How to Set Up an Asset Protection Trust

By Edward A. Haman, J.D.

How to Set Up an Asset Protection Trust

By Edward A. Haman, J.D.

Protecting property from creditors is a complicated matter. No single method affords protection in all situations. Although organizing your business as a corporation or limited liability company (LLC) can protect your personal assets from business debts, you can also obtain additional protection by setting up an asset protection trust, even if you don't own a business.

illustration people setting up a trust

What Is an Asset Protection Trust?

Asset protection trusts are designed to protect your property in the event you are sued. Lawsuits may be based on a variety of factors, such as a debt you owe, a negligence claim for personal injury or property damage, or even for intentional actions such as fraud and misrepresentation. If a court judgment is entered against you, the person who filed the suit, called a judgment creditor, can go after your property.

Most people set up a revocable living trust for the purposes of avoiding probate and providing for the private transfer of assets upon death. A revocable trust allows the creator to keep full control of their assets during their lifetime. Since a creditor may generally go after any assets within your control, a revocable trust does not protect your property because you still control the assets. Therefore, to achieve any degree of asset protection, your trust must be irrevocable.

An irrevocable trust requires that someone other than you be designated as the trustee and that assets be turned over to the control of that trustee. The trust document must contain certain language that clearly indicates it is irrevocable. Once assets are transferred to the trust, they are considered owned by the trust, not by you. If you are sued, your judgment creditor may not go after the trust assets, since they are not yours.

Where to Set Up an Asset Protection Trust

Asset protection trusts in the United States, which are governed by state law, are commonly referred to as domestic asset protection trusts. However, less than half of the states provide for such trusts, and those that do have various restrictions on their effectiveness. If your state does not permit asset protection trusts, you may still be able to create a trust in a state that does.

It is also possible to set up an asset protection trust in a foreign country. Such offshore trusts are popularly set up in places such as the Cook Islands, the Channel Islands of the United Kingdom, Nevis, and Belize. These jurisdictions may provide a greater deal of protection than that of a U.S. trust. However, they do have some drawbacks, such as being more complicated and expensive to set up and maintain, in addition to the fact that the trust assets are held in a foreign country.

How to Create an Asset Protection Trust

An asset protection trust must be properly set up as an irrevocable trust. This can be viewed as a three-step process:

  1. Choose a trustee. The most important consideration when choosing a trustee is that they must be someone you have faith in to assure that the purposes of the trust are fulfilled. They must also be willing to take on the responsibility. A trustee can be an individual person or a business entity such as a corporation or LLC. Two or more individuals can be designated as co-trustees. Many people select a trusted relative or friend. Some select their attorney, while others choose an institutional trustee, such as the trust department of a bank.
  2. Create and execute a trust document. Just as articles of incorporation create a corporation, a trust agreement creates a trust as a separate entity. Such documents are often quite complex and lengthy.
  3. Fund the trust. Once the trust agreement is executed, assets must be transferred into the trust. This is called funding the trust. A trust with no assets is worthless. For real estate, this means executing a deed to transfer ownership from your name into the name of the trust. For property such as cars and boats, you must transfer title to the trust. For property that does not have a title document, you must sign a statement that lists all such property and states that ownership is being transferred to the trust.

Pros and Cons of an Asset Protection Trust

There is one advantage to an asset protection trust: it removes assets from the reach of a creditor.

The disadvantages of such a trust are:

  • You give up control of the assets transferred to the trust.
  • The fee an attorney charges to set up an asset protection trust, as well as the trustee fees for managing it, can be expensive. Furthermore, a foreign trust is usually more costly than a domestic one.

There are other methods of asset protection that may be considered instead of, or in addition to, a trust. For that reason, your asset protection strategy is best created with the help of a knowledgeable attorney.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.