Asset Protection Trusts

An asset protection trust is an awesome tool. If done correctly, your asset protection trust can protect your assets from future personal liabilities, professional liabilities, business liabilities, government liabilities, lawsuits, bankruptcy, marriages, divorces, and any other potential liabilities that may come your way. If you want to keep your assets or income confidential, you can design an asset protection trust that removes assets from your personal financial statement, personal income tax returns, and all other public documents. Even if you are asked under oath to disclose all your assets, you cannot include assets that are owned by the trust if you have no legal ownership in those assets.

If asset protection planning is done in an unethical or illegal manner, it will not work and it is likely to make matters worse. More than a few individuals have gone to jail for perjury, fraud or contempt of court because they used an asset protection trust in an improper manner. I am an asset protection attorney, a tax attorney, and a law school professor. I do asset protection planning that is ethical, professional, cost efficient, and eminently effective. If you will email me a summary of your situation, I will send you a free proposal for an asset protection plan that is best for you.

You should consider these ten issues in designing your asset protection trust:

1. Avoiding Fraudulent Transfers

If it can be proven that you made a transfer with intent to hinder, delay or defraud a creditor, the transfer to the trust may be defeated as a fraudulent transfer. An experienced asset protection attorney can help you design a plan that is ethically appropriate and legally unassailable.

2. Selecting Grantors, Trustees and Beneficiaries

The “grantor” is the creator of the trust, the “trustees” are in control of the trust, and the “beneficiaries” are the people who are eligible to receive benefits from the trust. Most asset protection providers will tell you to name yourself as one of the beneficiaries of the trust - don't do it!  If you name yourself as one of the beneficiaries of the trust, this will make it a self-settled trust and this opens it up to attack in many ways.  A much better solution is to use a "special power of appointment" to create flexibility and to provide a way for you to get the assets back.  To learn more about the protection and flexibility you can derive from a special power of appointment, see http://www.assetprotectionatty.com/10-reasons-i-can-give-you-better-asset-protection

3. Selecting a Trust Protector

A trust protector is a person with special powers to ensure that the trust accomplishes the purposes of the grantor in creating the trust. The trust protector may have power to terminate the trust, to change the trustees, to change the jurisdiction of the trust, to veto proposed distributions, to approve proposed transactions, and to amend the trust to adapt to changes in the law.

4. Distributions During the Grantor’s Lifetime

During your lifetime, it is usually best to give the trustee broad discretion to make or withhold distributions to any member of a class of people related to you. This provides maximum flexibility during your lifetime. As the grantor, you can include anyone you want in the class of potential beneficiaries. As long as distributions are left to the discretion of the trustee and no beneficiary has a right to demand a distribution, the assets are protected from any claims from the beneficiaries or their creditors.

5. Distributions After the Grantor’s Death

Typically, a grantor will provide specific instructions for the distribution of assets after his or her death. You can design your trust to continue for multiple generations or to terminate at any time. You can create any guidelines, suggestions, restrictions, or limitations for the trustee to follow in administering your trust or providing benefits to your beneficiaries.

6. Gift and Estate Tax Treatment

There are two basic ways to design a trust for gift and estate tax treatment. You can design a trust so that gift taxes do not apply and the trust assets are included in your taxable estate (an “incomplete gift trust”), or you can design a trust that is subject to the gift tax rules and not included in your taxable estate (a “completed gift trust”). Most asset protection trusts are designed as an incomplete gift trust, allowing you to protect assets of any value immediately. If you want to remove the assets from your taxable estate, you will opt for a completed gift trust and you will carefully structure the transfers to avoid the gift tax.

7. Income Tax Treatment

You have three options for the income tax treatment of your asset protection trust. You can make the trust income taxable to the grantor, the beneficiaries, or the trust itself. You will want an experienced tax attorney to evaluate, design, and explain the tax treatment of your trust. He should also educate your CPA to be sure that the taxes are reported correctly.

8. Governing Law

All 50 states provide some degree of asset protection for an irrevocable trust. The best asset protection laws for trusts within the United States are found in Nevada, Alaska and Delaware. If you choose to create an offshore asset protection trust, the Cook Islands is the best jurisdiction.

