Asset Protection FAQs

The information presented here is not legal advice. It is a general overview of common questions about asset protection. Laws vary by state so please consult an attorney to help you with your specific situation.

What is a trust? – A trust is formed when you give some property to another with instructions on what to do with that property. You no longer have legal “title” to that property, but you continue to maintain control over and enjoyment of that property.

So let’s say you’re heading off for a trip around the world. You give your college buddy your old track trophy and instruct him to give it to your alma mater (the beneficiary) one year from now. You’ve created a “trust” with your friend (who is now the “trustee”), with the trophy as the property “held in trust,” and you’ve maintained control over that trophy via the instructions on what to do with it.

If you reserve the right to take that trophy back before the year is up, then you’ve created a “revocable trust.” If you do you not reserve the right to take it back, then you’ve created an “irrevocable trust,” and the trophy will go the the school no matter what.

What is an offshore trust? – The “offshore trust” lies at the heart of the most effective asset protection planning. The trust is formed in a jurisdiction outside of the United States, and the property settled upon is held “in trust” by an offshore trustee.

Do I have to send my money overseas? – No. It’s only the “trust” itself that is offshore, and which holds legal title to the property / money. Your money can actually stay with a U.S. bank such as Wells Fargo or PNC.

What is a domestic trust? – As the name implies, a Domestic Trust is formed in a U.S. jurisdiction such as Nevada, Alaska, or South Dakota.

What’s the main reason Offshore Asset Protection Trusts have become popular? – An offshore trust is based on the fact that foreign countries to do automatically recognize judgments from U.S. courts, so a judgment against you in the U.S. won’t hold any weight in a foreign country and the foreign trustee would not be compelled to turn over your assets held by the foreign trust.

The person suing you would have to initiate a new lawsuit in that foreign country and get a new judgment against you. The process of litigating in a new country can be so time consuming and expensive that the creditor may walk away entirely or negotiate a settlement for a lesser amount.

Can I be thrown in jail for using an Offshore Trust? – The handful of people who have been held in contempt of court in cases involving offshore trusts were abused the system and sometimes had poor planning.

For example, in the famous Anderson Case (cite coming) the Andersons, who were Ponzi schemers, manipulated their trust agreement after learning that the FTC was going to prosecute them. Their manipulation made it impossible to recover the funds. The judge found no humor in their antics and held them in contempt.

Law abiding citizens have nothing to fear from the proper, legal use of offshore trusts.

Can I use trusts to reduce my taxes? – It’s possible to use certain trusts for estate planning purposes, i.e. to deal with estate tax issues, but for the purpose of asset protection, trusts usually offer no tax advantages.

I’ve just been sued. Can I place my money/property in an asset protection trust and avoid the consequences of the lawsuit? – The main purpose of asset protection trusts is to protect your assets from future potential creditors, NOT present creditors or future creditors (those people you know are about to sue you or to whom you WILL owe money).

Attempting to make your assets inaccessible to a present or future creditor will likely result in the trust being deemed a “fraudulent transfer,” which may result in your being ordered by a judge to take the money/property out of trust and hand it over to your creditors. So it’s best to begin planning today, not when things go bad.

What’s a “fraudulent transfer?” Is this a crime? – “Fraudulent transfer” is term of art. We should call it something else, actually, because there is no “fraud” involved in the legal definition. What this means is that the person being sued has placed his or her money in a trust, or given it to their aunt, or placed their house in their brother’s name, in an attempt to keep the money/property from creditors, and that’s the only reason they did it.

So there was no real reason for transferring their money, other than to hide it from creditors. The courts won’t allow this, because if they did you’d never be able to recover from someone who harms you (they’d just give their money to their brother the day before you go to court).

To avoid fraudulent transfers, begin planning ahead and before things go bad. On the other hand, should you get sued or anticipate a creditor getting a judgment against you, don’t sit there and do nothing–consult an attorney and there may be ways to protect some of your assets.

Why can’t I just place my money in a Swiss Bank Account? – Sexy they may be, Swiss Accounts are useful for holding funds, but not for protecting those funds. As long as you are in control of the account a judge can order you to bring that money back to the U.S. and hand it over (a process called “repatriation”).

