Domestic Asset Protection
Persons concerned about protecting their assets do not necessarily need to seek out a distant palm-fringed island. There are plenty of asset protection techniques available that do not involve going offshore. The simplest plans can involve giving gifts to family members who do not share the same risk of future lawsuits, shifting property to assets that are exempt from creditors' claims, and obtaining adequate insurance coverage.
For those who own a business or real estate, entities such as corporations, limited partnerships and limited liability companies can shield personal assets from claims associated with the business or real estate operations.
Alaska, Delaware, Nevada, Rhode Island and South Dakota have adopted laws that allow the establishment of a trust that is free from the claims of creditors yet allows distributions to the trust grantor as a beneficiary. While some may be more comfortable using a U.S. based trust, many experts are not convinced that these domestic trusts will provide the same level of protection as foreign trusts.
Offshore Asset Protection
Foreign situs trusts, although more complex and costly than domestic trusts, provide the ultimate in asset protection. There are multiple advantages in going offshore as opposed to using U.S. based techniques. Offshore jurisdictions often have laws that ensure privacy and are more favorable to the grantor of a trust with regard to the amount of access to and control over the trust principal. These jurisdictions generally do not recognize foreign judgments, so a creditor must file a new lawsuit in the offshore location. Other laws require that local counsel be used and prohibit contingency fees. Statutes in such jurisdictions also make it much more difficult for a creditor to prove his case or file it in a timely fashion. Distance and cultural differences can provide financial and psychological barriers as well.
Each of these factors is yet another hurdle for a creditor to overcome. When confronted with so many barriers, creditors are often willing to settle for pennies on the dollar.
Anatomy Of An Asset Protection Trust
Asset protection trusts must have a trustee in the jurisdiction of the trust situs. Most trusts also have a "trust protector," (often the grantor of the trust) who retains the power to remove and replace trustees and veto certain decisions of the trustees. It is also possible to have several trustees in different jurisdictions as a way of providing additional safeguards.
Once the trustees have been chosen and the trust executed, the grantor transfers his or her property to the trust. Beneficiaries of the trust can include the grantor, the grantor's spouse, and his or her children.
Foreign-based trust companies generally offer a variety of financial services such as private banking, insurance, and investment opportunities worldwide, including U.S. securities.
What jurisdiction is best? In addition to the five states mentioned above, there many countries with laws favorable for asset protection, mostly island nations in the Caribbean and elsewhere. The Cook Islands in the South Pacific and Nevis in the Eastern Caribbean are particularly attractive due to advanced trust legislation, political stability and sophisticated communications infrastructure. In addition, neither jurisdiction is on the Organization for Economic Co-operation and Development's (OECD) "Harmful Tax Practice" list. However, the optimum jurisdiction will depend on your particular situation.
Sophisticated asset protection trusts are not necessary for many of us, but almost everyone can benefit from making basic asset protection planning a part of their overall estate plan. And since asset protection techniques must be put in place before any liability arises, the time to do such planning is now.