Just to let everyone know, we are recording this so we can send it out to people in the future. So, that is why we are recording it.
Hi, and welcome! I’m Rob Hamrick, the Director of Development and Client Relations at Stuart Green Law, and I’ll be one of your hosts today. Stuart Green, our founding attorney, is joining us as well, and I will let him introduce himself here in a moment.
Today’s webinar focuses on asset protection trusts. Asset protection is, unfortunately, one of the most overlooked aspects of estate planning. With roughly 40 million lawsuits happening each year and lawyers looking to do nothing but sue people for a huge payday, we’re excited to talk about the fundamentals of asset protection trusts, who can benefit from them, and the mechanics of asset protection trust strategies. So, thank you for joining us today.
Before I kick it over to Stuart, we have a few administrative items that we need to go over first. We’re required to tell you that this is not legal advice and should not be construed as such. If you have questions, you can reach out to a licensed attorney like Stuart Green.
We will be referring to asset protection trusts as APTs, so we’ll be using that acronym throughout to keep things less wordy. Second, we’re going to try to keep this content as non-technical as possible, as it is a new topic for most of us. We’re also going to try to pack as much content as we can within 45 minutes, so our goal is to be no more than 45 minutes.
We are using Zoom, as you’ve probably noticed. We have turned off your mics and the camera to minimize any accidental background noise or distractions, so feel free to enjoy your lunch without worrying if your mic is on. You can submit questions using the chat feature that Zoom provides. At the bottom of your viewing screen, there’s a little chat icon. If you click on that, you can send a question to us. If we don’t answer it over the course of this webinar, we’ll try to get to it at the end.
Finally, for the most streamlined viewing experience, there’s a ‘View’ button in the upper right-hand corner of your Zoom window. If you click that button, you’ll want to select ‘Hide Non-Video Participants,’ and that should give you a cleaner look for this webinar as we move forward.
All right, at this time, I want to turn it over to Stuart Green so he can go ahead and introduce himself.”
“Cool, thanks, Rob. So, like Rob said, I’m Stuart Green, the founding attorney of Stuart Green Law. Just a little bit about my background: I’ve spent my entire career with estate planning law firms and public accounting firms. The law firms have been national boutique practices dedicated to high-net-worth estates and trust planning. In public accounting, I spent six years as a tax attorney, mostly with Ernst & Young, one of the Big Four international public accounting firms.
In each of these roles, I’ve worked on multi-jurisdictional tax and trust issues with clients all over the world. Our practice is headquartered in Houston, Texas. We also have an office in Louisville, Kentucky, and we focus on estate planning with a particular emphasis on asset protection and tax planning. Because of our focus on using the best asset protection laws available, we have a particular niche providing asset protection trusts using South Dakota and Cook Islands trust laws. We’ll get into that a little bit more and explain what that really means and why we’re focused on those particular jurisdictions.”
“Thanks, Stuart. Let’s just jump into the concept of asset protection. A lot of estate planning attorneys use the phrase ‘asset protection,’ but what does it actually mean? Do all attorneys mean the same thing? And lastly, what are we protecting our assets from?”
“Yeah, great questions. First, not all attorneys mean the same thing. Most attorneys, when they’re talking about asset protection, they’re talking about protecting your assets from nursing home expenses. This is really a different subset of clients than we work with—high-net-worth clients. My goal, and what I mean by asset protection, is protecting clients from lawsuits, creditor claims, legal risks, negligence suits, malpractice suits, bankruptcy, divorcing spousal claims, and any other type of legal risk. There are a few different things that a person can be protecting their assets from.”
“What type of clients face these issues? Who can benefit the most from asset protection trusts?”
“Great question. High-net-worth clients can benefit the most, and we loosely define what high-net-worth means. Depending on the industry that you’re in, it may have a different definition. But we find that, specifically with asset protection trusts, clients with a $5 million-plus net worth really begin to understand and see the value. It could be less; it could certainly be more, but that’s kind of a loose standard that we use.
