Asset protection is important for individuals and families that have a significant risk to legal exposure, such as business owners and other professionals who face an increased risk for litigation. Asset protection planning techniques provide legal protection against lawsuits, creditor claims, fraudulent legal claims, bankruptcy, spousal claims in the event of divorce, and other benefits.
Many think creating a limited liability (“LLC”) company is the magic bullet for protecting business assets from lawsuits and creditors. While an LLC is effective for creating a barrier between your business and personal assets, it doesn’t mean that creditors are barred from going after your personal assets. This is where Asset Protection Trusts provide more comprehensive strategies for protecting your business and personal assets.
Domestic Asset Protection Trusts
Generally, in most states, asset protection is not afforded to an individual who places assets into a trust of which he or she is a beneficiary. These are known as “self-settled trusts”. However, there are exceptions, and a number of states recognize the validity of such trusts called Domestic Asset Protection Trusts (“DAPTs”). While approximately 20 states currently offer Asset Protection Trust laws, not all Asset Protection Trust laws are created equal. South Dakota is routinely recognized as the premier Asset Protection jurisdiction in the United States, and that’s why individuals and families throughout the world seek South Dakota as the preferred jurisdiction.
Hybrid Asset Protection Trusts
Historically, the only way to receive asset protection benefits from a trust was if someone else established an irrevocable trust for your benefit. This is known as a third-party settled trust. While the advent of the DAPT has changed the Asset Protection Trust industry, third-party settled trusts are still superior to DAPTs. As a result, lawyers created the Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”), so clients could have the tried and true reliability of a third-party settled irrevocable trust, while also having the flexibility of a modern DAPT.
In a Hybrid DAPT, you create a third-party settled trust for the benefit of your spouse and descendants (or other beneficiaries). Trust assets may be accessed by your spouse, descendants, or other beneficiaries through a distribution from the trust. You have created a third-party trust with significantly more asset protection than a traditional DAPT. If necessary, the trustee or trust protector can create a subtrust from the original trust you established, and move assets from the original trust to the subtrust for your benefit. This allows for a backdoor strategy in case you are no longer able to access assets from your spouse, descendants, or other beneficiaries. Once the subtrust is created, you end up with a DAPT, as described above. It truly is s magic bullet.
Foreign Asset Protection Trusts
Foreign Asset Protection Trusts (“FAPTs”) are created under the laws of a foreign country (often the Cook Islands or Nevis) that does not enforce the judgments of other countries. Foreign jurisdictions were the first leaders in modern Asset Protection Trust planning dating back to the 1980s. States throughout America that have DAPT laws have modeled Asset Protection Trust laws after these foreign jurisdictions. FAPTs are great options that are structured similar to DAPTs.