Asset Protection Trusts

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What Are Asset Protection Trusts?

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Generally, Asset Protection Trusts are irrevocable trusts that are established by the business owner for his own benefit (referred to as “self-settled”) and the benefit of his or her spouse and family. The trust is a discretionary trust, that is, no one can compel the trustee to make distributions. It has what is referred to as a spendthrift provision that prohibits the beneficiaries of the trust from pledging the assets of the trust as collateral, assigning the assets, or encumbering the assets in any way.

With a spendthrift provision, the trust property is generally not subject to legal process or to the claims of any creditors while it remains trust property. If these trusts are set up in certain states (Alaska, Colorado, Delaware, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming) they are also referred to as domestic asset protection trusts, as opposed to such trusts that are set up in other counties and are referred to as foreign asset protection trusts or offshore trusts.

Generally, the business owner cannot be in charge of the trust, or a court might conclude that the business owner retained too much control over the trust assets. An independent trustee such as a bank or trust company is often the best choice. These trusts will not avoid the challenges involving fraudulent transfers. So, again, it is best to establish these trusts before the business owner has any problems.

Unfortunately, in 2005 Congress changed the Bankruptcy Code and created a 10-year limitations period for transfers to self-settled trusts. This means that transfers to domestic asset protection trusts will be suspect for the ten years prior to the date that a bankruptcy petition is filed. Thus, domestic asset protection trusts may be more risky than in the past. However, this also emphasizes the need to plan before a problem occurs. If more than ten years pass before a bankruptcy petition is filed, the assets in a domestic asset protection trust may not be at risk. If you think that you would never file for bankruptcy, you should be aware that it is possible, subject to certain limitations, to force a debtor into bankruptcy.

If you have any questions regarding asset protection trusts, or are in need of professional assistance, please feel free to call Anthony J. Madonia & Associates. Our attorneys are always happy to help.