The Asset Protection Trust

April 13, 2006

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Did you know that the nature of the trust allows you to place your assets in a trust for your children, and completely shield the assets from the children's creditors?

The law is very clear in this situation. Assets in this type of asset protection trust are out of the reach of children's creditors in all circumstances, including court judgments, bankruptcy and divorce. An asset protection trust is equally effective when a trustor establishes the trust with beneficiaries other than children.

However, when a trustor places assets in a trust for his own benefit, the law is less clear as to whether the assets can be shielded from the trustor's/beneficiary's creditors.

If the trustor is also a beneficiary, a trust can potentially function as an asset protection device, provided that the trust:

is irrevocable
has an independent trustee
does not provide for mandatory distributions of income or principal (i.e., such distributions are subject to the discretion of the trustee)
has a spendthrift clause

Given these circumstances, a number of asset protection strategies are available. Most common are the use of offshore trusts. But since 1997, Alaska and Delaware have changed their state laws to allow similar trusts here in the U.S., thereby preventing the flight of capital overseas.