Asset Protection 101: Foreign & Domestic Trusts

When clients come up to me with big plans to start a business, structure their money, or make a significant purchase, the first thing I always want to know is whether their assets are protected. Most clients don’t know either way. Asset protection? What’s that? I don’t even have assets! Asset protection sounds vague, but it’s one of the most important ways you can shield your wealth, business, and family from significant legal threats.

Asset protection is especially important for anyone working in a field prone to litigation. Physicians, nurse practitioners, real estate owners, accountants, public personas (such as Twitch and YouTube streamers), high net-wealth individuals, and directors and owners of companies are all people who need to take asset protection seriously. 

It’s easy to protect your assets now. It’s very difficult – even impossible – to protect them once a lawsuit begins.

There are many ways to protect your money and reduce your risk moving forward. This post will explore the basics, but for analysis specific to your business or estate, meet with an attorney from Counxel Legal Firm. We can help you hone in on the asset protection strategies that are right for you.

Creating a Trust

A strong form of protection (sometimes the strongest) is the creation of a trust. Trusts are a preemptive asset-protection strategy, and they’re often the best step in shielding your money from future creditors. That means a trust is most effective when it is created with no current or looming claims by a creditor, and provided that the settlor will not go bankrupt after transferring his or her assets into the trust.

The Self-Settled Asset Protection Trust

Self-settled trusts have often been maligned as overly risky or difficult to use, but legislation in many countries and states now allow you to transfer your assets into an irrevocable trust while retaining interest or power over those assets.

Popular venues for self-settled asset protection trusts include Nevis Island, the Isle of Man, Belize, and the Cook Islands. Foreign trusts in these jurisdictions provide some of the strongest levels of protection, including:

  • Difficulty enforcing a creditor’s judgment obtained in the United States to claw assets out of the trust
  • Few or no rules limiting the lifespan of the trust
  • Short statutes of limitations, giving creditors only a brief window of time to sue
  • High burdens of proof to demonstrate to the satisfaction of the court that a conveyance of money constitutes a fraudulent transfer
  • Difficulty of a United States court to find jurisdiction over a foreign trustee

What Are the Downsides of a Foreign Trust?

Foreign trusts do have downsides. Apart from the escalated expense of creation and maintenance, foreign trusts tend to have heightened reporting requirements that can reveal personal information. The Internal Revenue Service closely scrutinizes foreign trusts and tax reporting. Further, by creating a foreign trust, clients are essentially putting their faith in the long-term stability of a small, faraway country. If you are comfortable with this level of risk, work, and cost, the creation of a foreign trust remains one of the best means of protecting your assets.

Domestic Trusts

Domestic trusts established within the United States are also an option for clients. While they generally offer less protection, they also come at a cheaper cost to set up and manage. Eighteen states now permit self-settled asset protection trusts.

Once a claimant has obtained UI benefits, the DES will also follow up to see if they refuse a job offer without good cause, if they don’t report money earned while receiving UI benefits, or if they conceal or misrepresent facts in a claim for benefits.

Self-Settled Trusts and Taxes, Relationships, and Immigration

For high-earning individuals, a self-settled asset protection trust can reduce your overall tax liability or your state income tax burden. You can also use a trust to reduce the tax liability for your beneficiaries. Self-settled trusts can be structured as a grantor trust, where a grantor’s ability to pay taxes on income from the trust can become a tax-free benefit to the trust’s beneficiaries. 

Self-settled asset protection trusts can also be used as a tool to shield your money from a current or future spouse. Some states exempt self-settled asset protection trusts from property division on divorce. That also means the self-settled asset protection trust is a great alternative to a prenuptial agreement, because the trust can be used to avoid financial disclosures during negotiations.

A self-settled trust can be used by noncitizens to avoid gift tax liability when they plan to move to the United States. The non-resident creates a self-settled asset protection trust and transfers his or her assets to the trust. Then, once they move to the United States, their transfer will incur a liability for gift taxes. After immigrating, the settlor can then redistribute the assets.

Protecting Your Assets Once You Pass Away

What happens to those assets once you pass away? Creating a will is the first step to protecting your assets after your death, of course, but that’s just the start. Even with a will, your property might still end up in probate, which is expensive, time-consuming, and will quickly eat into the assets. Meet with an attorney to form a living trust which will allow you to easily transfer your assets after death. Your trustee can then disperse your property, and everyone involved will avoid probate. 

In this first part of Asset Protection Basics: Trusts, we explored some of the most common (and strongest) methods to protect your money. Your wealth is your livelihood, your wellbeing, and a measure of security for you and your family. Asset protection shields you and your loved ones from creditors who seek to take that wealth and destroy what you have worked for.

The advantages and disadvantages of a trust are highly nuanced and based on myriad country and state laws. The creation of a trust is an important but complicated decision, so call the offices of Counxel Legal Firm today to discuss the specific asset protection steps that will be right for you.

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