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    Why You Need an Asset Protection Trust

    Offshore Legal Service Provider EST. 1996

How To Set Up an Asset Protection Trust and How Does It Work?

Table of Contents:

A 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.

What is a Trust?

A 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. Trust 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 protection.

What is an Asset Protection Trust?

Asset Protection Trusts are a special type of trust which have the following two important characteristics:

  • They are “self-settled”
    • This means that the grantor (the one who transfers assets into the trust) and the beneficiary (the one who has the right to the benefits/proceeds of those assets) can be the same person. This is not the case with ordinary trusts.
  • They are “spendthrift” trusts
    • This fundamentally means that all the assets in the trust are owned and controlled by the trust, not by the grantor. An independent trustee is appointed to manage the assets in the trust. This has the major advantage of separating all legal ownership from the grantor, meaning the assets are well protected from the grantor’s creditors.

The above two characteristics of APTs are what make them so effective for use as asset protection vehicles. The excellent feature of APTs 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.

Asset Protection Trust Structure

A Trust is based upon a written agreement between three parties:

  1. The Settlor/Grantor: The one who endows the trust with funds and/or assets.
    • The Settlor can effectively be thought of as the “owner” of the trust. 
  2. The Trustee: The one who is appointed to manage and protect the trust assets.
    • The Trustee is generally an outside party who does not have direct personal or vested interests in the Trust assets.
  3. The Beneficiary/ies: Is the one who receives the benefits and appropriations of the Trust. 

Top Uses and Benefits of a Trust

1. Personal Asset Protection

A Trust provide one of the most powerful forms of asset protection 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. 

2. Tax Neutrality

An APT 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 protection 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. 

3. Estate Planning

APTs 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.

How Does A Trust Work To Protect Assets?

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 Settlor endows/transfers their personal funds and assets to the trust – this separates ownership of the assets and protects them from creditors and lawsuits
  • A Limited Liability Company is incorporated in a favorable foreign jurisdiction, which is then entirely owned by the trust. The trust’s assets and bank accounts can be held in the LLC’s name, which provides an additional layer of protection. 
  • The Trustee is appointed as manager of the LLC. The Trustee is not in an ownership position and therefore is only fulfilling their legal obligations towards the LLC and the Trust when they protect the funds from seizure.
  • The Beneficiary (who is usually also the Settlor) receives the benefits of the trust assets and can access them freely under ordinary circumstances.  

The important thing to understand here is that under ordinary circumstances, the Settlor/Beneficiary can manage and control the APT’s 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 APT 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 APTs. 

Choosing the Right Type of Asset Protection Trust

Domestic Trust vs. Offshore Trust

When forming an APT, the first and most important decision is “where to establish it?”. This has a major impact because each jurisdiction will have its own laws which offer varying degrees of asset protection.

The two main types of APTs are Domestic Asset Protection Trusts (DAPTs) and Offshore Asset Protection Trusts 

In the US, Domestic APTs are available in 17 different states. They are also generally more affordable and easier to form. However, they do not offer the same degree of protection as Offshore APTs. 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 US, an increasing number of States have enacted asset protection trust laws which provide a good degree of protection. The benefit is that DAPTs 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. 

Offshore APTs, 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 an APT. The trust’s assets and beneficiaries will be protected by layers of legal safeguards. Cook Islands APTs have consistently proved to be impervious to all kinds of lawsuits and court judgments.

Revocable Trust vs. Irrevocable Trust

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 protection, as the beneficiary cannot be changed. The disadvantage is that it lacks flexibility. 

In a jurisdiction like the Cook Islands, APTs can be seen to be “semi-revocable”. Under ordinary circumstances, the Settlor can request any changes which do not threaten the trust’s asset protection 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.  

How to Setup an Asset Protection Trust

  1. Trust Agreement Formation
    • Legal document that creates and defines the separate parties that are part of the trust as well as how the trust is managed
  2. Transfer of Funds into the Trust
    • Asset are transferred to the trust 
  3. Trust Management
    • Duties and obligations of the trust are laid out 

Trust Formation Document Requirements

  1. Notarized Passport copy 
  2. Proof of address 
  3. Banking reference letter

Depending upon the jurisdiction other documents that may be required are

  1. Affidavit of Solvency
  2. Deed of Indemnity
  3. Money Laundering Act Fulfillment Document

Asset Protection Planning

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 plan 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 asset protection 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 asset protection could be setting up a limited liability company (LLC) or an asset protection trust (APT). Choosing the right strategy and tools is important to maximise the benefits of asset protection that will suit your needs and situation.

