ASSET PROTECTION TRUSTS
We live in an extremely litigious society. As a result, it is critically important that wealthy individuals, and even companies, protect themselves (and/or beneficiaries) and their assets from potential litigants, creditors, divorcing spouses and predators.
Asset protection planning has become one of the hottest areas of law and provides an ideal complement to estate planning.
The asset protection trust is one method that individuals may use to shield their assets from future potential creditors and predators. This advance planning technique does not involve hiding assets or creating secret or illicit agreements. Instead, it involves the use of domestic ("DAPTs") or offshore ("OAPTs") self-settled or third party trusts.
Generally, an asset protection trust is a type of irrevocable trust in which the trust funds are maintained and invested by the Trustee and distributed on a discretionary basis. The key to effective and legal asset protection planning is advance planning, undertaken prior to a creditor emerging. If an individual has already been sued or has otherwise incurred an obligation, it is too late to employ asset protection planning due to fraudulent transfer laws.
When done in advance and properly drafted, structured and administered, assets held directly in an offshore asset protection trust will be unreachable by any court in the United States. In addition, these offshore trusts are generally tax neutral, such that there are no income, estate or gift tax implications (unless otherwise drafted to accomplish estate planning objectives).
Asset protection trusts may be drafted either as self-settled trusts, such that the settlor is also a beneficiary of the trust, or as third party asset protection trusts. A third party asset protection trust is an irrevocable trust created for third party beneficiaries, and allows such beneficiaries to serve as their own trustees, while protecting the trust assets from creditors of the beneficiaries. A combination of the self-settled and third party asset protection trusts is called the hybrid domestic asset protection trust (“hybrid DAPT”). In the case of the Hybrid DAPT, the settlor is not an initial discretionary beneficiary of the trust, but can be added later. This type of DAPT may provide increased protection over the traditional DAPT.
Prior to 1997, self-settled asset protection trusts were not recognized in the United States and, instead, were required to be established offshore (outside the United States), often in exotic places such as the Cook Islands or Cayman Islands. Currently, at least 16 states have enacted legislation recognizing self-settled asset protection trusts, including Alaska, South Dakota, Tennessee, Delaware and Nevada.
Similar to the offshore self-settled asset protection trusts, a properly formed and operated self-settled DAPT is generally an irrevocable trust to which an individual transfers assets, while simultaneously (i) retaining a beneficial interest in those assets and (ii) denying creditors access to them. While the laws differ from state to state, they generally require that the trust have at least one trustee who is a state resident or corporation authorized to do business in the state, and that at least some trust assets are located in that state. The laws of each state differ with respect to a number of variables, including the statutes of limitation regarding preexisting and future creditors (typically, between 1.5 and 6 years), as well as which creditors (called "exception creditors") can still access the trust assets (such as an ex-spouse who is owed alimony, a child entitled to receive child support or preexisting tort creditors). Depending on a client's needs and priorities, certain state situses are more favorable than others.
The DAPT law continues to develop, but it is certainly regarded as the new frontier. Both the domestic and offshore self-settled asset protection trusts are formidable strategies that help clients legally shield their assets from third party liability.