The Most Common Asset Protection Trusts

Beneficiary Trust

You should not confuse a beneficiary trust with the beneficiary of a particular trust. A beneficiary trust is a tool or entity of asset management. This kind of trust is irrevocable in nature, so the grantor does not have the power to cancel or change it once the trust is created. The grantor does not have the ability to make investment decisions related to the trust; instead, this power is transferred to the beneficiary. It should be noted that the grantor after assigning assets to a beneficiary trust, the grantor cannot maintain any control over or utilize the trust property or the trust will not qualify as an irrevocable trust

The main idea of a trust is to build an imaginary legal person who will protect, manage, and hold all your private property so that your heirs may benefit. In a beneficiary trust, assets are transferred by the creator of the trust into the trust for the gain of the beneficiaries. This type of irrevocable trust provides a grantor with a way of giving property to another person, while at the same time, protects the assets from lawsuits, income taxes, estate taxes, and loss due to divorce. By this trust, the beneficiaries are allowed to make and profit from investment decisions for the trust and benefit from the fact that there is no requirement to pay income tax on the income of the trust.

In a beneficiary trust, tax is handled in a unique way. Any asset or property within the trust is owned by the trust instead of by an individual. This trust is not subject to any kind of estate taxes upon the death of the grantor or the beneficiary. This trust also protects the beneficiary from income taxes. In most cases the grantor of the trust is the person who is considered the owner and is subject to the jurisdictional income tax laws.

Assets in a beneficiary trust are not subject to claims in divorce because no individual owns the assets. The same rule applies for creditors. The beneficiary cannot be held responsible for any unpaid debts or lawsuits because the beneficiary does not have any ownership in the assets of the trust.

Although the beneficiary is not considered the asset’s owner, he or she is capable of deciding how and when to make decisions about assets and investments in the trust. The beneficiary can even begin a business through the trust and benefit from it, while still maintaining the asset protection afforded by the trust.

Children’s Trust

To protect assets for children, one can set up a children’s trust. This can ensure that they will have enough funds for education, their first home, or to establish themselves in a business or profession.

Dynasty Trusts

The Dynasty Trust helps with the effective transfer of property to an individual’s heirs. A Dynasty Trust is designed for holding assets without any direct ownership; Dynasty trusts are transferred to the beneficiaries, with successive generations receiving distributions from the assets that are held in the trust. In addition to keeping assets for the future that are not diluted by transfer taxes, the advantage of a Dynasty Trust is that you can benefit from the exemptions and protections which are currently in existence. However, you should remember that the rules and exemptions may change if you wish to create the trust on your own. Currently there government has submitted proposals to reinstate the “rule against perpetuities,” which allowed trusts to exist only for about 90 years. If passed, the trust would no longer have the exemptions after the 90th year of existence.

Another benefit of a Dynasty Trust is that usually the assets cannot be claimed by creditors and ex-spouses, as the assets of the trust do not belong to the beneficiaries. Also, if you create a Dynasty Trust in one state but you reside in another, in general, the trust is not subjected to the taxes of the state where your trust is established if that state also recognizes the Dynasty Trust structure. You can take advantage of these trusts in 23 states. The states that recognize Dynasty Trusts are:

Alaska, Delaware, District of Columbia, Idaho, Illinois, Kentucky, Maine, Maryland, Michigan, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Wisconsin, and Wyoming.

If you form an asset protection trust your assets will be protected from creditors and lawsuits. A trust is simply a contract between a person who wants to safeguard his or her assets (the grantor), and the individual who is going to manage these assets for all the beneficiaries (the trustee). Beneficiaries can include the Grantor’s heirs, friends/associates or another company  The contract of the trust requires transferring of the assets from its actual owner (grantor) to a legal entity. For this purpose, an asset protection trust is formed.

 Foreign Asset Protection Trusts

Foreign asset protection trusts provide a choice of which country’s laws suit your purpose the best, which trustee to select, and a range of provisions to draft into the trust. Asset protection trusts can work well if you choose the jurisdiction carefully.

Getting the assistance of a professional to draft a foreign trust can help you achieve optimal results. Note that the jurisdiction should not recognize U.S. judgments automatically. Creditors who have obtained a judgment against you in U.S. courts must start the litigation again in the foreign jurisdiction.

