You Don’t Really Want an Asset Protection Trust

I get a lot of calls from people asking if I can set up an Asset Protection Trust for them. These people usually owe taxes or child support, are contemplating divorce, have recently been the responsible party in an accident or injury to someone else, or anticipate their risky business practices will lead to lawsuits in the future. Despite what they may think, most people in these situations do not want their property owned by an Asset Protection Trust.

Asset Protection Trusts are permitted and created in a handful of states (currently 16) such as Delaware, Nevada, Ohio, Alaska and Rhode Island. Trusts created in other states do not have the same level of protection. The idea is that you create the trust in one of these states and retitle assets in the name of the trust. The document usually names you and your trusted family members as a beneficiary, and some states also allow you to also act as a Co-Trustee, but you must also designate a disinterested Co-Trustee who resides or works in the state you created the trust and can overrule your decisions. The point of creating the trust is that the assets you place in the trust should be protected from all types of creditors.

Now for the reality: Asset Protection Trusts do not treat all creditors equally. First and foremost, if you think anything in any document is going to protect you from federal tax liabilities then I’ll have some of what you’re smoking, because you’re living in a 1960s concert if you think there is any US trust that protects you from the IRS. Next, some states (such as Nevada and North Dakota) say their trusts can protect your assets from a pending divorce, but keep in mind judges serve in “Courts of Equity”, meaning they can take drastic steps to ensure a financially fair solution is reached in a divorce even if that means placing you under arrest until you distribute marital assets from the trust. And just because you place your house in trust does not mean the mortgage can be ignored: Many contracts you have signed consider moving related assets into any trust to constitute fraud and a breach of the original contract.

There are also rules you have to follow to make these trusts even minimally effective. First, Asset Protection Trusts typically have a “seasoning period”, meaning the assets have to be owned by the trust for at least 1 – 2 years to be protected by the trust. So if you get into a car accident on Monday and try to establish the trust on Tuesday you still need to wait at least 1 year before the assets are protected from a lawsuit. Next, the trust is its own entity, so there will be associated accounting costs for filing taxes, and it may need to pay taxes as well. Let’s also not forget that you have to pay to have the trust drafted before any of these problems become fully apparent.

And remember how I said you need to hire a disinterested Co-Trustee? Well, that person isn’t going to work for free, and likely charges a minimum annual fee no matter what type of asset the trust owns or the value of that asset. Lastly, what if the disinterested Trust – who as a matter of law must have the power to overrule your decision making authority – decides to do the exact opposite of what you want? Yep, they can do that.

A good argument can be made that people who get sued all the time – surgeons, architects, general contractors – should consider owning their personal assets in an Asset Protection Trust. This may be true, but these people’s assets can also be protected by utilizing Limited Liability Companies, malpractice and liability insurance, or switching their assets to be owned by their spouse instead. So as a rule of thumb, if your barista or cousin’s shady friend told you to give your assets to an Asset Protection Trust you should prepare for your attorney to tell you it’s not the right option for you to consider.



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