If you're concerned with protecting your assets against possible legal claims against them, there are a wide variety of sophisticated financial tools available to help with this. One of the most controversial, yet often highly effective, examples of these is the asset protection trust. That term can be applied to a wide variety of trust structures, but generally refers to self-created trusts meant to shield your assets by placing them under the control of a trust located in a state with favorable protection laws, such as Nevada or Delaware.
In general, they work much like any other trust. You – the settlor – take your assets and place them under the control of a trust, using a situs trustee in that state. Often with these asset protection trusts, there is also a designated protector you select who has power over what the trustee does with your assets.
One unique aspect of them, which often makes them preferable to other estate planning trusts,is that in many cases the settlor can also be a beneficiary. In some cases, it's even possible for you and/or your spouse to form a Limited Liability Company and exert some level of control over the assets, while still being legally shielded.
Properly set up, they can make it extremely difficult for a debtor, divorcing spouse, or other legal claimant to gain access to any of your assets. By being located in another state, one with secrecy and protection laws, they should be outside the reach of local courts. The trust can even be set up with instructions to ignore orders given under duress, effectively rendering you blameless if court orders directed at the trust are not fulfilled.
It's important to know one thing that an asset protection trust is not, however. It is not a tax shelter. The settlor is still responsible for taxes on any assets within the trust, and must report them in their tax filing. Any attempt to hide assets from the IRS in an asset protection trust is risking tax fraud charges. Also, these trusts should not be deliberately used to defraud legitimate debtors. There are substantial legal tools that can be brought to bear on the settlor if a court deems the trust to be fraudulent.
Asset protection trusts are not for everyone, and carry some risks and significant drawbacks,not the least of which being the deliberate transfer in a structure that makes practical sense to you. Nonetheless, in cases where they are needed, they can be extremely powerful tools for asset protection with relatively little risk to you other than the cost of creation and annual trustee fees. I like to think of these costs as insurance premiums for protecting your wealth.
