that assets were transferred with the willful intention of shorting that specific creditor. The creditor must also prove that transferring those assets made the settlor insolvent.
Access to Assets Under Legal Duress
If properly established, asset protection trusts allow settlors to access assets while under legal duress. While a settlor is under legal duress, the trustee retains control of the assets held within the LLC in the trust. The trustee is not allowed to comply with foreign court orders. They may, however, pay bills for the settlor or pay a trusted friend or relative for the settlor.
Trustees of domestic trusts are routinely deposed or compelled by subpoena. They are subject to the judgments of US courts. US laws often require the disclosure of sensitive financial documents during legal proceedings. In contrast, many offshore jurisdictions consider the settling of trusts to be a private matter. The Cook Islands, for example, does not even require trusts to register the names of their settlors. Only the name of the trust, the name of the trustees, and the date of the trust deed are required to be registered.
Asset protection trusts can be used to hold a wide variety of assets. They are frequently used to hold intellectual property, life insurance policies, and other types of assets. Both liquid and tangible assets may be held in asset protection trusts. It is also possible to hold real estate in an asset protection trust. However, it is important for US citizens to note that American real estate held in an offshore trust may still be affected by judgments levied in America. So, we record equity line of credit mortgages against those properties. An offshore lender buys them as needed and deposits the proceeds into an inaccessible account in the offshore trust. Liquid assets in the offshore trusts may prove tremendously beneficial for American settlors of in the event that the settlor experiences legal duress.
Assets may be transferred to the trust or the LLC held by the trust at the time the trust is settled. Assets may also be transferred to the trust or LLC at any time other. A settlor is best served when he or she transfers assets when they have or are immediately anticipating claims on those assets. This is best to avoid claims of fraudulent conveyance of assets. However, fraudulent conveyance, (now commonly called a voidable transaction) is merely a civil matter, not criminal. Thus, many, if not most, most clients successfully transfer assets after the fact.
You do not need to hold assets in the Cook Islands or Nevis. You can keep them in any financial institution in the world which provides a financial safe haven. Trustee involvement may be required depending on the type of assets you transfer into the trust. Trustee(s) may be required to sign transfer documents. Their signatures may also be required to open accounts.
As described above, asset protection trusts are often formed in conjunction with limited liability companies (LLCs). It is also possible to open trusts in tandem with a limited partnership (LP). In this situation, the assets are transferred to the partnership. The settlor of the trust receives 1% partnership interest for transferring their assets to the trust and acts as general partner. In turn, the settlor will transfer 99% partnership interest to the trust as a limited partner. Professionals suggested the LP approach in the past prior to widespread LLC legislation.
Offshore trusts are generally comprised of four different roles. The names of these roles may vary based on the jurisdiction where the trust is established.
The settlor of a trust is the person who first establishes the trust.
The trustee(s) hold the title to the assets which are held by the trust. Additionally, trustees are responsible for administering the trust. In certain jurisdictions, it is possible for trusts to own LLCs in their entirety. These LLCs may hold assets including bank accounts. In these jurisdictions, the most popular of which are the Cook Islands and Nevis, control of the LLC owned by the trust may be transferred to the trustee(s). When using this strategy for asset protection, it is beneficial to have only one trustee. However, many jurisdictions allow for multiple trustees.
Trust custodians are optional positions in most jurisdictions. Custodians provide additional security to trusts by providing checks and balances to the power of the trustee. Custodians have the ability to appoint trustees. They may also veto decisions made by trustees on the settlor’s behalf. The custodian is generally a person whom the settlor trusts, such as a family member.
A beneficiary of a trust is any person who receives benefit from the trust. Most often, beneficiaries of a trust include the settlor of the trust and/or their family members.
Most experts in the field call the asset protection trust the strongest means of securing wealth from creditors. Offshore asset protection trust beat their domestic competitors. This is because local judges do not hold jurisdiction over trustees who reside abroad. If you want to form an asset protection trust, fill out the inquiry form on this page or utilize the phone numbers on this page.