Using a Trust to Protect Assets

Some lawyers, especially those who are not experienced in the field of asset protection, tell their clients that a trust is all they need to protect their assets. In addition, many unscrupulous promoters are selling all kinds of abusive trusts that claim to avoid taxes.

Let’s examine what a trust is and what it isn’t in the context of asset protection. The trust is probably the oldest form of entity for financial planning. It’s been around for many centuries. A Venetian merchant, a tall ship captain or a medieval knight needed to leave home for an extended period of time and wanted someone he trusted to manage his estate while he’s away and a trust was thus created.

A trust, in its simplest form, consists of three parties:

  • The grantor or settler – this is the person who puts his assets in the trust. Using the previous examples, the merchant, the ship captain or the knight would be the settler.
  • The trustee – this is the trusted individual or firm to whom the settler entrusts his assets. He, by agreeing to be the trustee, must abide by the specifications and instructions spelled out in the trust document, which is drafted by the settler. The specifications in the trust document typically include how the assets should be invested and to whom and when the trustee should distribute assets from the trust.
  • The beneficiaries – these are the persons who are going to receive or benefit from the assets in the trustee in accordance with the specifications and instructions in the trust document. The beneficiaries can be the spouse and children of the settler, a charity, a college, and/or quite often, the settler himself.

Modern trusts often include another party known as a protector, who has the power to remove the trustee and appoint a new one in his stead. The protector can also be vested with the power to veto decisions of the trustee and give check and balance.

Since trusts are private arrangements among these parties, they can take just about any forms and variations.

The most common type of trust one finds in the U.S. is the so-called living trust (sometimes called family trust). This is a great estate planning tool that helps transfer an estate smoothly from parents at the time of their death to their children without going through probate. While the parents are alive they are beneficiaries of the trust and they retain total control and enjoyment of the assets within the trust.

The living trust is a good example of what is called a revocable trust. A revocable trust is a trust that the settler can change or even revoke at anytime. In other words, the settler has complete control over all the assets within the trust. When it comes to asset protection, a revocable trust such as a living trust is completely useless. The assets in the trust are essentially the assets of the settler since he is a beneficiary and he can revoke the trust at will. The courts do not respect a revocable trust when it comes to the collection of a court judgment.

Therefore for a trust to be at all effective in asset protection, the settler must genuinely give up control of the assets to the trustee and not be one of the trust beneficiaries. This type of trust is called an irrevocable trust. Now an irrevocable trust can still be subject to collection if the settler is benefiting or receiving distribution from the trust even though the trust forbids the trustees from paying creditors of the settler. This type of trust is called a self-settled spendthrift trust because the settler creates the trust for his own benefit and asset protection.

When it comes to judgment collection, the settler of a self-settled spendthrift trust might argue that he cannot take any assets out of the trust to pay the judgment since the trustee has complete control over the assets and the trust document contains a protection clause that does not allow the trustee to pay creditors of the settler using any trust assets. However the laws of most U.S. states explicitly prohibit the asset protection clause in any self-settled spendthrift trusts. In addition, many judges, sensing that the self-settled spendthrift trust is simply a ploy for the settler to avoid paying a court judgment and still enjoy the benefits of the assets, would order the trustee to cough up trust assets to pay the judgment. Since almost all trustees would rather violate the trust agreement than go to jail for contempt charges, they inevitably pay the judgment from the trust assets over the protest of the settler.

So from the discussions above, you might conclude that no trust is effective in asset protection. Well that conclusion would be mostly true. Most trusts are practically useless when it comes to asset protection. The only types of trust that can withstand legal challenges are a domestic Special Power of Appointment Trust and an Offshore Asset Protection Trust.

Special Power of Appointment Trust

To learn more about the Special Power of Appointment Trust, click here.

Offshore Asset Protection Trust

An offshore asset protection trust is a trust that uses an offshore trustee in a jurisdiction with strong asset protection laws. Since an offshore trustee is not subject to U.S. court orders, he can refuse to pay the judgment issued by a U.S. court without worrying about going to jail for contempt charges. Offshore jurisdictions such as the Cook Islands and Belize have such strong asset protection laws that they make it impossible to collect even if the creditor moves his legal challenge to those countries.

Many of us are leery with sending our assets offshore more because we are unfamiliar with those countries than for actual risks inherent in those countries. For those of you who are nervous with going overseas, you can take advantage of the benefits of a trust called the Integrated Estate Planning Trust (IEPT). An IEPT is a self-settled spend-thrift trust that has an initial trustee in the U.S. and a registered standby co-trustee in an offshore jurisdiction such as the Cook Islands or Belize. When there are no legal issues, the trust remains in control of the U.S. trustee as a U.S. grantor trust and you can enjoy the comfort of and peace of mind knowing that the trustee of your assets is in the good old U.S. of A. When serious legal challenges arise, the protector of the IEPT can elect to change the control of the trust to the offshore trustee by dismissing the U.S. trustee, making the IEPT an offshore trust. Since the trust has been registered in the foreign country from the very beginning, the trust formation date in that country is the first formation date and not the date of the switch, so there are no fraudulent transfer issues there as long as the trust is set up before any actual lawsuits.


The diagram below shows how an IEPT is typically structured to protect assets.



In this sample structure, you are the settlor of the trust and you can be the protector as well. You appoint someone whom you trust as your U.S. trustee. APCG provides a multi-national trust company in the offshore jurisdiction as the standby trustee. The trust can own assets directly or own assets through one or more LLCs, corporations and/or family limited partnerships. If the trust owns the LLC/corporation/FLP, you can have yourself appointed as the manager/general partner so that you can maintain control of the assets while the water is calm.

When you are not threatened with legal problems, the trust remains as a domestic trust under the management of the U.S. trustee. All incomes of the trust flow to the tax returns of the settlor (you).

When you are threatened with a serious legal challenge, you, as the protector, can dismiss your U.S. trustee and move the control of the trust to the standby trustee in the offshore jurisdiction. When you do that, the trust becomes an offshore trust. Since the offshore trustee is not subject to U.S. court orders, the assets in the trust are protected from any attachments or seizures from U.S. judgments.

The best countries to form the IEPT are the Cook Islands and Belize.

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DISCLAIMER: All information contained in this website is for education purpose only. Asset Protection Consulting Group, Inc., their agents and affiliates cannot and will not render any legal or tax advice of any kind, unless said agent is duly licensed by the applicable state and/or federal authority to give said advice.

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