Crucial Facts You Should Know about Asset Protection in Estate Planning

November 18, 2022
Asset Protection in Estate Planning

Asset protection trusts are a legal method for a grantor of a trust to put valuable property into trust under the care of an independent trustee while giving the grantor access to the property as a beneficiary.  An asset protection trust is a crucial estate planning tool for any person or married couple who owns liquid assets such as cash and brokerage accounts and is vulnerable to liability judgements. APT can protect those assets from creditors and injury lawsuits.  Moreover, some APTs can provide income tax savings by putting income bearing assets into a trust in a jurisdiction that does not have an income tax.

For an APT to be protective it must first be irrevocable.   Distributions are made only at the discretion of an independent trustee with the oversight of trust protector.  Distributions cannot be made to pay off creditors or liability judgments because of spendthrift stipulations written into the trust instructions.

Domestic APTs

Domestic asset protection trusts can be established in states that allow them.

A major drawback against Domestic APTs is that the trust assets remain in the U.S. and under the jurisdiction of the U.S. courts.   This makes those assets vulnerable to court orders, liens, personal injury liability and bankruptcy judgement. Also, since Domestic APTs are a recently emerging technique in estate planning there is limited case law that demonstrates how successful they are as asset protection schemes.  On the other hand, there may be limited case law to draw examples from because domestic APTs may be effective enough that they are rarely challenged.

Foreign APTs

Another type of APT that is virtually bullet-proof to U.S. court judgements or liens of any type is the foreign asset protection trusts, sometimes called an "offshore" trust. These trusts are held in accounts outside the jurisdiction of any U.S. court.  Some popular jurisdictions that are friendly to these trusts are the British Virgin Islands and the Cook Islands.  Foreign APTs have been the most successful asset protection method and probably more successful than the Domestic APT because the assets are outside the U.S.  Asset protection planning not inexpensive.  All these techniques are costly to establish.  However, doing the cost benefit tradeoff one might determine that the value of the asset they are protecting far exceeds the cost.  Also, an asset protection trust might be desirable if you are in at circumstances where you have a high risk of being sued such as small business owners.

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