Also, business owners, celebrities, social media influencers, political activists— I have a client right now who would never describe themselves as a political activist, but because of some of the work they do, it’s kind of pushed them in that direction, and they’ve had a really interesting career with a lot of interesting things happen to them. So we’ve been able to help them with some asset protection trust planning.
Other types of clients include doctors, lawyers, accountants, financial advisors, architects, engineers—really any of those professional service providers. And anyone who just really has a heightened level of legal scrutiny because of their net worth or because of what they do for a profession.”
“All right. So, with asset protection, we’re talking about lawsuits, creditor claims, negligence suits, malpractice, divorce. I think it would be helpful for folks to understand what happens if you get sued. Say you’re a doctor and you get sued for malpractice, or a business owner and you get sued for product liability. Or a wealthy family member, and you’re in a car accident and get sued for negligence. Say it’s like a $20 million suit that comes against you. Are you on the hook for all of that?”
“That’s a great question. Most people think that their malpractice insurance, business insurance, or even their umbrella policy is going to cover everything. And hopefully, it will, but that’s not always the case.
First, think about your insurance. It’s only going to cover up to the coverage limit. So, if it’s a $10 million policy and you get sued for $20 million, yes, you could be on the hook for that additional money, especially if the plaintiff’s attorney deems you as having ‘low-hanging fruit,’ so to speak.
Second, you might be underinsured, right? There are objective standards to figure that out, and that may be something the plaintiff’s attorney is looking at and decides, ‘Hey, Joe Smith is underinsured. We’re going to go after his personal assets. We know that he has a second home in Florida or a third home in the Cayman Islands,’ or whatever it may be, right?
So, there are situations where you will continue to be on the hook even if your insurance doesn’t cover it. And then lastly, continuing with this idea of insurance—insurance companies do everything they can to make sure they don’t have to pay anything outside the terms of the policy. And that’s fair, right? It’s a contract between you and the insurance company. So, if there’s something in there that falls outside the scope of what your policy says, then yes, you can be personally liable and must figure out how to pay out of pocket.”
“Okay, so with being personally liable, it means the creditor is going to come after your personal assets. Are there assets that are just off-limits to creditors?”
“Each state has different rules around this, but there are assets that are exempt from creditor claims. Some examples—some typical examples—are usually your primary home and also retirement accounts. However, assets such as cash, investment accounts, secondary homes, business interests—those types of things—are not exempt.
So, all of a sudden, if you can’t afford your mortgage because you lost all of your liquid assets to a creditor, your house could be in foreclosure. You might even end up moving closer to bankruptcy than you imagined, even if you have a pretty solid retirement account. There are a lot of things that could still happen even though you do have protected assets.”
“It looks like the name of the game is how to protect these non-exempt personal assets. What strategies can we use to protect these non-exempt assets?”
“The objective of asset protection strategies is to make it difficult for the creditor—the person who has the judgment against you because they sued you—to make it as difficult as possible for them. We want to use the best laws available to create structures that will make the pursuit of that claim hopefully so difficult and expensive that the creditor will either give up or be willing to negotiate much more favorable terms for you.
Since creditors can reach any non-exempt assets personally owned by you, what we really want to do is remove legal ownership of your assets from your personal name while implementing structures—”
[Rob Hamrick interrupts]
“Sorry, I keep letting people in. That’s maybe why I’m pausing here and there.”
“—but we want to implement structures that will allow you to retain control over those assets and the beneficial enjoyment of those assets. So, we’re changing legal ownership but making sure that you are continuing to be able to benefit from those assets.”
“Yeah, that makes a lot of sense. It seems that an LLC is a common way that people try to protect their assets. So, many years ago, I set up a business. It served me well at the time, but what I was doing was setting up that LLC to protect my business assets from my personal assets. Can I just set up an LLC for everything? Are there limitations to the LLC?”
