The Growing Importance of Asset Protection Trusts
As litigation becomes more prevalent, asset protection trusts (APTs) are gaining popularity among wealthy individuals. These trusts provide a proactive means to shield assets from potential future creditors. Here’s an overview of APTs, their benefits, and how to establish them.
Establishing an Asset Protection Trust
An APT must be irrevocable, with trust documents explicitly stating its governance by specific state or foreign laws. The grantor can receive discretionary distributions from an independent trustee. Importantly, the trust must include a spendthrift provision, preventing beneficiaries from transferring their interests.
Domestic Asset Protection Trusts (DAPTs)
Nineteen U.S. states have enacted asset protection statutes, allowing for the creation of DAPTs. These trusts offer protection from creditors and may provide additional benefits like state income tax savings. Each state has different provisions and protections, so grantors should ensure their state of domicile supports DAPTs.
Foreign Asset Protection Trusts (FAPTs)
FAPTs are established outside the U.S. and offer significant benefits, such as requiring creditors to litigate in foreign jurisdictions, which can be a major deterrent. FAPTs provide greater control, confidentiality, and flexibility in asset location. However, navigating international laws and compliance requirements can be complex.
Funding an Asset Protection Trust
APTs must be funded with assets like cash, marketable securities, LLC memberships, business assets, and real estate. The trust’s jurisdiction should have a substantial relationship to the trust, which often means transferring assets into LLCs located in the same jurisdiction as the APT.
Types of Assets in APTs
1. Cash and Marketable Securities: Held in an LLC with favorable protection and privacy laws.
2. Real Estate: Typically transferred to an LLC within the APT’s jurisdiction.
3. Business LLCs: Often restructured to align with the APT’s location for optimal protection.
4. High-Risk Assets: Held in LLCs to minimize liability exposure.
Distributions and Trustee Powers
Trustees have wide-ranging discretionary powers over APTs. A “Letter of Wishes” from the grantor can guide trustees in making decisions aligned with the grantor’s intent, though it’s not legally binding.
Legal Considerations
The federal Bankruptcy Reform Act and the Uniform Voidable Transactions Act (UVTA) impose restrictions on APTs, particularly concerning fraudulent transfers. Legal advice is crucial when establishing an APT to navigate these complex laws.
Conclusion
APTs offer a robust strategy for protecting assets against future creditor claims. By understanding the nuances of domestic and foreign trusts, funding mechanisms, and legal implications, individuals can effectively safeguard their wealth for future generations. Consult with professional advisors to ensure compliance and optimize your asset protection strategy.
The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.