A quick guide on property protection trusts

Property protection trusts, also known as asset protection trusts, are important legal and financial tools designed to hold an individual's assets, with the main purpose of protecting them against creditors. This type of trust will offer the best protection for your assets against creditors, judgments against your estate or lawsuits. Simply put, your property protection trust will protect all your assets against financial and legal problems.

Asset protection trusts will also help you avoid costs related to litigation, they can positively influence a settlement deal and can offer protection against possible negative litigation results.

Understanding asset protection trusts – what are they?

Asset protection trusts are self-settled trusts specifically designed to offer asset protection against creditors or lawsuits. Similar to other trusts, asset protection trusts have a grantor (also known as the creator of the trust), a trustee and a beneficiary. In this case, the grantor is also designated as the permissible beneficiary. As such, the grantor has direct access to the funds in the trust account. On the other hand, the creditors don't have access to these funds. Asset protection trusts offer other types of protection as well. For instance, if the trust is created in a no-income-tax state, the grantor will not pay income taxes on the assets in the trust. The tax benefits vary depending on the state, so make sure to check with your estate attorney for more information.

Asset protection trusts are complex financial protection tools. For instance they are irrevocable – the grantor cannot make any changes to it, in any circumstances. On the other hand, property protection trusts allow occasional distributions, according to the independent's trustee preference. The trusts also have specific stipulations, such as the spendthrift clause, which stops the beneficiary from selling or spending the assets, without specific permission or according to the agreement of the trust.

There are two types of asset protection trusts

Clients can choose from two types of asset protection trusts: the domestic asset protection trust and offshore (foreign) asset protection trust. Here's a breakdown of these two types of trusts:

Domestic asset protection trusts

These trusts are probably the best choice for clients who want to protect their assets against creditors. They are very versatile and adaptable, but are not allowed in all states. For instance, only 17 states allow the creation of domestic asset protection trusts: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. However, don't panic! Recent data shows that the list will continue to grow, as more and more states understand the advantages of this powerful financial tool.

One of the major disadvantages of domestic asset protection trusts is that your assets are still under US jurisdiction, as all assets are located in the country. This means that your assets are at risk of judgments, lawsuits, court orders and liens, bankruptcy laws and local laws. Similarly, the concept of property protection trust is relatively new, so there is still a sense of reluctance among professionals. This can be problematic if your case goes to court.

Foreign asset protection trusts

A foreign property protection trust will protect your assets in an offshore account. These trusts are very useful for clients who want to protect large estates or complex holdings. They are created in jurisdictions outside the United States, namely in the Caribbean (the British Virgin Islands or the Cook Islands are very popular locations). This type of property protection trust will cost a lot more, but they have tremendous advantages. These jurisdictions have strict privacy laws, making these trusts ideal for clients focused on privacy. Another benefit is that these jurisdictions are self-identified as offshore tax havens, so the taxes owed are lower. What's more, the United States Government has no jurisdiction in these areas, so your assets are fully protected.

Asset protection trusts – how they work

Asset protection trusts are very complex and you will need an experienced estate attorney to help you out. Make sure the attorney has experience with this type of trust and is working in a state that allows these types of trusts. Also, talk to a financial planner to better understand the financial implications (a property protection trust will cost more than other types of trusts). Keep in mind that only 17 states recognize this type of trust. Before you create a trust, you must understand how they work. Let's take a closer look:

Funding the trust

How is the trust funded? This is a common question coming from potential clients. Well, in order to efficiently use an asset protection trust, it helps a lot if you are wealthy, or at least comfortable financially. This is because the trusts are worthless if they are not funded by the grantor. What's more, a property protection trust will cost a lot more than other types of trusts. The assets include cash, securities, limited liability companies, real estate, recreational assets (boats, airplanes, helicopters, cars), business assets, intellectual property assets, inventory, equipment and various other valuable items.

Transferring the assets

Transferring the assets from you to the trust is incredibly complex. You will need an experienced estate lawyer, a financial planner and an accountant. If securities are involved, a broker is also recommended. These professionals will make sure all the paperwork is correct and legal. There are a lot of legal hurdles to pass and you will need all the help you can get. For instance, every asset must be carefully assessed before being transferred to a foreign trust. Also, the issues related to federal and state taxes must be solved.

Other considerations

A property protection trust will be an amazing tool to protect your assets, but it has its limitations. For instance, the most substantial relationship is to the state where the trust was formed, not the grantor's state of residence. This aspect can be problematic for certain clients. Of course, if the trust is foreign, the relationship is to the foreign country and its laws. Legal problems can occur, especially if the lawsuit is based in the United States and the assets are in a trust created in the British Virgin Islands. If unsure about this aspect, talk to your estate lawyer.