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Asset Protection Trust: What is it? How Do You Set One Up?

Estate Planners | Monday, October 25th, 2010

“Asset protection trust” is a rather broad term that covers a wide array of legal solutions. This kind of trust is generally put in place in order to ensure that financial assets and funds are to be held in a discretionary fashion. There can be a number of different reasons why these trusts are set up, such as to avoid excessive taxation, provide protection for certain assets in the case of a bankruptcy, or to mitigate the negative financial effects of a divorce. However, there are laws that govern how and when these trusts can be set up, which is why it’s important to work with an attorney or experienced asset protection planner.

Choosing the Correct Kind of Trust

Although revocable trusts are commonly used to avoid probate, they are generally not sufficient for asset protection. Instead, irrevocable trusts are generally used to truly protect assets. An irrevocable trust can provide protection from frivolous lawsuits, as well as a method for avoiding certain estate taxes and the probate process. Irrevocable trusts are also commonly used as a means of avoiding “spend-down” provisions before a person enters a nursing home.

Understanding Asset Protection Trusts

When an irrevocable trust is put into place, the person owning the assets essentially gives complete control to a Trustee, who is then responsible for managing and protecting the assets. It is essential that an asset protection trust be set up by somebody who is very familiar with the laws governing these kinds of financial arrangements. It must also be set up in a jurisdiction which has laws in place to support this kind of trust. A majority of these trusts are set up in offshore locations, because their laws are conducive to this kind of asset protection. However, there are also certain states that have laws in place to support these trusts, such as Alaska, Nevada, Rhode Island and Delaware. Once the financial assets are placed into the trust, they usually cannot be seized, even if you are sued or file bankruptcy.

Who Can Benefit From an Asset Protection Trust?

Although many people think that only large corporations and wealthy individuals need an asset protection trust, they are actually becoming more popular with business executives, accountants, doctors and other professionals. The proliferation of lawsuits has help to increase interest in these kinds of trusts, even among individuals who do not have an exceeding large amount of assets to protect. For example, one frivolous lawsuit might be all it would take to cause irreparable financial damage to an individual or business. In some cases, professionals such as physicians are utilizing asset protection trusts instead of malpractice insurance, due to the skyrocketing cost of this kind of insurance.

Legal Issues

When setting up an asset protection trust, it is vitally important that they be set up correctly, and for the right reasons. The courts will generally rule against a trust if it is set up after legal actions have already been started against an individual. They should also never be set up for the purpose of income tax evasion. Working with an attorney or someone who specializes in these kinds of trusts is the best way of protecting your assets, while staying on the right side of the law.

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