Frequently Asked Questions

A trust is a fiduciary relationship that is created with respect to property or assets. It is a basic concept where one or more persons manage property or assets for the benefit of others. The person that creates the trust is known as the "Settlor" or "Grantor". The person who manages the Trust is known as the Trustee. The persons for whom the Trust is created are known as the Beneficiaries. An Asset Protection Trust is aptly named because a Settlor who transfers assets into a trust can by the design and location of the trust achieve a higher level of protection than other devices may offer.

An Asset Protection Trust is a legal device that is designed to provide a substantial barrier to an attack on assets from potential creditors, provides additional protection during any civil (business related, contractual or for money damages) law suit. It is frequently designed with enough flexibility so the beneficiaries may use trust assets while fighting any litigation proceeding. Properly constructed, it frequently allows the Settlor to put the assets "beyond the reach" of creditors and US judgments.

There are many different types of trusts for estate planning purposes. For this asset protection information, we are concerned with only one attribute, specifically the legal (and tax) geographic classification of the trust. For our purposes, trusts are classified as either Foreign or Domestic. Foreign Asset Protection Trusts are frequently preferred for asset protection purposes, because they provide a higher level of protective measures than domestic trusts by the nature of the statutes that govern them. Because the foreign asset protection trust is an offshore entity ("person"), it is generally not answerable for judgments handed down by US courts. For a US creditor to collect a judgment against a foreign asset protection trust, it would generally have to bring a new action in the foreign jurisdiction. While there are lots of client specific issues that determine how immune the trust assets may be from creditor attack, generally the barriers are formidable for all but the most determined and well financed creditors.

Domestic asset protection trusts are trusts formed under the laws of US jurisdictions, and have such an identity for "tax purposes". Although they are designed to hinder creditor attack, they may still be susceptible to US judgments. The most favorable legislation for domestic asset protection trusts exists in Alaska and Delaware. At this point we do not believe there is sufficient legal authority to convince us that they will withstand creditor attack in the long term. Although certain states have enacted complimentary legislation, on the surface it seems to fly in the face of the US federal constitutional provisions that guarantee "Full Faith and Credit" in the enforcement of a judgment won in one jurisdiction and sought in another. Whether or not the trust is titled a "self-settled trust", the state legislation does not seem to trump the federal constitution on the issue of making ones assets immune from creditor attack. Perhaps the power of these "self-settled" state trusts will become more evident in the future, but for the time being, we would not recommend a self-settled trust in the US. Self Settled trusts are common in foreign jurisdictions.

Foreign or offshore asset protection trusts are carefully designed trusts formed under the laws of an offshore jurisdiction to take advantage of specific provisions of the local statutes. Typically these provisions offer the trust, Settlor and Trustee a significantly higher level of flexibility, control, or privacy than a comparable domestic entity. The Cook Islands, Belize, and Nevis are very favorable jurisdictions for foreign trust legislation.

Possibly, and depending on your profession and many other factors, you may be vulnerable. No one is judgment proof, or immune from lawsuits and creditor attack, but professionals especially doctors, accountants, financial consultants, owners of closely held businesses, corporate executives and others with highly visible careers are most susceptible to creditor lawsuits, including frivolous litigation.

The Trust protects your assets because the funds placed in the Trust account are unavailable to persons who sue and may win a judgment against you. They may also be unavailable to a court in the US to hold (freeze or encumber) while a lawsuit is pending but before there is any judgment rendered in the case.

For example, say you have $500,000 in a local bank. Assume you are sued and are ordered to pay a judgment of $250,000. Since you have control over the $500,000 and the funds are available, you would have to pay the $250,000 judgment. Your money is not protected. Now, instead of keeping the funds in the local bank, you gift the $500,000 into a Trust account. The transferred funds may be invested in either US or offshore investments probably similar to the type you currently hold. These may be in US banks, or brokerage accounts, or may be in offshore accounts with major banks or brokerage firms.

Either way, this money is much safer from a judgment, because you no longer own the $500,000, the Trust owns it. Essentially, you are placing your money into a foreign trust that is out of reach of potential creditors. By giving up the ownership of the assets, you are placing them beyond reach of a US court, who could order you to surrender them. If you do not own them, or do not have signature authority over the accounts where the assets are deposited, it is impossible for you to comply with any US court order to surrender them. This is a perfectly legal position to take. (There is more to the concept than this quick summary, but the principle is clear.)

Typically, the Settlor appoints a Trustee who manages and administers the Trust assets. The Settlor (in a Letter of Wishes) and in the trust document itself, outlines exactly how the trust operates. When naming a Trustee, the Settlor wants to make sure that the Trustee will act in accordance with the Trust objectives and adhere to the outlined provisions. Typically a professional Trustee is used who is bonded or part of a larger organization such as a Trust Company, Bank or International Investment Organization. A Private Trustee may also be used.

Our general rule is that an Asset Protection Trust may be appropriate where a client's net worth is $500,000 or more. Over $1 million you should definitely be looking at the benefits. Remember, houses, cash in the bank, investment portfolios, insurance policies, retirement savings (401k's, IRA's, SEP's etc.) all contribute to your net worth. Professionals such as doctors, lawyers, stock brokers, high level executives and owners of closely held businesses may find asset protection plans particularly beneficial. Estimated costs will be provided after discussing the client's specific objectives and requirements. There is no one structure that meets every client's needs. These are highly customized, technically demanding plans that require substantial knowledge and practice to implement properly.

Our office will typically provide services tailored to the client's unique requirements. These services may include: consultation with the client, preparation of a draft document for discussion, preparation of final legal documents, and identification of a reputable licensed foreign trustee. Other services may be applicable, including the fees to establish foreign or domestic entities to hold and manage trust assets.

In many instances our office can assist clients in establishing local offshore bank accounts, brokerage accounts and credit cards secured by those accounts for the trust. We can also form both domestic and offshore business entities in all major jurisdictions. The costs for these services are on a case-by-case basis.