This is a huge opportunity for people who have accumulated wealth before they got married, entrepreneurs, or maybe you received or are going to receive a business interest. One of the things that I focus on as an estate planning attorney is asset protection. There are a few different things to consider when it comes to bulletproofing your assets from a divorce. Today, I’m going to talk about three things, and they should really be used in conjunction with one another.
The first one, and I’m not going to go into great detail, is a prenup or postnup. There are many estate planning attorneys who will draft prenups and postnups. I don’t actually focus on doing that because I spend so much time on another aspect of asset protection, but I work with divorce attorneys and family law attorneys all the time who handle this for clients. Basically, what that is, is a contract you have with the person you marry that says, in the event of a divorce, we’re going to split our assets according to what we agree in this document. You can do it as a prenup before you actually have your nuptials, or as a postnuptial agreement after you get married.
One caveat is that you have to be forthcoming about all the assets you have, the nature of your assets, and how much they’re worth. You can’t hide any details from your spouse when doing a prenup or a postnup. A lot of times, people run into issues because they’re not forthcoming. Maybe you’re intentionally deceiving your spouse or spouse-to-be, or maybe you just forgot something or didn’t understand how a particular asset was owned. Maybe it was an asset that you inherited, or maybe it was just something that never got talked about during the process of the prenup or the postnup. The point is that prenups and postnups can often be challenged. You’ll often hear attorneys say, “Well, they’re not worth the paper they’re written on.” I don’t know if that’s necessarily true. I would probably disagree with that, and I think it’s a very valuable tool to have. That’s one aspect of asset protection and bulletproofing your assets from divorce.
The other two are really focused on trust planning. We’ll talk about third-party settled irrevocable trusts and first-party settled asset protection trusts. Historically, when parents would set up an irrevocable trust for the benefit of their kids and pass the inheritance to the trust rather than outright to the children, any of those assets in that irrevocable trust—some people call it an inheritor trust or a descendant trust—were protected from any type of creditor claims. The goal here is not to give an individual ownership of assets, but to have the trust own it. The child just has a beneficial interest, a beneficial ownership of these assets, but they themselves don’t actually possess anything.
That was historically one way to bulletproof assets. Parents would make sure that rather than giving it outright to the child, they would put it inside an irrevocable trust. A third party sets it up for the benefit of someone else. The other thing in that situation is that the child could then sell their own assets to the trust from which they benefit. You have to create a legitimate transaction in the eyes of the IRS. A lot of times, you take a promissory note with an interest rate associated with it that the IRS sets. That’s one way for an individual to get assets out of their individual name and into the name of an irrevocable trust. There are tax planning strategies and estate tax planning strategies associated with that, but there’s also this asset protection aspect of it.
Really, it’s complicated when you start selling. I should say it’s not complicated when parents set it up for the benefit of the kids, but it’s complicated when you start selling your own assets to a trust from which you benefit and usually, they are also the trustee on. You have a lot of flexibility to manage those assets as well as to benefit from those assets.
The other option you have, in the event that your parents do not set up an irrevocable trust for you, or cannot set up an irrevocable trust for you, or maybe you have significant assets in your own name and you can’t sell them to an irrevocable trust that was set up for your benefit, is to set up a domestic asset protection trust or a foreign asset protection trust. So, what is this? This is what I was talking about a second ago with first-party settled asset protection trusts. First-party settled means you yourself, as the first person, set it up for the benefit of yourself. You set up an irrevocable trust for the benefit of yourself. You fund that domestic asset protection trust or foreign asset protection trust with your own assets. There are different ways to set that up, and I won’t go into detail about that in this video.
Again, the name of the game, the objective, is to change the nature of ownership from you as an individual to the trust. If you have assets in your personal name and there is a personal creditor against you, such as a spouse who has divorced you or maybe you’ve divorced a spouse, then they can go after assets in your individual name. However, if done properly, done correctly, structured the right way, they cannot go after assets that are in the name of an irrevocable trust, even if you benefit from those assets.
One thing to keep in mind when approaching this is the fraudulent conveyance doctrine. You want to make sure you do the planning before you get married—that’s the best way to do it. Unlike a prenup or a postnup, you don’t have to disclose that you have this asset protection trust that you’re benefiting from, even though your spouse, once you do get married, can indirectly benefit from this trust because you are sharing those assets with that spouse. But you don’t have to disclose everything that might be in that trust.
This is a huge opportunity for people who have accumulated wealth before they got married, entrepreneurs, or maybe you’re part of a family business. You can move your business interest into an asset protection trust. One thing to keep in mind is that there are only 20 states with asset protection trust statutes on their books, and really only a handful of them are worth considering. Nevada and South Dakota are among the best, with South Dakota being particularly advantageous because of its privacy and flexibility laws, as well as its trust protector laws, making it much more advantageous than Nevada.
The other thing to consider is going offshore. You can look at the Cook Islands or Nevis or a few other jurisdictions that are known for having really strong asset protection laws for United States citizens.