“There are limitations to the LLC. Really good question. LLCs are a very, very strong start. I don’t want to say LLCs aren’t good, because we certainly use them as part of our strategy, even along with asset protection trusts. But they are not foolproof, right?
First, LLCs are typically used for business purposes and holding business assets. You kind of mentioned that or alluded to that. If the business itself has a judgment against it because something happened during the course of business, then a creditor can seek a judgment against those LLC assets.
However, if there is a personal creditor claim against you, your LLC interest—that is, what you own—so if you have partners within your LLC, that particular interest that you own in the LLC is considered a personal asset. The judgment would allow a creditor to receive any distributions or payments that you’re entitled to as the LLC owner. So, as you can see, it’s not a perfect solution.”
“Yeah, that makes sense. They’re good, but they do have some limitations. They should be part of an effective asset protection plan. Are there other strategies out there that people are using for asset protection that just aren’t effective at all?”
“Absolutely. I refer to them as ‘strategies’ in quotation marks because I consider them more of a liability than an actual plan.
First, retitling your assets in the name of your spouse or child. There’s a problem with this: ultimately, if there’s a divorce or a death—and those things do happen; I mean, everyone passes away at some point, and divorce does happen—then, to the extent that that happens, now all of a sudden, if you’ve moved assets to your spouse’s name or to your children’s names, there’s a divorce or death, and you don’t have access anymore. And then, of course, your children could end up being sued, your spouse could end up being sued as well, and now they have a creditor claim for those assets that you put into their names.
Lastly, the other ‘strategy,’ and we’ve talked about this a little bit, is just depending on insurance way too much, whether it’s your umbrella policy, your business insurance, your malpractice insurance, whatever it may be. There are limitations, and you want to make sure when it comes to asset protection that you have as holistic of a strategy as possible.”
“Okay, so let’s finally talk about asset protection trusts, or APTs, the missing piece in most asset protection strategies. What value does an APT provide that LLCs and insurance simply cannot?”
“First, an APT, the asset protection trust, removes assets from your personal name. The trust owns the assets, not you as an individual. That in itself is a huge help. Second, you will benefit from those trust assets either directly or indirectly, and even though you don’t own the assets personally in your individual name, you can still benefit from the assets in the same way as if they were in your personal name.
Lastly, and this might be just as important, the jurisdiction of your asset protection trust plays a really important role. Again, if you remember, I mentioned South Dakota and Cook Islands earlier. The reason jurisdiction plays such an important role is that a creditor who has a claim against you or the trust is going to have to enforce that claim against a trustee of the asset protection trust in that asset protection trust’s jurisdiction, not where you live, not where the injury occurred.
So, as an example, a South Dakota court will not enforce a claim that comes from California, Texas, Kentucky—wherever it may be, any jurisdiction. The creditor will have to go to South Dakota and recommence the suit against the trustee in South Dakota. This is an example where the additional legal and court fees alone should be enough for most potential creditors just to drop the claim. It’s just not worth their time. The legal fees could end up being astronomical.”
“That’s fantastic. A lot of people aren’t familiar with these APTs, and as you mentioned, there aren’t a lot of attorneys that practice in this particular area of asset protection. Can you give us more background on how they came to be and why they’re growing in popularity?”
“Sure. Obviously, trusts have been around for hundreds of years, if not longer, possibly even thousands of years. Historically, though, you have not been able to set up a trust yourself for your own benefit and have the assets be protected from creditor claims against you.
Back in the ‘80s, all of this changed. Several offshore jurisdictions passed laws changing the entire trust industry by allowing a person to set up an irrevocable trust for their own benefit while protecting those assets inside that trust from creditors. Since then, countries like the Cook Islands and Nevis, small island countries, have become known for what’s called their foreign asset protection trusts, or FAPTs. Several states, including Nevada, South Dakota, Alaska, and Delaware, have become known for their domestic asset protection trust laws. We’ll talk more about the difference here in a second.
