Asset Protection Trusts: How Do They Work?

By matt Barnett | July 22, 2020

In general, a trust is a written agreement between three parties, the settlor (one who puts his/her assets in the trust), the trustee (who manages the assets), and the beneficiaries (who receive the benefits from the trust). Asset protection trusts differ from other types of trusts in that the settler and the beneficiary can be the same individual.

The main objective of an asset protection trust is to protect your assets from creditors and lawsuits. While funding this trust, you’re transferring your assets to the trust permanently. It’s irrevocable. Your trustee gains ownership and manages your assets. By moving your property to the trustee’s name, you’re keeping your assets safe from creditors and lawsuits.

How Does An Asset Protection Trust Work?

If you manage your personal finance well, you can have enough assets to pass on to your future generations. But having enough assets doesn’t ensure your future generations can reap the benefits of your hard work. Setting up an asset protection trust ensures that your assets are safe from creditors and lawsuits.

To fund an asset protection trust, you need to take two steps. First, you need to create a trust document. It comprises of basic things like choosing the trustee and beneficiaries. You may also need to specify how you want the trustee to manage your assets on behalf of the beneficiaries.

Once you create the document, you need to fund the trust. The funding depends on the type of assets you want to transfer to the trust. You may need to establish an LLC for funding the asset protection trust.

There are two types of asset protection trusts. One is domestic and the other one is offshore. The domestic asset protection trust is less expensive and more comfortable to create. Several states have their asset protection trust statutes. However, this type of asset protection is within the US legal system. So, your assets can be exposed to the risk of adverse court orders and federal bankruptcy laws.

On the flip side, the offshore asset protection trust is extremely secured. The laws of the foreign nation govern it. Even if your creditors win the case, they can’t go after your assets that easily. Companies like Mile High Estate Planning: https://www.milehighestateplanning.com/bridge-trusts have been creating asset protection trusts for many individuals as per their asset protection needs.

Why Is Offshore Asset Protection Trust Preferred?

As mentioned before, foreign laws govern offshore asset protection trusts. To go after the assets held offshore, your legal opponent will have to take the help of an international legal counsel. It’s an incredibly expensive and time-consuming legal hurdle. On top of that, the opponent must win the case to get ownership of the assets. Therefore, there are several challenges before one can go for assets held offshore.

What Happens During A Lawsuit?

During a lawsuit, the trustee can represent as the manager of the trust. Remember, the manager is not an owner. Even if your opponent asks you to get the funds from your trust, your trustee can trigger the duress clause. It won’t allow courts to hold you accountable and the manager won’t have to send the funds from the trust.

What About Taxes?

The trust needs to comply with the income tax laws on behalf of the beneficiaries. It is “Tax Neutral” for the settlor or grantor. So, the settlor only keeps some interest in income. It belongs to your own 1040 form, as you’re not maintaining the assets in your name.

However, an asset protection trust is irrevocable. It means that you can’t change the name of the beneficiaries. Even the beneficiaries don’t have the right to change the names or opt out. If your creditors come after your property, your trustee will step in and protects your assets.

Is It Possible For The Trustee To Flee With The Assets?

There’s very little chance that the trustee will be able to flee with the assets. A trustee needs to undergo extensive background checks to obtain the license to hold assets. The checks ensure that the trustee can be relied upon. Secondly, your assets are insured. You can be free of worries about the security of your hard-earned money.

Estate Planning

To get your assets distributed equally among your loved ones, you need a reliable estate planner. It requires proper planning to sail smoothly through personal and legal processes. Having a properly structured trust helps you to avoid the expensive and lengthy probate process. Furthermore, you can also minimize estate tax. 

Final Thoughts

Asset protection trust is an excellent solution for people who’re concerned about the security of their assets. If you’re at a high risk of facing a lawsuit against your assets, you should strongly consider creating and funding an asset protection trust.

With an asset protection trust securing your assets, you’re preserving your wealth for future generations. Furthermore, you can avoid the costly and legally risky probate process.