The Importance of Asset Protection For Estates

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 protection. 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.

What is an Asset Protection Attorney

An asset protection attorney is a lawyer who specialises in assisting their clients to establish a legal means to protect their assets against lawsuits, creditor claims, divorces, and other financial threats. The attorney would typically have experience with the use of a variety of asset protection tools depending on the circumstances.  

The attorney will not necessarily refer to themselves specifically as an “asset protection” attorney. Though there are various titles which they may have, such as “trust attorney” or “estate lawyer” or "family planner". Asset protection is a complex and sensitive issue which requires a degree of discretion.

Whatever your asset protection attorney calls themselves, it is important that they should have sound knowledge about the laws and tools available which can best help you protect your assets, whether your looking for a domestic solution or and foreign offshore solution.

Why do you need an Attorney

Asset protection is variable and filled with subtle complexities that make it difficult for a person to solve individually. Most asset protection structures require very careful and well thought out structuring in order to maximize the effectiveness of the entity.

Often many of the wording of trust and will documentation is convoluted and filled with legal phrases that make it difficult to clearly understand. Without properly knowing your obligation as a protector or beneficiary you will not know your responsibilities. Many of the regulations and laws are also easily misinterpreted especially when using more complex multi-jurisdictional arrangements with multiple entities and parties involved.

Worse yet, you could slip up and even make the mistake of not staying within the bounds of the law, resulting in the very lawsuits you are trying to avoid. It is therefore vital to enlist the help of a qualified asset protection attorney who can ensure that everything is done properly and efficiently.

An asset protection attorney is there to:

  • Help protect you against fraudulent transfer claims
  • Help you to find an asset protection plan that will maximize your benefits, whilst staying within the bounds of the law
  • Ensure that your protection plan is properly implemented and carried out
  • Give guidance and troubleshoot in the case of any issues

How to Choose the Right Estate Attorney

It is important to find the right asset protection attorney to help you find the most appropriate solutions for your situation. A good asset protection attorney should be someone who:

  • Has extensive experience in dealing with asset protection in your jurisdiction
  • Has a good track record, is trustworthy and has years of experience
  • Is accessible and available – having an emergency contact number can be a good indicator of this,
  • Is willing to establish a long-lasting relationship in which they continue to guide and inform you every step of the way.

The best choice is not necessarily the cheapest attorney available. Take your time to do your research and meet with a few attorneys before deciding. You should leave your first meeting feeling like you have a clear and informed perspective about what the next steps are for you to implement your asset protection plan.

How to Prepare

To save yourself and your attorney valuable time and resources, it is good to be well-prepared before your first meeting. You should have considered how much time and money you are willing to put into implementing your asset protection plan as well as a general idea about which tools and/or strategies you would be interested in pursuing.

Documentation will be needed in the beginning to properly map out our asset strategy that includes things like bank statements, trust certificates, housing deeds, receipts of physical assets, proof of digital assets etc. 

Every situation is different the most optimal asset protection plan for you could maybe different than the next person. Your asset protection attorney will do a full analysis of your financial situation, and help you determine which assets can be transferred, protected and whether needs to be any changes in your documentation. 

The more well-prepared you are, the easier it will be for the attorney to understand your situation and provide you with the best possible counsel.

Do not Wait Until Tomorrow

The best time to implement a comprehensive asset protection plan is now, not after a lawsuit or other threat arises. There are laws which make it difficult to implement protective measures after a case has been opened, and such measures can easily be deemed to be “fraudulent transfers”.

While there can be some measures that can be taken after a lawsuit has begun, it is much easier to protect your assets before things turn ugly. That is why you should not wait until tomorrow. Start taking the necessary steps today, and seek the help of a qualified asset protection attorney to help you on the way.

Asset Protection Trusts, though seemingly complex, offer arguably the highest level of asset protection of any of the financial vehicles available. It is important to choose the right APT type and structure to maximise the benefits available.

Of all the different ways to form an APT; irrevocable offshore APTs that own 100% of an offshore LLC have shown to provide the best level of asset protection. Establishing such an APT in a favorable jurisdiction like the Cook Islands is indeed an integral part of a successful offshore asset protection plan. 

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