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.

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.

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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.

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.

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Can a Living Trust Protect a Home From a Lawsuit?

References

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