If the laws in a jurisdiction are favorable to the protection of your assets, creditors will incur more risk. Some jurisdictions, such as Cook Islands, set a time limit to file a lawsuit, and the court backlog in this jurisdiction generally takes three to five years to obtain a judgment. Even if you lost your case, your assets in the foreign asset protection trust cannot be touched by the creditor because the two-year time limit for collecting on a judgment will have lapsed.

There are complexities in establishing a foreign trust; however, they are no more complex than domestic trusts. Understand that it can be beneficial to set up an asset protection trust as irrevocable rather than as revocable. If you choose the revocable trust, the judgment creditor may force you to revoke it and pay funds.

Offshore Trusts

Over the last few decades, many taxpayers in the United States have protected their assets successfully from the claims of creditors by forming offshore trusts in the jurisdiction of some foreign countries—for example: Luxembourg, Bahamas, Cayman Islands, Cook Islands, and Belize—because the judgments of the courts in the United States are not recognized by these jurisdictions. Most often, the creditors have settled for just a small percentage of their claims; however, it is highly expensive to form and administer an offshore trust. Many people find that domestic protection trusts are more suitable because of the expense of an offshore trust.

Family Trust-Asset Protection

A Family Trust is set up to hold the assets belonging to a family or to conduct the family’s business. This trust is normally established for the purpose of protecting assets or for tax purposes. Such a trust consists of a settler who establishes the trust; trustees who are appointed to administer the trust, and beneficiaries.

A Family Trust is established by any family member for the benefit of other members in the family. The trustees in a trust can be family members, friends, or professional persons. The beneficiaries can be a spouse, children, and grandchildren.

How Does the Family Trust Work?

Once the Family Trust has been established, the settlor opens a Family Trust bank account. The settlor decides what assets are to be put into the trust. The settlor can put a house, rental properties, or investments into the trust. Then a deed of acknowledgement of debt is prepared to specify which assets are being transferred to the trust, and then the assets will be registered in the name of the trust. Family members are each allowed to gift $27,000 per year to the trust. Funds or assets gifted to the trust are protected effectively from creditors and the amount gifted by trust members will be acknowledged by a deed of partial forgiveness of debt.

Nowadays, many family trusts prefer to appoint a protector. The protector is an independent person who has no interest in the trust and whose main duty is to ensure that the wishes of the settlor are followed and to settle any disputes between trustees.

Family Trust Benefits

A Family Trust can provide tax advantages if it qualifies in the family-control test and distribution test. The trust income will go only to the beneficiaries of the trust and provide assistance with protecting the family assets from the liabilities of any of the family members. For instance, if any one of the family members files bankruptcy or is declared insolvent, the Family Trust helps to protect the assets from creditors of that family member. It serves as a tool to pass family assets to future generations.

A family trust also helps to avoid issues such as disputes in the will following a death of the senior family member. It is also highly beneficial in protecting personal assets in the event of a matrimonial dispute.

 Family Trust and Trustees

In our modern world where the rate of divorce is quite high and lawsuit cases are increasing, preservation and protection of assets is a cause of concern for all of us. Most families would prefer to see the inheritance of their children and grandchildren develop with a sound strategy of investment and to be shielded from claims of creditors, lawsuits, and divorce.

Besides documents of estate planning and customized trusts, the asset protection strategy of a family can be enhanced by independent trustees as well as trust protector, preventing the loss of their inheritance to creditors and predators.

When families create trusts they sometimes choose a family member as the successor trustee for managing and distributing the property after other members’ deaths or if they become disabled. A member of the family can be a great choice as manage, as he or she understands the circumstances and dynamics of the family. However, the average person has little idea of asset protection strategies, taxes, investments, accounting, and the trustee’s fiduciary responsibilities.

A trustee who is a member of the family is usually inexperienced in financial, tax, and legal matters andtherefore can make mistakes, leading to personal liabilities. The funds of the trust can even be depleted and mismanaged by the trustee, resulting in family conflict that could destroy a hard-earned family legacy. For these reasons, it’s preferable to appoint an independent trustee.

Better long-term strategies may involve a trust which can constantly manage your legal, tax, asset protection, and investment purposes after your death. This approach can provide your children and future generations with significant benefits. The trust’s assets are less vulnerable to the creditors of future generations.

An independent trustee is responsible for maximizing asset protection for your heirs. In the absence of an independent trustee, the property of a trust can be exposed to creditors, lawsuits, divorce, and bankruptcy. If you wish to secure an inheritance, consider employing an independent trustee.