Asset protection trusts are effective tools to protect a person’s property from judgments, creditors, and lawsuits now, and in the future. Property held within an asset protection trust is not considered to be the property of the beneficiaries, so it can typically escape seizure for debt collection. Learning more about the features of domestic and offshore asset protection trusts can help ensure that an appropriate type of trust is established.

The Basics of the Asset Protection Trust

Asset protection trusts are hybrid trusts that combine aspects of living trusts, spendthrift trusts, and self-settled trusts. The settlor sets up and can benefit from the trust – similar to a living trust. However, while the settlor maintains some powers and controls, he or she cedes some control over how the trust is managed, including disbursements of funds and investments – like a spendthrift trust.

The corpus of the trust can be anything including houses, personal items, cars, investments, businesses, and cash.

Establishing the Trust

First, a settlor should decide “where” to establish the trust. The “where” determines which laws govern the trust and thus protect the settlor’s property (or the property of the trust). Settlors can create both offshore and domestic asset protection trusts.

The pros of domestic trusts are that they are cheaper to create, easier to manage, and several states have enacted favorable laws for asset trusts. However, the major con to domestic trusts is that they remain within the U.S. legal system, subjecting them to bankruptcy courts and other mechanisms. Since domestic trusts are relatively new, there is less developed case law pertaining to them.

The pros of offshore trusts are that these are well-developed and outside the U.S. system – making them harder for creditors to attach claims. Moreover, the trust has protection under the laws of a foreign government, rather than a state, so they are beyond the reach of many U.S. courts. Specifically, trustees of offshore trusts are not required to respond to demands from U.S. courts, which forces creditors to file claims in the local jurisdiction (which is expensive and time-consuming). Unfortunately, offshore trusts can be expensive to set-up and maintain.