Just know that South Dakota and Nevada are the strongest jurisdictions these days, with South Dakota being recognized among practitioners and commentators as the best trust jurisdiction in the country.”
“Can you tell us what South Dakota offers that other states might not, in regards to asset protection?”
“Great question. We love South Dakota for four reasons, or maybe you could say five: privacy, flexibility, no state income tax, and Dynasty trust planning.
First, privacy. This is really important. South Dakota has what’s called a ‘perpetual seal’ on trust details that come out in court proceedings, so it’s sealed from any public record whatsoever. Other states don’t provide a perpetual seal, or they give the judge discretion to provide the seal, but that will ultimately have a shelf life. A lot of people have heard of Delaware trusts. Delaware was a strong leader initially when there started to be a modernization of trust laws in the U.S., but they’re one of those jurisdictions that gives judges discretion on whether or not to seal any information or whether or not it becomes public. I believe it’s a three-year statute of limitations; after three years, it becomes public knowledge again and can be open to the public eye.
Also, South Dakota provides quiet trust laws, and I love this. Ultimately, quiet trust laws allow you to determine how much information beneficiaries are allowed to have from the trust. In most jurisdictions, if not all jurisdictions other than South Dakota, as soon as a beneficiary hits 18 years old, they’re allowed to know certain terms of the trust. In South Dakota, you can completely eliminate that if you want.
Next is flexibility. South Dakota allows for updates to irrevocable trusts that will ensure your irrevocable trust will always serve your desired outcome.
No state income tax: that’s a really big deal for people who live in states with income tax. To the extent that there is income being produced inside the trust, it won’t be subject to state income tax.
And then Dynasty trusts. Many states have certain shelf lives that a trust can last. Certain states will say that a trust can exist for 21 years, 300 years, 800 years, whatever it may be. A handful of states, South Dakota in particular, say that a trust can live into perpetuity—it can last forever. This means that any assets in there are never going to have to be distributed from the trust; they will never be subject to any type of wealth transfer, estate tax, inheritance tax, or generation-skipping tax. So, it’s a really, really huge benefit to be able to do trust planning where there are Dynasty trust laws.”
“That’s fantastic. Those are some really good reasons why South Dakota is really the top jurisdiction in the U.S. You mentioned Cook Islands. So, a foreign asset protection trust—that’s obviously a foreign APT, and South Dakota is a domestic APT. Let’s do a quick comparison of concerns that people might have. What concerns, if any, are there with that foreign asset protection trust?”
“I personally don’t think that there are real concerns; I think it’s just a matter of preference, right? Whatever a client is most comfortable with, whatever accomplishes their desired outcomes. But a few of the differences:
A foreign asset protection trust is going to cost more. Usually, the rule of thumb, though not always necessarily the case, is that it costs about twice as much as a DAPT, the domestic asset protection trust. Legal fees associated with a foreign asset protection trust can run anywhere from $25,000 to maybe $30,000, or even more. I’ve seen cases where it even reaches close to six figures, but that’s usually because of complex issues and nuances with the client.
Usually, it’s around that $25,000 to $30,000 range. There are ongoing trustee fees that will be associated with it, probably in that $10,000 to $15,000 range, whereas a DAPT is probably closer to $10,000 to $15,000 in legal fees and maybe $5,000 to $10,000 for annual trustee fees, sometimes less—it just depends. There are ongoing fees associated with it, and there is a difference in pricing.
Second, with the FAPT, you obviously are going to have to move your assets offshore. I don’t think that’s really a big deal, but with some clients, moving assets offshore does scare them. It’s something they’ve not done before. They may not have done it before, so that could be a concern for them. Again, I don’t think it’s really a big deal because you’re working with a trust company that is very reputable. It’s been around for decades, if not longer, and there’s a reason they have the reputation they have.
