Asset Protection Trust Definition
An asset protection trust is a vehicle that protects a person’s assets from creditors by holding them on his behalf. It provides a way for debtors and creditors to avoid costly litigations and encourages parties to settle on terms favorable to both of them. This trust is irrevocable and also has a spendthrift clause. The distributions of an asset protection trust only occur at the discretion of an independent trustee.
A Little More on What is an Asset Protection Trust
The assets held in asset protection trusts are not recoverable by creditors. For example, assets held in trust are protected from attachment in judicial proceedings against the beneficiary by parties like suppliers, customers, and family.
Banks are also a part of the asset protection structure. They often manage the trusts. The laws governing governing the trust relationship provide for increased confidentiality and security.
Some bank laws in offshore jurisdictions like Panama are even more protective of beneficiaries, unless they suspect money laundering or criminal activity.
A trust agreement is created when a trustor transfers assets to the trust and then gives legal control of these assets to the trustee. The trustee then manages and controls the assets for the benefit of one or more individuals. The trustee may, in some cases, also be a beneficiary.
Despite the alluring security and privacy that asset protection trusts provide, one should note that assets should not be transferred to this trust when there are imminent or ongoing legal actions against them. Any attempt to do that would be considered a fraudulent act. The only way to do it is to design an appropriate asset protection structure in advance.
References for Asset Protection Trust
Academic Research on Asset Protection Trust
Domestic Asset Protection Trusts: Pallbearers to Liability? Lischer Jr, H. J. (2000). Domestic Asset Protection Trusts: Pallbearers to Liability? Real Property, Probate and Trust Journal, 479-600. This article investigates if creditor-protection provisions of the Asset Protection Trust are consistent with the sound debtor-creditor policy.
Asset Protection Trusts: Trust Law’s Race to the Bottom, Sterk, S. E. (1999). Asset Protection Trusts: Trust Law’s Race to the Bottom. Cornell L. Rev., 85, 1035. This paper studies the case of one a man called Stephan Jay Lawrence and how he secured his assets against his adversary by transferring 90% of his assets to an Asset Protection Trust.
Home from the Islands: Domestic Asset Protection Trust Alternatives Impact Traditional Estate and Gift Tax Planning Considerations, Eason, J. K. (2000). Home from the Islands: Domestic Asset Protection Trust Alternatives Impact Traditional Estate and Gift Tax Planning Considerations. Fla. L. Rev., 52, 41. This paper investigates how US citizens are increasingly sheltering their wealth in Offshore Asset Protection Trusts as the US is getting more litigious.
Professional Responsibility Issues Associated with Asset Protection Trusts, Lischer Jr, H. J. (2004). Professional Responsibility Issues Associated with Asset Protection Trusts. Real Property, Probate and Trust Journal, 561-626. This paper studies the asset protection trust by providing an overview of this trust and the recent litigations that have faced it.
Planning with Domestic Asset-Protection Trusts: Part I, Nenno, R. W. (2005). Planning with Domestic Asset-Protection Trusts: Part I. Real Property, Probate and Trust Journal, 263-356. This article covers the reasons supporting and against the domestic asset protection trust, the ethical and practical considerations, and fraudulent-transfer rules.
Domestic Asset Protection Trusts: The Estate Planning Tool of the Decade or a Charlatan, Taylor, R. W. (1998). Domestic Asset Protection Trusts: The Estate Planning Tool of the Decade or a Charlatan. BYU J. Pub. L., 13, 163. This study investigates how the use of asset protection has fueled the growth of offshore financial centers for more than 30 years.
Asset Protection and Dynasty Trusts, Fox IV, C. D., & Huft, M. J. (2002). Asset Protection and Dynasty Trusts. Real Property, Probate and Trust Journal, 287-361. This article investigates the type of domestic trusts that are permitted under Alaska, Delaware, Nevada, and Rhode Island. It also determines if it is possible to create perpetual dynasty trusts under the laws of the states that have banned perpetuities.
Offshore and Other Shore Asset Protection Trusts, Henzy, E. (1999). Offshore and Other Shore Asset Protection Trusts. Vand. J. Transnat’l L., 32, 739. This paper examines the various types of offshore asset protection trusts that are available to individuals and their requirements and regulations.
Putting a Stop to Asset Protection Trusts, Gingiss, R. J. (1999). Putting a Stop to Asset Protection Trusts. Baylor L. Rev., 51, 987. This paper focuses on how to stop asset protection trusts because people use them to hide assets from the law.
Fear Not the Asset Protection Trust, Hirsch, A. J. (2005). Fear Not the Asset Protection Trust. Cardozo L. Rev., 27, 2685. This study argues that asset protection trusts are unobjectionable and beneficial and that they affect the rights of only the voluntary creditors.
Fundamentals of Asset Protection Planning, Osborne, D. E., & Terrill, J. A. (2005). Fundamentals of Asset Protection Planning. ACTEC J., 31, 319. This paper examines the basic guidelines that govern asset protection planning and differentiate between legitimate and fraudulent transfers.