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Home > Services > Domestic Wealth Planning > Domestic Asset Protection Trusts

Domestic Asset Protection Trusts

Domestic Trust Discussion

Domestic Asset Protection Trusts
A trust (APT - Asset Protection Trust) is a legal relationship in which one person holds property for the benefit of another. The property can be money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. A person may establish a trust for the benefit of himself or for the benefit of another, such as heirs, spouses and charities. As Asset Protection Trusts may be revocable or irrevocable, they may exist for a designated term of years for a short existence or a long existence.  You will need to become informed of all of your options before you decide if this is the best tool for Estate Planning and Succession Planning in the case of your assets.


Dynasty Trusts
One widespread domestic trust is the Dynasty Trust. Dynasty Trusts became known as such, since they have historically been used to house family assets for their protection in passing to further generations. A Dynasty Trust is a trust that is designed to hold assets without the direct ownership being transferred to any beneficiary. Instead, successive generations may receive distributions from trust assets or assets that remain held in trust, thus allowing for future benefit and growth. For transfer tax purposes, the assets of the trusts are valued at the amount they were worth when the trust was first created; as long as they stay in the trust they remain at that value instead of becoming valuated at Fair Market Value. Generally, any appreciation is exempt from estate taxes until the assets are removed from the trust.

When Domestic Trusts Fail
Though Dynasty Trusts are common, it is important to note that they are flawed like all domestic trusts. When creditors demand money, some judges break the boundaries of domestic trusts in order to satisfy the judgment.  When a person is protecting their assets they must be sure that they have the absolute latest and state-of-the-art legal tools available in Asset Protection to gain the maximum benefits of protection and reduced taxation.  Also, it is increasingly important that clients become aware of the need to avoid probate.

Some planners try to sell asset protection by convincing their clients to set up trusts and business structures in other states. This is a poor strategy since all states must abide by the verdicts of another state. This right to judgment is found in the Full Faith and Credit Clause in Article IV, Section 1 of the U. S. Constitution and states, "Full faith and credit shall be given in each State to the public acts, records and judicial proceedings of every other state."

Since all US creditors can penetrate domestic trusts, no matter what state delivers the verdict, it is wise to use a foreign trust called a Foreign Asset Protection Trust (FAPT). A creditor rarely penetrates an offshore trust for the reason that no country in the world recognizes judgments outside of their jurisdiction. A creditor who tries to seize assets outside the US (as owned by an FAPT) must go to that jurisdiction to sue. Offshore jurisdictions generally require special certification and monetary deposits making lawsuits very difficult for US creditors. Lawyers are less likely to pursue wealth when they have to litigate in other countries at a high personal cost to their firms.

Other Domestic Asset Protection Tools
Asset Protection Specialists use Family Limited Partnerships (FLP) and Limited Liability Companies (LLC) to strengthen their client’s financial barriers. When a business structure is issued a Charging Order, thusly ordered to submit to monetary judgments, it is generally a source of frustration for the creditor. There is no guarantee a creditor who is awarded a Charging Order will ever be able to collect any money, which makes the FLP and the LLC unappealing structures for litigation.

All asset protection techniques have one thing in common: they each make it more difficult for a creditor to either find or take assets. By implementing a properly crafted asset protection plan, an individual can legitimately put a significant portion of their assets out of the reach of judgment creditors and retain substantial control over these protected assets. The effect of asset protection planning is the destruction of the economic incentive to litigate.

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