What is an Asset Protection Trust?

An asset protection trust is any trust utilized to insulate assets from creditor attack. An asset protection trust is normally established in an offshore jurisdiction, although the assets will more often than not remain in the United States under the indirect control of the person establishing the trust (the “settlor”). These trusts are normally structured so that they are irrevocable for a term of years and so that the settlor is not a current beneficiary.

Even though they are “foreign trusts” we normally structure them so that they are treated as domestic grantor trusts for tax purposes. With a properly drafted and timely settled trust, the creditors of the settlor cannot reach the assets of the trust. An asset protection trust is also normally structured so that the undistributed assets of the trust are returned to the settlor upon the termination of the trust provided there is no current risk of creditor attack, thus permitting the settlor to regain complete control over the formerly protected assets.

An asset protection trust is:

  • An effective tool to settle or discourage litigation.
  • A means to keep the ownership of assets absolutely confidential.
  • An alternative to traditional pre-nuptial agreements.
  • A hedge against potential exchange controls.
  • A device to protect otherwise un-protectable pension assets.
  • A means to give an insolvent debtor a fresh start.
  • The preferred technique to avoid forced heirship laws (common in Europe).
  • A way to internationalize investment and hedge against governmental instability.

How Asset Protection Works

There are literally hundreds of different techniques to protect different categories of assets. Some are appropriate for everybody and are based on common sense (e.g. not flashing your money around or never entering into a general partnership) and others are appropriate for wealthy or soon-to-be-wealthy people (e.g. foreign asset protection trusts). Asset protection techniques also vary depending on both the type and location of property.

All asset protection techniques have one thing in common: they each make it more difficult for a creditor to either find or take assets. By implementing a properly crafted asset protection plan (which may include an asset protection trust as well as a family limited partnership) an individual can legitimately put a significant portion of his assets out of the reach of judgement creditors and still retain substantial control over these protected assets. A properly implemented asset protection strategy reduces the size of the target the plaintiff’s attorney is shooting for. Once the plaintiff’s attorney is convinced that any judgment will be difficult or impossible to collect his motivation fades because he is unlikely to be paid for his work. The effect of asset protection planning is the destruction of the economic incentive to litigate.

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