As implied by its name, an asset protection trust is one you establish to perform a specific function; i.e., protect your assets from creditors and others who may seek to obtain some or all of them in the future. You might want to consider establishing an asset protection trust if you fall into one of the following categories:
- You are at risk for becoming unable to pay all your debts and therefore having one or more creditors obtain judgments against you.
- You own your own business as a sole proprietorship and are at risk for having your personal assets invaded in the event your business fails and you cannot meet your business financial obligations.
- You are at risk of becoming the defendant in a lawsuit, the settlement of which likely would invade your personal assets.
- You are at risk for divorce or other marital upheaval in which a disgruntled or vindictive ex-spouse likely would attempt to claim a substantial portion of your personal assets.
Irrevocability
The main downside of an asset protection trust is that once you establish one and transfer your assets into it, the trust’s provisions become written in stone. You cannot later change or revoke your trust, even if the risk for which you established it no longer exists. The trust itself therefore owns your assets “forever,” rather than you.
Legality
The following 17 states allow you to set up a domestic asset protection trust (DAPT):
- Alaska
- Delaware
- Hawaii
- Michigan
- Mississippi
- Missouri
- Nevada
- New Hampshire
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Tennessee
- Utah
- Virginia
- West Virginia
- Wyoming
If you do not live in one of these states and feel the need of an asset protection trust, however, you may be able to establish one in a state that allows them. As you might expect, this can be quite tricky and complicated. Your wisest strategy consists of consulting with an experienced estate planning attorney with a track record of successfully setting up out-of-state DAPTs.
Foreign Asset Protection Trusts
Your other option if you need an asset protection trust but live in a state that disallows them is to establish your trust offshore in a country sympathetic to investors and debtors. The Cook Islands, located in the South Pacific, and the Federation of Saint Kitts and Nevis, located in the West Indies, are two such jurisdictions.
Once again, however, you need the advice, counsel and representation of a knowledgeable and sophisticated estate planning attorney who knows or can competently research the laws of these countries to make sure that your asset protection trust meets all their legal requirements.