Lastly, reporting and compliance. The U.S. Treasury has really been trying to crack down over the last 10 to 20 years on tax evasion with offshore vehicles. They’re thinking about business entities like LLCs or trusts. Because they’re cracking down on it, there’s much, much more reporting and tax compliance that goes on with these offshore trusts. This is part of the reason for the increase in ongoing fees. It’s something that the trust company will handle, or they’ll coordinate with your CPA to make sure that it’s being covered.”
“So, yeah, these foreign APTs may have some concerns, but not really any issues or anything like that. What about the domestic APT? Are there any concerns related to those?”
“I don’t think so; I don’t think there are any real concerns whatsoever. But you might read about concerns—again, in quotation marks—online or from different judges, different commentators, that kind of thing.
The concern that you might see is whether a judgment in a foreign court, such as, say, Texas or California or Florida, somewhere else, can be enforced in a domestic asset protection trust jurisdiction like South Dakota. The reason there is this concern is that the U.S. Constitution states that each state must give full faith and credit to another state’s laws. This is probably something we’re all familiar with, but at the same time, each state doesn’t have to recognize another state’s laws if it is against that state’s public policy. So, it’s really a balancing act, right? You end up with this circular argument.
The thing is, this particular issue has never been litigated in the almost 40 years that these domestic asset protection trusts have existed. That in itself is an awesome track record and proves that these are effective because they’re not being litigated.”
“That’s fantastic. However, just because it hasn’t been litigated doesn’t mean it’s a resolved issue. Are there legitimate legal solutions to this? Otherwise, I could see where a client might be hesitant to move forward.”
“Yeah, and this is one of the reasons South Dakota is so great. It’s so modern in its approach to trust planning. There are two solutions to this.
The first one: South Dakota law provides the best of domestic and foreign asset protection planning within one trust instrument, one trust agreement. So, you essentially have a foreign asset protection trust within a DAPT, a domestic asset protection trust. South Dakota law states that if a foreign court, say Texas in this example, doesn’t apply South Dakota law to the decision made against the trust, then the trustee is not allowed to recognize or pay the judgment.
In fact, the only power granted by law in South Dakota to the trustee is to resign as trustee and appoint a successor trustee. As a function of law, it’s never going to work. The trustee will never be able to actually pay the creditor. This is what gives us the opportunity to move assets from South Dakota to an offshore jurisdiction like the Cook Islands and appoint a Cook Islands trustee to now oversee the assets.
Ultimately, the creditor would have to go to the Cook Islands court system and recommence litigation to seek to have a judgment enforced. Again, making it really difficult. You’d have to find attorneys in a foreign jurisdiction, pay for those attorneys, and start the process all over again. It’s just a huge deterrent to creditors.”
“So, one solution is turning that domestic APT into a foreign APT. Is the second option to keep it in the U.S., to keep it domestic?”
“Yeah, great question. This is a conversation we’d need to have while we’re structuring the trust. Ultimately, we can create what’s called a ‘hybrid DAPT,’ which is slightly different from the traditional DAPT but has the same asset protection benefits. We don’t have enough time to go into all the details about a hybrid DAPT here, but the point is there is a solution.
With the hybrid DAPT, what you’re essentially doing is setting up the trust for the benefit of someone else, but you’re reserving the ability to have the assets moved into a sub-trust for your benefit. The sub-trust doesn’t exist until you actually need it to exist. I won’t go into more detail about it, but just know there is also a domestic solution in case foreign asset protection trust planning does not interest you at all.”
“We’ve kind of given an overview of how asset protection trusts work. Can you share with us some real-world examples of their effectiveness?”
“Yes, 100%. The best-case scenario that we’re striving for, that I’ve mentioned, is for a possible creditor to make it as difficult as possible to reach any assets so that they’re deterred from even bringing the suit. Once they figure out that you don’t own assets in your personal name, that they are in an asset protection trust—if they can even figure that much out—hopefully they’ll just drop the whole thing. But we’ll just say, for whatever reason, they don’t.
