An Asset Protection Trust is the strongest corporate structure that can be created to protect your assets from creditors and lawsuits. A trust can be used effectively as an instrument in a number of ways whether it's for wealth protection, estate planning, and asset protection. A trust is your best form of security and deterrence from any parties seeking to go after your assets.
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An asset protection trust is a separate legal vehicle, which can own property, bank accounts, and other asset classes.
It offers limited liability protection to the settlor and beneficiaries because assets which are transferred to the trust are thereafter separate from the Settlor. As such, they cannot be claimed if the Settlor is sued. A trust's assets which are designated for distribution to the beneficiary are also well-protected by legal provisions in the trust deed.
The distinguishing feature of an Asset Protection Trust compared to an ordinary Trust is that it is “self-settled”. This means that the Settlor and the Beneficiary can be the same person (i.e. you).
The Settlor/Beneficiary also has a greater degree of control over the functioning of the Trust and how its assets are used. In ordinary cases, the Settlor/Beneficiary has free access to the funds in the trust account, whilst still being legally separate and protected. This makes it a perfect vehicle for personal asset security.
Asset Protection Trusts or APTs are a special type of trust which have the following two important characteristics:
The above two characteristics of asset protection trusts are what make them so effective for use as wealth protection vehicles. The excellent feature of asset protection trusts is that that, under ordinary circumstances, you do actually have relative control over the assets in the funds (through the trustee whom you have appointed).
However, in the case that there is a court order which requires you to hand over your funds to a creditor, the trustee is legally obliged to step in and protect the trust’s assets. This is because the Trustee’s primary duty is to the trust, and so can refuse to cooperate with the grantor if they are deemed to be acting under duress.
A Trust is based upon a written agreement between three parties:
A Trust provides one of the most powerful forms of asset security from creditors and lawsuits against one’s estate. Due to the legal structure of Asset Protect Trusts, it is difficult for external parties to win claims against the assets. In addition, it can help to avoid legal cases altogether and provide good leverage for settlement agreements.
An asset protection trust is not recognized as a separate taxable entity. It is a “grantor trust”, which means that the income is reported directly to the beneficiaries for tax return purposes. This means that it is effectively the same as holding the funds in one’s own name for tax purposes, whilst providing the type of asset security that comes with holding one’s assets in a separate legal entity.
The benefit is that it is completely tax neutral and will not incur additional taxes above one’s own tax obligations. The Trust can also pass on its real estate and mortgage interest tax deductions to beneficiaries’ personal tax returns.
Asset protection trusts work well as Estate Planning tools. Estate planning provisions can be a part of the trust structure, and the trustee is legally obliged to protect the estate’s assets and ensure that it is passed on to the relevant heirs.
Family members and other inheritors can be made discretionary beneficiaries of the trust for greater privacy and protection. Well-structured trusts can also help to minimize estate taxes.
Trusts involve complex and cleverly designed structures to offer the best protection for one’s assets. The recommended way to structure an trusts is, in a simplified sense, as follows:
The important thing to understand here is that under ordinary circumstances, the Settlor/Beneficiary can manage and control the asset protection trusts funds and assets. However, in the case that there is a court order requiring the Settlor to hand over their funds to a creditor, the Trustee is legally obliged to protect the trust’s assets and can refuse to hand over the funds, on the grounds that the Settlor is acting under duress.
If an asset protection trust is properly structured in this manner, it can provide the best level of asset security, while giving one complete freedom and control over the assets in the fund. Case law has shown that it is exceedingly difficult and rare for creditor claims to be enforced against properly structured asset protection trusts.
When forming an asset protection trust, the first and most important decision is “where to establish it?”. This has a major impact because each jurisdiction will have its own laws that offer varying degrees of security.
The two main types of trusts are Domestic Asset Protection Trusts (DAPTs) and Offshore Asset Protection Trusts (OAPT).
In the United States, domestic asset protection trusts are available in 17 different states. They are also generally more affordable and easier to form. However, domestic trusts do not offer the same degree of protection as offshore asset protection trusts. This is primarily because the trust assets are still held within one’s own local jurisdiction, and so are therefore more vulnerable to local court rulings.
In the United States, an increasing number of states have enacted asset protection trust laws which provide a good degree of protection. The benefit is that domestic protection trusts can be formed quickly and easily.
They are generally more affordable than their offshore counterparts. The downside is that one’s assets are still held within their own legal jurisdiction, which makes them less resistant to legal claims. They are also quite new and untested in providing protection in a range of circumstances.
Foreign asset protection trusts, on the other hand, offer the strongest level of asset protection available. They offer the important additional layer of protection that comes with keeping one’s assets in a foreign trust jurisdiction.
In particular, the Cook Islands is known to be the best jurisdiction to establish a foreign asset protection trust. The trust’s assets and beneficiaries will be protected by layers of legal safeguards. Cook Islands foreign protection trusts have consistently proved to be impervious to all kinds of lawsuits and court judgments.
In addition to the above, there also exists both “revocable” and “irrevocable” trusts. A revocable trust is one where the trust provisions and beneficiaries can be altered. The advantage is flexibility. However, they are less secure, in that if a creditor wins a case against the trust’s funds, they could have the right to be made the new beneficiary of the trust’s assets.
An irrevocable trust cannot be changed by anyone once it has been established. This includes the Settlor, the Trustee, the Beneficiaries, or any other outside party. This obviously provides a much greater level of asset security, as the beneficiary cannot be changed. The disadvantage is that it lacks flexibility.
In a jurisdiction like the Cook Islands, asset protection trusts can be seen to be “semi-revocable”. Under ordinary circumstances, the Settlor can request any changes which do not threaten the trust’s provisions. In a case where the Settlor is acting under duress and makes a request which threatens the trust’s assets, the Trustee is obliged to step in and protect the trust and its beneficiaries.
A Trust of this kind is therefore the perfect balance between flexibility and asset security.
Depending upon the jurisdiction other documents that may be required are
Initiating an effective estate and asset protection plan is an important step towards securing your finances. Without managing your assets in the trust they are vulnerable to claims, legal suits, creditors, economic influences and account seizures.
A well-structured asset protection strategy is difficult to form without the right expertise and guidance. This is where the help of asset protection attorneys is invaluable. We will be exploring what exactly asset protection planning is, why its so important, and how an attorney can help mitigate risk while protecting your assets.
Asset protection and estate planning is about creating effective strategies for safeguarding your wealth and assets from claims to your wealth whether that is spouse, creditors, lawsuits etc..
There are several different types of strategies. The most basic forms include home and/or auto insurance policies and retirement plans. Whereas more advanced types of wealth protection could be setting up a limited liability company (LLC) or a foreign asset protection trust. Choosing the right strategy and tools is important to maximise the benefits of asset protection that will suit your needs and situation.
Estate and asset protection is important for anyone with digital or physical assets that are exposed to unnecessary levels of risk, are not diversified or and held by corporate entities that do not provide asset security. The reality is that anyone can get find themselves in legal trouble, not only the wealthy, for any number of reasons such as car accidents, malpractice, dissatisfied clients, overdue debt, etc.
Being on the losing end of an unexpected court case could easily leave you with next-to-nothing if your assets are not well-protected. As such, if you have landed on this page then chances are that a well-structured asset protection plan is probably something that may be for you.
Why You Need A Plan B
Threats to Your Assets
Global Diversification Planning