Which asset protection trust is the best? Is it possible that the best trust for protecting your assets from creditors, lawsuits, and other risks, is not an “asset protection trust?” In this guide, we’ll cover the key factors to consider when selecting a trust for protecting your net worth. But first, let’s talk about what an asset protection trust is.
What Is an Asset Protection Trust?
An asset protection trust (or APT) is an irrevocable trust that has three main features. It is “self-settled,” you name yourself as the beneficiary, and it has “spendthrift” provisions.
An Asset Protection Trust is Self-Settled.
The first feature of an APT is that it is self-settled. That means that you create it (or “settle” it). In contrast, someone sets up the standard irrevocable trust for someone else’s benefit.
You Name Yourself As The Beneficiary.
One of the reasons that APTs are so popular is that you list yourself as the beneficiary of the trust. In this way, it’s just like your standard living trust that is for your benefit during your lifetime. Except that most living trusts are revocable, and an APT is irrevocable.
It Has a Spendthrift Provision.
A spendthrift clause is language in the trust that says someone else like your creditor can’t get the assets you transferred to the trust. Below is a small portion of the spendthrift language generated by WealthCounsel. (WealthCounsel is one of the US’s major suppliers of legal documents to asset protection attorneys).
What Is a Foreign Asset Protection Trust?
The first APTs were created outside the U.S. Historically, the rule was that if you can get assets from a trust, then so could your creditors. (See RESTATEMENT (SECOND) OF TRUSTS, section 156.) This began to change during the 20th century when some foreign countries started allowing foreign asset protection trusts (FAPTs).
A foreign asset protection trust (FAPT) is a type of trust created in a jurisdiction outside of the United States. They tend to be an island like the Cooke Islands or Nevis. The purpose of this type of trust is to protect assets potential legal issues that might arise within the United States. The promise is that a judgment in the U.S. can’t be enforced in a foreign jurisdiction like the Cook Islands or the Isle of Mann.
The problem with FAPTs
The problem is that there are dozens of cases proving that these do not work for U.S. citizens. There are no U.S. court cases validating their benefits for U.S. citizens. And if you choose to go this route, you are risking your personal freedom and your ability to use the money later. The U.S. court cases involving FAPTs mostly have to do with holding U.S. debtors in contempt or preventing them from accessing their offshore accounts. So, the money is “protected.” You just can’t use it. And you might go to jail.
FAPTs violate the Second Pillar of Asset Protection
The Second Pillar of Asset Protection is that creditors cannot limit how you use and enjoy your assets. Obviously FAPTs don’t comply with this.
Since FAPTs don’t sound so good, let’s see how APTs created right here in the U.S. hold up.
What Is a Domestic Asset Protection Trust?
A Domestic Asset Protection Trust (DAPT) is a trust created under the laws of one of the U.S. permit them. Asset protection trusts are currently allowed in the following states:
- New Hampshire
- Rhode Island
- South Dakota
- West Virginia
The concept is that they provide asset shielding for the grantor and their family members. People set up DAPTs with the promise of getting protection from potential creditors and judgments.
This is the type of trust that is most heavily marketed. The reason is that the attorneys and trust companies make TONS of money selling these.
Do DAPTs stand up in court?
Generally no. I’m only aware of one U.S. case supporting the use of a DAPT to shield assets from creditors. It’s Klabacka v. Nelson, a 2017 case from Nevada.
The Klabacka case is the exception that proves the rule. And the rule is this …
DAPTs only work for residents of a state that permits them, as long as they are not in bankruptcy.
Below is a chart to help you understand this.
Basically, if you do not live in one of the minority of states that permit DAPTs, then don’t even consider using one. Also, if you have legal exposures in non-DAPT states, then you also should consider a better option.
Even if they work for a lawsuit within your state, you are not protected in bankruptcy (unless you created your trust more than 10 years ago)!
So, what is a better option? It turns out that the best trust for protecting your net worth is not an “asset protection trust.”
Generations of Case Law Prove That a Special Power of Appointment Trust Gives Better Protection
A Special Power of Appointment Trust (SPAT) is an old reliable tool that can be used to replace and improve on the concept of a FAPT or DAPT. It can protect against estate taxes, provide flexibility in how the trust is taxed, and protect against potential creditors.
The concept of a power of appointment has been a part of the English common law for centuries. It is well recognized in all 50 states and in the federal tax laws. Some minor variations in the law about powers of appointment have occurred over time. But the basic legal principles about them have never varied.
Unlike APTs, every court case involving a SPAT has held that they are effective against all types of legal threats. They have withstood attacks in state and federal court. And they are effective against lawsuits, divorces, IRS audits, government actions, and even bankruptcy.
To put it briefly, SPATs actually work. APTs don’t in most situations.
Our law firm calls our version of a SPAT an Asset Vault Trust. The Asset Vault Trust provides additional protection for assets, beyond that provided by an APT. Specifically, the Asset Vault Trust allows for the protection of the grantor’s assets from potential creditors or judgments related to estate taxes, divorce proceedings, or other legal actions. The grantor has control over how their assets are distributed and can thus decide who can benefit from the trust in accordance with their wishes.
Why Are APTs So Popular If They Don’t Work?
This isn’t so crazy when you think about it. There are lots of other products out there that make you feel good but don’t actually solve your problem. For example:
- Alcohol or pot makes you feel better, but it doesn’t solve your inner anxiety.
- Porn makes you feel good temporarily, but doesn’t help you feel connected to another human being.
- Shopping makes you feel good for a minute. But then you realize you still feel empty.
Asset Protection Trusts are the same. They make you feel amazing for short while. You transfer your money and property to a trust company. The company and its promoters assure you that you’ve made a great decision. You think you are invincible and that one can get your assets. (But, of course, we discussed above why this isn’t true in most situations.)
Do You Want Proven, Effective Asset Protection?
If you want protection that actually works, give us a call at 602-443-4888.