How to Set Up an Asset Protection Trust

By Tom Streissguth

If you want to shield investments and property from creditors, or anyone who might have a claim on them, an asset protection trust provides a viable option. A trust is a legal structure that owns assets under a separate name and is under the control of a trustee. Claimants to the assets will still have access unless the creator of the trust, known as the grantor, does some careful advance planning when establishing the trust.

Revocable and Irrevocable Trusts

With a revocable trust, the grantor retains the authority to change the trust, revoke it, or appoint a new trustee to manage it. In effect, the grantor keeps control over the trust property, even though there is a new legal owner. Creditors and the IRS also have access to trust assets to enforce judgments against the grantor. For that reason, an asset protection trust must be irrevocable, meaning the grantor removes his rights of ownership. For the purpose of sheltering assets, you can establish an asset protection trust in another state, or a foreign country.

Location, Location, Location

As the grantor, your first decision when setting up an asset protection trust is the location of the trust. If the trust remains within the United States, several considerations go into this decision. You may consider if the state levies income tax on trusts, as well as the statute of limitations for creditor claims and judgments. Other considerations include the state law limit on access to trust assets -- and whether there is an exception for child support or alimony. Many states also have laws on fraudulent transfers. Trust attorneys are generally familiar with their own state's laws, and also recognize a few states that offer high barriers to claims.

Protect your loved ones. Start My Estate Plan

Creating a Trust

To set up an asset protection trust, you must create and sign a document that establishes the trust. The document must name the trust, appoint a trustee, indicate the purpose of the trust, provide instructions to the trustee and name beneficiaries who will receive property on the death of the grantor. State laws govern the validity of trusts; however, in most states, the document must be witnessed and notarized. An attorney experienced in trusts and estates, or an online legal document provider, can provide a standard structure and language that allows the trust to meet the requirements of the law.

Unlawful Trust Transfers

In setting up an asset protection trust, as the grantor, you must be aware of the laws on fraudulent conveyance. Moving assets out of the way of creditors during a pending lawsuit would be one example of fraudulent conveyance. Setting up a trust and donating investments to it just before declaring bankruptcy would be another. If a court finds fraudulent conveyance, it can allow a creditor access to assets in a trust, add penalties and interest, as well as refer the case to a criminal prosecutor. The IRS also has an extremely long reach while in pursuit of unpaid taxes.

Offshore Trusts

Another alternative for asset protection is an offshore trust, established under the laws of a foreign territory. Many countries enhance such friendly havens by limiting access by foreign entities and, in the case of the island nation of Mauritius, making the disclosure of any information about the trust a criminal act. Doctors, accountants, stockbrokers and other professionals use offshore trusts as insurance against lawsuits. With the help of an attorney, you can create an offshore trust without leaving your home, and for even greater confidentiality, through a representative.

Protect your loved ones. Start My Estate Plan
How to Use a Trust for Asset Protection


Related articles

Can a Revocable Trust Be a Sole Member of an LLC?

Revocable trusts have been popularized by estate planning advisers because they convey advantages relative to probate costs. However, despite marketing schemes touting the benefits of revocable trusts, they have significant drawbacks in terms of asset vulnerability and taxation. When a revocable trust is the sole member of a Limited Liability Company, the negative aspects of the revocable trust may taint all property in the LLC.

What Is Diversion of Property From a Trust?

Diversion of trust property is a legal term used to describe the misapplication or misuse of trust property. Not only does diversion of trust property violate the terms of the trust itself, but it's often a criminal act. A trust agreement forms a contract between the person who sets up the trust in the first place, the trustee and the beneficiary. The trustee has a fiduciary duty to act in the best interests of both the trust and its beneficiary.

Are Living Trusts Exempt From Lawsuits?

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation to the next. However, not every trust protects assets from creditors or lawsuits. Testamentary trusts, which only become active after your death, can protect assets from your beneficiaries' creditors. However, living trusts, created during your lifetime, only provide protection from lawsuits against you if the trust is irrevocable.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help. Wills & Trusts

Related articles

How to Legally Protect Assets From Creditor Claims

In a lawsuit-happy society, protecting assets from potential claims is a smart financial step. There are several ...

Appointing a Bank as a Trustee

Many people may consider hiring a bank to act as a trustee instead of appointing a relative or friend to manage their ...

A Revocable Trust & Asset Protection

Living trusts are estate planning tools used for transferring property at death. These trusts go into effect during ...

How to Create a Trust to Claim Lottery Winnings

Winning the lottery is just the beginning of your financial adventures. To manage that jackpot, and protect your ...

Browse by category
Ready to Begin? GET STARTED