Asset Protection Planning is a broad term used to describe the many methods by which an individual or family can preserve their wealth from claims by creditors. The creation of an asset protection trust is just one of many ways to protect your assets from creditors. It can also be one of the more expensive options which most people do not really need.
There are primarily two types of asset protection trusts.
Self-Settled Asset Protection Trusts
The first type of trust is one in which a person creates the trust for the benefit of himself or herself. This is known as a self-settled asset protection trust. At common law, it was impermissible to put your own money in a trust to protect it from creditors. Accordingly, up until 1997, if you wanted to create a self-settled asset protection trust, you would need to set it up in another country. These were typically referred to as offshore asset protection trusts and were quite popular with ultra high net worth individuals. Today, there are seventeen states that allow self-settled asset protection trusts. The most common locations to create a domestic asset protection trust are in South Dakota, Delaware and Nevada.
In order to create a Self-Settled Asset Protection Trust, one must create a legal trust agreement. The person creating the trust is known as the Grantor. The Grantor must hire a neutral, independent party to act as trustee. Frequently it is a corporate trustee located in the jurisdiction where the trust is created. The Grantor reserves the right to be a beneficiary and receive money back. However, the Grantor gives up a the right to demand money from the Trust. The Grantor is only a discretionary beneficiary. This type of trust provides creditor protection because the Grantor is a beneficiary at the whim of a neutral trustee.
Third Party Asset Protection Trusts
The second (and more common) type of trust is one in which a person creates a trust for the benefit of other people, usually the person’s heirs. This is known as a third party asset protection trust. Third party asset protection trusts are frequently created in conjunction with a client’s overall trust plan. Specifically, it is quite common to form a life insurance trust as an asset protection trust. There is usually no need to send third party asset protection trusts offshore as they are highly protected from creditors. However, a tax advantage may be had by creating them in another country.
The More Restrictive The Trust, The More Creditor Protection
If you wish to create a trust that has the most protection, you should create one in which money can only go to the beneficiaries at the discretion of the trustee. Additionally, the trustee should be an independent party. Beneficiaries have no (or limited) rights to take the trust money for themselves and they cannot assign their interest in the trust. Be careful though as you may actually wish for responsible members of your family to have easier access to money.
Fraudulent Transfers are NOT Legitimate Asset Protection Planning
We WILL NOT help you to transfer assets subject to a claim from an existing creditor, so please do not ask.