9. Control and Protection of Assets

I would never give my money to an offshore trustee or any other person or entity outside of my control. I would create a Delaware LLC or a Nevis LLC that is owned by the asset protection trust. The managers and members of these LLCs are not public information. I would appoint myself as the manager of the LLC and the only person on earth with knowledge of the identity, value or location of my assets. The trustee of the asset protection trust would know about the LLC, but they would have no knowledge, access or control over my assets and they couldn’t take my money even if they tried. Because the manager of the LLC is not public information, no one would know that I have control over the assets of the LLC. As manager of the LLC, I could invest the assets in anything I wanted without limitation.

10. Flexibility and Termination

I would not put my assets in a trust that I could not change or terminate. How is it possible to create an irrevocable trust that is legally beyond my control, but is within my control for all practical purposes? This can be done with the use of powers of appointment, trust protectors, management entities, and other proprietary techniques. As a warning, I would say that not all asset protection trusts are created equal in this regard.

Consider the following examples:

The Cook Islands Trust

If you want the best asset protection trust that money can buy, you should create a Cook Islands Trust and a Nevis LLC. You would be the grantor and primary beneficiary of the trust. You could include your spouse, children, parents, siblings and any other friends or family members as potential beneficiaries during your lifetime. You could name your attorney or trusted friend as the trust protector to ensure that the trust will always accomplish your intended purposes. After your death, the trust could divide into separate shares for your spouse and children, with each being the primary beneficiary of their own share. They can continue this separate share as long as they wish, with the same freedom, flexibility, and control that you had during your lifetime. The trust would be designed as an incomplete gift trust so you can transfer any asset to the trust at any time without limitation. The trust would pay its own income taxes so its income does not appear on your personal income tax return. You would manage the assets within the Nevis LLC and invest them as you wish.

The Nevada Trust

If you are concerned about going offshore, you could create a similar plan to that described above using a Nevada Trust and a Delaware LLC. As long as you create the plan at a time when it is not considered a fraudulent transfer, either of these plans would provide excellent asset protection and confidentiality.

The Dynasty Trust

If you own a business or other appreciating asset and you want to avoid the estate tax on it at the time of your death, you should create a dynasty trust. I would recommend that you use a Nevada Trust and a Delaware LLC as described above, except that it would be designed as a completed gift trust, and the income would be taxable to you. You could sell your business to this type of trust without recognizing capital gains because the IRS will disregard a sale from a grantor to a grantor trust (See Revenue Ruling 85-13, 1985-1 CB 184). Each time you pay income taxes on behalf of the trust, it would be the equivalent of a tax-free gift to the trust. (See Revenue Ruling 2004-64, 2004-2 CB 7). This allows you to deplete your taxable estate and allow the trust to grow free of income taxes and eventually pass on to future generations without estate taxes or generation-skipping taxes. In addition, the trust can make unlimited distributions to your beneficiaries without any tax because you will have already paid the tax on the earnings of the trust. With enough time, this technique can be used to completely eliminate estate taxes on any size of estate. Your heirs can receive an inheritance that is permanently protected from lawsuits, bankruptcy, government agencies, creditors of all kinds, ex-spouses, and estate and generation-skipping taxes, and this could be continued for multiple generations.

The Beneficiary-Controlled Trust

The only trust with greater benefits than your own dynasty trust as described above, is a dynasty trust created by your parents for your benefit (often called a “Beneficiary-Controlled Trust” or a “678 Trust”). If you can get your parents to create the trust for you, you can sell your own assets to the trust and enjoy all the benefits described above without any risk that a creditor or the IRS will argue that the grantor made a fraudulent transfer or retained powers that cause the trust to be included in your estate. In addition, if your parents create the trust for you, you can actually be one of the trustees in control of your own trust.

I am an asset protection attorney, a tax attorney, and a law school professor. I do asset protection planning that is ethical, professional, efficient, thoughtful, and eminently effective. I will provide ongoing support for any plan that I create. If you are interested in asset protection planning, call me or send me an email with a summary of your situation and I will send you a free proposal designed just for you. l This e-mail address is being protected from spambots. You need JavaScript enabled to view it