by Stephen H. Telford

Occasionally in my practice, I am asked, “Why should I consider creating an asset protection trust?”  The person posing this question frequently proceeds to tell me why such an asset protection planning technique is not for them.  However, many of the objections I hear are based on misconceptions.

An asset protection trust is a legal structure designed to safeguard assets from various risks, ensuring they are protected and preserved for the intended beneficiaries. In today’s world, business and individual assets are coming under greater threat as aggressive attorneys assert new and creative legal equitable theories. The unpredictable nature of judges and juries has prompted the pursuit of alternative asset protection methods that offer greater predictability. In this article, I will focus on offshore asset protection trusts, which move assets to jurisdictions where they benefit from the protections offered by different, perfectly legal, frameworks.

I have written several articles highlighting the benefits of using a trust established in a jurisdiction outside the United States to safeguard assets. Here, I will address common misconceptions and explain why they are unfounded.

“I Will Lose Control of the Protected Assets”

An offshore asset protection trust puts the assets in the control of a designated trustee, who manages them according to the terms outlined in the trust document, shielding them from potential creditors or legal claims and providing an additional layer of security and confidentiality.

For this reason, it may be true that you will lose control of the protected assets when a trust is under attack from unexpected creditors. Ironically, your lack of control will be a major factor in keeping the protected assets out of the “grabbing hands” of unwanted creditors. The loss of control serves as a protective barrier against unwanted creditor actions, ensuring that the assets remain beyond their reach.

When assets are placed into the trust, legal ownership is transferred to the trustee, effectively removing them from direct ownership by the individual. This separation makes it more difficult for creditors to access the assets, as they are no longer considered part of the individual’s personal estate. Additionally, the trustee, who now has control over the assets, is typically located in a jurisdiction with favorable trust laws, such as the Cook Islands. Such jurisdictions have stringent asset protection statutes that make it challenging for creditors to seize trust assets and often have shorter statutes of limitations for creditors to pursue claims.

While the “waters are calm,” most offshore asset protection structures allow you to exert a great deal of control over the protected assets through an Idaho family limited liability limited partnership or an Idaho limited liability company. These entities offer a flexible and efficient means for individuals to maintain influence and decision-making authority over their assets while still benefiting from the protective features offered by offshore jurisdictions. An individual can act as the managing member or general partner of these entities, allowing the individual to retain control over the management and operation of the entity. For example, using an Idaho family limited liability limited partnership, family members can contribute assets to the partnership while maintaining control over their management. The partnership agreement can outline specific rules and procedures for managing the assets, including distributions, investments, and succession planning. This allows individuals to tailor the structure to their specific preferences and needs, enabling them to enjoy the benefits of asset protection while retaining a substantial degree of influence and autonomy over their financial affairs.

Additionally, a local or foreign protector can act as a “watchdog” for you and your family as beneficiaries of the trust. A local or foreign protector is an individual designated within a trust instrument to oversee or monitor the actions of the trustee and ensure that the trust is administered according to the settlor’s wishes. Such a protector can have significant veto powers over most of the key decisions made by the offshore trustee. Ultimately, the protector acts as a check against potential mismanagement, conflicts of interest, or any other adverse action that could impact the trust’s beneficiaries. While a local trustee can also be appointed to make decisions in conjunction with the offshore trustee, the existence of a local trustee could expose the trust assets to local creditors. It is critical to be able to timely remove the local trustee when any trust assets come under assault. Consequently, you may want to refrain from using this form of control.

“I Will Be Unable to Benefit from the Protected Assets”

While it may be true in most places in the United States that you cannot be the beneficiary of a trust that you create, it is not true in several other countries. For example, the Cook Islands in the South Pacific and Nevis in the Caribbean allow the trust creator to be a primary discretionary beneficiary of a trust.

Stateside, Alaska, Delaware, and Nevada have enacted legislation appearing to allow “rainy day” discretionary asset protection planning through the creation of domestic asset protection trusts (“DAPT”). However, the Full Faith and Credit Clause of the United States Constitution greatly restricts the actual asset protection they can provide unless you happen to be a resident of one of those states. The Full Faith and Credit Clause requires each state to recognize the public acts, records, and judicial proceedings of every other state.[1]  Recent developments, including a ruling by the Alaska Supreme Court, have shown that DAPTs are no longer reliable options.[2] Essentially, even though Alaska, Delaware, and Nevada have enacted legislation allowing for the creation of DAPTs, residents of states that do not recognize DAPTs may not receive the intended protection. Courts in non-DAPT states can and will apply their own laws regarding fraudulent transfers, regardless of whether the assets are held in a DAPT-friendly state. In practical terms, this means that individuals relying solely on DAPTs for asset protection may not receive the level of protection they expect, particularly if they reside in states that do not recognize or enforce DAPTs.

There is no substitute for the type of protection offered in places like the Cook Islands or Nevis. By establishing trusts in these jurisdictions, individuals can benefit from stronger legal frameworks and a greater level of certainty in asset protection strategies.

“I Cannot Protect My Real Estate”

Obviously, your real estate, which is comprised of dirt and any improvements sitting on or in the dirt, cannot be “moved” offshore when a creditor is searching for assets to seize. However, your equity in such assets can be protected through strategic financial arrangements. One such method involves establishing a standing equity loan line of credit secured by a mortgage, deed of trust, or other similar debt instruments. This allows the loan proceeds to be transferred to the offshore trustee. If the protected real estate assets come under an attack and the loan proceeds must be sent to the offshore trustee for protection, the offshore trustee will make any debt payments coming due during the attack. The key to making this technique effective is to have the planning in place before an unwanted creditor appears on your doorstep with a claim to ensure the trust assets cannot be accessed.