Isn’t my LLC good enough to protect me? – It depends. What are you protecting? Does your LLC’s operating agreement have the correct clauses in it to protect you in the event a creditor gets a “charging order” against the LLC? A charging order essentially garnishes whatever salary/income you take from the LLC. There are ways to deal with this possibility.

How is asset protection planning different for married couples? – Married couples have the option of dividing property between the two, often resulting in the “at risk” spouse owning the less desirable property–which creditors really don’t want to pursue. Meanwhile, the “lower risk” spouse may own the most desirable property, which is sometimes easiest for creditors to pursue.

What is a “transmutation agreement?” – In community property states (like California), where each spouse claims ownership to 100% of the marital assets, creditors who sue one spouse can go after the marital property assets of the other spouse as well.

A transmutation agreement enables them to opt out of the community property treatment, so that they have separate property, and creditors can only pursue the property of the spouse who is being sued.

Our son/daughter is about to get married and we don’t want his/her inheritance to fall into the hands of his spouse should they get divorced? What can we do? – Consider a spendthrift trust structure to protect the inheritance from both the spouse as well as “emotionally influenced” decisions of your son/daughter.

Is asset planning a substitute for insurance? – No. Actually, a strong asset protection plan may include insurance. Get as much insurance coverage as you can afford. If you are sued, in addition to the money provided by insurance, the fact that you acquired insurance may play in your favor when it’s time for the judge to look at your asset protection plan.

My friend is marrying a man/woman who is clearly after their money–they’re a golddigger. But my friend is so in love. What can I tell my blockheaded friend? – Consider a strong prenuptial agreement in addition to a trust that keeps assets separate after the marriage.

Also, if your friend has a business, then some modifications to the operating agreement are probably in order to prevent the ex-spouse from acquiring your friend’s shares in the company and taking control.

I want to protect my residence. Can I do this with an LLC?You can transfer ownership of your residence to an LLC, and set up that LLC in any jurisdiction in the world. You can also use what’s known as a Qualified Personal Residence Trust, and transfer your residence to that trust. Keep in mind there are restrictions to consider when using these structures.

Also, it’s usually possible to transfer title to an LLC, then place the LLC into a trust.
Or you can first execute an “equity strip,” then transfer title to an LLC, then transfer that LLC into a trust.

Why should I ever use a Limited Partnership, which requires a General Partner with unlimited liability, when I can just use an LLC instead?Laws vary by state. LLCs generally provide the best protection but if, for whatever reason, you decide to use a Limited Partnership, consider making the General Partner an LLC, not a corporation.

If the General Partner is a corporation, then a creditor can take control of the corporation’s stock, thereby making the creditor the General Partner, which enables the General Partner to order monetary distributions which will be intercepted by the Creditor. With an LLC the only remedy is a charging order, which is often useless when it comes to collecting.

What is a charging order?A charging order can be acquired by a creditor against an LLC, allowing the creditor to intercept any payments made from the LLC to the debtor. It’s kind of like garnishing wages. Charging orders are not difficult to defeat and are typically useless when used against an LLC with a properly constructed Operating Agreement.

What is an “Equity Strip?An equity strip means that your property has taken out a new mortgage at a very high borrowing rate, and the lending bank takes priority when it comes to collecting on the house. So, by way of example, say your house is worth $1,000,000 and you take out a loan for $900,000.

If a creditor were to foreclose on the home and sell it for $1,000,000 then the bank which loaned you the $950,000 will have to be paid off, leaving the creditor with only $100,000. In addition, if you live in a state with a homestead exemption–say $75,000–the creditor must pay you whatever the exemption is. That leaves the creditor with only $25,000 which is probably less than their attorneys fees.

Meanwhile, you’ve placed the $900,000 in loan proceeds in a bank account which is held in trust. You’ve stripped out the equity and protected the proceeds. The creditor may decide it’s not worth it to go after your house. Note that the interest rates on loans used in equity stripping techniques can be high in some cases.

What about “Pure Trusts,” aka Constitutional Trusts. Can I use them to lower my taxes? – No. If you try this, you can end up in prison. Pay your taxes. U.S. courts have ruled that these structures are illegal and that yes, we still have to pay our taxes. Any person who tells you that you can avoid paying taxes through the use of “Pure Trusts” is either a con-artist or seriously ill-informed and YOU will pay a high price when the courts take your money and toss you in the slammer.