It’s proven to be effective just by the lack of cases that are out there to cite, as I was mentioning a few slides ago. One of the most famous real-world examples is related to the divorce of a Houston billionaire named Ed Bosarge and his ex-wife, Marie. You can Google ‘Ed Bosarge South Dakota trust,’ and you’ll find articles about it in Forbes, I think, New York Post, Washington Times, Washington Post, those kinds of publications.
There are pretty sensationalized articles about it. They act like South Dakota trusts are secretive and that type of thing. But again, from my perspective as an attorney, they’re really sensationalized and kind of being pushed by an ex who ultimately didn’t do planning or hire attorneys herself to make sure her interests were taken care of.
The point is that an asset protection trust can be pretty darn effective, even when it comes to protecting assets from a divorce. That’s one great example.
Here on the slides, I have a few other examples. These are from other attorneys that I know who’ve done asset protection trust planning for clients.
The first one here is a $58 million judgment against the client that ended up being resolved for $7 million. Working our way down, there’s another really large one here at the bottom: a $75 million personal loan settled for $5 million, paid over five years. A $34 million malpractice suit against a doctor was settled for less than $1 million.
I won’t read the rest, but the point is they are effective. They’re very effective.”
“Let’s talk about some of the common questions that we get at Stuart Green Law. The one we get all the time: are there tax implications from setting up an APT?”
“Yes and no. It depends.
First, there are no nefarious tax implications to an asset protection trust. I think a lot of people hear the word ‘offshore’ or ‘foreign trust,’ and they automatically think it’s intrinsically linked to tax evasion, and that’s just not true. The only way to get in trouble with a foreign asset protection trust is if you’re just not reporting the taxable income to the IRS. That is obviously tax evasion, and I always tell clients, ‘I’m not going to jail for you,’ so I’m not helping you commit tax evasion.
Regarding the domestic asset protection trust, it depends. There can be tax advantages, depending on how we structure it. You could potentially avoid state income tax, and certainly, you could avoid estate tax when you ultimately pass away and pass along your assets to other generations.”
“Can you show a diagram of an asset protection trust so folks have an idea of how it’s structured and laid out?”
“Lucky for you, I have one. So, we’ll start here in the top left-hand corner and kind of roll through this.
The structure itself is pretty simple; it’s really not that complicated. We start in the top left-hand corner with the settlor. The settlor is the client—that’s you, the person setting up the asset protection trust. This structure works for both domestic asset protection trusts as well as foreign asset protection trusts. It’s a similar, typical structure. There can be variations to this, but it always starts with the person setting it up—the settlor.
So, the settlor is going to transfer assets into an LLC, a limited liability company. It could be another type of entity, but it’s usually an LLC. It could be a domestic LLC here in the U.S., or Nevis is known for their LLCs as well as their asset protection trusts. There are a few different things that we may want to do there, but ultimately, you transfer your assets to the LLC, which is owned by the asset protection trust. So, the LLC really just sits inside this asset protection trust.
Really, where the beauty of the asset protection benefits works out is here on the right-hand side of this flow chart, with the various roles that we have to fill in.
The beneficiaries of the trust can either be you, the person setting up the trust, or it could be family. That’s where a hybrid domestic asset protection trust may come into play, or it could be both of you. There’s a lot of flexibility; it just depends ultimately on what you want to accomplish.
Next, we have the trustee. The trustee must be a resident of the domestic asset protection state. Most people will use a corporate trustee in a jurisdiction like South Dakota or the Cook Islands.
This is one of the things to keep in mind. Asset protection trust jurisdictions allow for the bifurcation or even trifurcation of responsibilities of a trustee’s role. Rather than the trustee being responsible for everything going on with the assets of the trust, you can name a close friend or an advisor, maybe even yourself, in the role as distribution advisor or investment advisor. They work in conjunction with the trustee of that jurisdiction.
Lastly, we have the trust protector and/or committees.