What to Know About Asset Protection Trusts

The goal of an asset protection trust is to protect your assets from creditors and lawsuits. A trustee (your choice of associates in your circle or yourself) will manage the assets for the benefit of the trust’s beneficiaries. The manager is under a special fiduciary duty and must account for all spending decisions. They must operate without conflicts.

As you might imagine, there are many rules, laws, and regulations that apply, depending on your jurisdiction, to the trust that you create. Asset protection trusts can be of several varieties. These include offshore trusts, domestic, and self-settled trust. Consulting with your legal and financial experts is an excellent way to understand these important and powerful legal instruments.

Who Needs Asset Protection?

 The short answer is anyone with significant assets who cannot afford to lose them as a result of legal action or creditor lawsuits. This is a broad range of individuals and entities, including high-net-worth persons, business owners, real estate investors, etc. The more subject to risk that you are, the more critical this protection is. For example, anyone operating in a highly regulated industry, working with dangerous substances, exposed to malpractice lawsuits, or maintaining many contracts should definitely have protection.

Asset protection is not just for the top 1%. Anyone with over a million dollars in assets and subject to risk should consult with their attorney. Because we are going through an unpredictable economic period, with interest rates rising and Covid in the backdrop, it pays to be protected.

The 3 Types of Asset Protection Trust

A trust is created by an instrument that allows a “trustee” to hold assets on behalf of a party (a “beneficiary.”) The assets are put into the trust by a “grantor.” Trusts can be set up in a myriad of ways. The main feature of a trust is that it dictates when and how assets are distributed to beneficiaries. You can be very precise with controlling when and to whom assets are conveyed. Because the assets are held by the trustee, depending on location, they are generally not probated.

The most common asset protection trust is the domestic self-settled trust. This classification of trust permits the grantor (the person creating the trust) to maintain some control over the assets placed in the trust, and also to be a possible beneficiary of the trust. In some cases, these trusts are less effective than spendthrift trusts, because the grantor retains greater ability to access the assets in the trust.

A spendthrift trust is a trust that is designed to protect assets from the grantor’s creditors. The grantor transfers assets to the trust, and a trustee is appointed to manage the assets for the benefit of the grantor or other beneficiaries. The grantor is typically not allowed to access the assets in the trust until a certain event or milestone occurs, such as reaching a certain age or achieving a specific financial goal. As the name implies, the main purpose of a spendthrift trust is to protect the beneficiary from his or her spending habits, ensuring that their assets are preserved for future use.

The next type of trust is the offshore trust. An offshore trust is a trust that is founded in a jurisdiction outside of the grantor’s home country. They are typically set up in countries with strong legal protections for assets. The country may have strong privacy laws, as well to minimize or prevent public disclosure. This type of trust can be beneficial for asset protection because the laws in certain offshore jurisdictions make it more difficult for creditors to reach the assets held in the trust. Some offshore jurisdictions also have favorable tax laws.

Limitations of Asset Protection Trusts

Although helpful, these trusts are not without their limits. For example, in some jurisdictions, the assets need to be placed in trust for a certain amount of time before they will be protected from a creditor’s claim. If not, they may be subject to laws preventing fraudulent transfers.

Choosing the Proper Trust For You

As you have likely concluded by now, picking the correct type of trust depends on your unique circumstances and your goals. For many people, defining goals is not an easy task, particularly the first time around. Many questions come up that have not been considered before. Drafting what you want to happen is adequate because when you meet with an attorney to craft the trust, the exact details may change. The attorney can aid by questioning you and providing legal advice to make the procedure relatively painless.

Domestic asset protection trusts will be less expensive in the short term than off-shore trusts. They will also, in general, be less expensive. Seeking an inexpensive off-shore option is not something we recommend, given the sensitivity to political and legal fluctuations that they entail. The advantage is that assets may be less subject to exposure, depending on the process and underlying claims against the estate.

Where Do I Start?

The first step is to create or revisit your goals and your estate plan and make sure you are comfortable with the outline of the distribution of your assets. It should adequately describe how you want to distribute your assets and to whom after your passing. At that point, you should meet with your lawyer and financial representative to effectuate that plan. Of course, these professionals can help you in goal setting as that is part of their experience and expertise. They have helped hundreds of individuals navigate potentially confusing waters.

In this volatile economic and political setting, it is recommended to do what you can to create certainty and reduce the risk of loss. Asset protection trusts are an essential component of your estate plan and may help to minimize taxes. Please do not hesitate to contact one of our experienced lawyers for legal advice. Call the trusted estate planning attorneys at Lowthorp Richards at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area  – Ventura, Santa Barbara, and San Luis Obispo.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036