To Use a Domestic Asset Protection Trust or NOT!

Revocable Trusts Aren’t Asset Protection Trusts

Lots of people establish a living revocable trust thinking they are creating some sort of a domestic asset protection trust. A revocable trust is not an asset protection trust. Living trust asset protection is pretty much a myth. Whether the trust is a living trust, family trust, or another type of trust you can conjure up, if it is revocable, it does not protect its assets if the grantor (the person who sets up the trust and puts assets into it) gets sued.

Land trusts are often touted as asset protection tools. They are almost always a form of revocable trust, and land trust asset protection is as big of a myth as living trust asset protection. Whether it is land trust asset protection or living trust asset protection somebody is trying to sell you, a revocable trust by whatever name is simply not a trust to protect assets.

On the other hand, irrevocable trusts provide good asset protection for the grantor, when the grantor is sued. But, you have to realize that if you establish an irrevocable trust and move assets into it, they are no longer your assets. You can’t get them back.

There is a special type of irrevocable trust called an “asset protection trust.” If the irrevocable trusts asset protection is established under US laws, it is a “domestic asset protection trust.”

The asset protection trust comes in lots of different varieties. There is a domestic asset protection trust version and an offshore asset protection trust version. The domestic asset protection trust is probably the one you will use, if you use an asset protection trust. I may talk you out of an asset protection trust, because for most people there are simple things they can do for asset protection, as described in my book, Protecting Your Financial Future.

Self-settled Domestic Asset Protection Trusts

Domestic asset trusts protection derive their “protection” from state statutes. The following states have passed “self-settled domestic asset protection trust” laws, Alaska, Colorado, Delaware, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming.

A self-settled (self-created) domestic asset protection trust is unique, because it protects the assets of the grantor from creditors of the grantor. That’s a big deal, because it is very hard to set up a trust so that you can get a benefit out of the trust and still have it protected from your creditors. These state laws specifically let you create an asset protection trust that does exactly that.

The first self-settled domestic asset protection trust was created in Alaska. Yes, it protects assets, allows the trust to retain its assets for centuries, and has some major tax advantages. But, I think you need to look at why the Alaskan Domestic Asset Protection Trust was created.

Every state that has created a form of domestic asset protection trust has the underlying goal of getting more money into their state for the banking industry. Alaska needed a source of new investment in their state. So, they created the trust assets protection and give it the promised asset protection. People wanted the promised long life of the Alaskan Domestic Asset Protection Trust (999 years), the asset protection and the tax advantages, so they dumped their money into Alaska.

Instate Bank Trustee Required for Domestic Asset Protection Trusts

Note that all of the states that have passed domestic asset protection laws require a bank in the state or at least a resident of the state to be the trustee of the domestic asset protection trust. The banks make money off the domestic asset protection trusts as the trustee in addition to the money they make from the investment of the money in the trust. That means you are “paying” to have your “asset protection trust.” You have given up control of the assets. In fact, you have given up the assets – period.

Generally, people within the state where the domestic asset protection trust is authorized by state law can’t establish an asset protection trust in their own state and get the “neat benefits.” They have to go to another state to establish their trust to get the asset protection trust benefits, because the state where they are already resident doesn’t need to “attract” their money. That state already has their money, and it would be “unfair” to give special tax benefits and asset protection benefits to state residents, just because they establish an asset protection trust.

In case you couldn’t tell, I feel like the domestic asset protection trusts are a come on by some states, banks and attorneys. When I actually explain a domestic asset protection trust to my clients, they usually decide they don’t really want one. Don’t get me wrong. In some situations the domestic asset protection trust is just what the doctor ordered.

Usually, clients don’t want to give up their property to the degree it is actually required by the states that have passed the domestic asset protection trust laws. The attorneys and promoters setting up the asset protection trust structures make good money, and they tend to sell the benefits, not the details.

Many of my clients realize that a limited liability company coupled with a living revocable trust can provide management, asset protection, and tax advantages. Basically, using simple tools in their home state, they can get the advantages they could get with the domestic asset protection trust.

Domestic Asset Protection Trusts Last a Long Time

I always point out one other thing. How do you write a document that will be visionary for a thousand years? The argument can be made that the domestic asset protection trust that goes on for centuries provides a huge legacy for dozens of generations. Actually, that is true, if there is a huge chunk of wealth in the domestic asset protection trust to start with.

Do you realize that the United States was founded 235ish years ago? It has only been a little over 500 years ago that Columbus found the Americas. The Magna Carta was signed 800 years ago, William the Conqueror of Normandy invaded England 900 years ago, and 999 years ago the First Crusades got under way, the Chinese introduced the world’s first paper money, Arabic numbers were introduced (it would be 500 years before they caught on in Europe), and the first stone castles in Europe were built.

You’re going to create a trust that dictates how your money will be used by your heirs 999 years from now. Don’t make me laugh!

If there are millions and millions of dollars in the domestic asset protection trust, it is an inspired tool for the next three of five generations, but I don’t think it is worth the hassle to get the benefits for $10,000 or even $100,000. If that’s all you have to play the game with, for a state created “domestic asset protection trust,” I think you would be happier getting asset protection and tax benefits out of some of the other tools.

My book, Protecting Your Financial Future, and the DVD, Using the Law to Make Money and Protect Your Assets, will lay out a lot of those tools for you and teach you how to use the tools. Check them out before you jump head long into a “domestic asset protection trust.”

The Offshore Asset Protection Trust

Offshore asset protection trusts are trusts created outside of US law. Lots of countries have enacted laws that allow you to create some form of asset protection trust. The most popular is the Cook Islands. In the early 1980’s a US law firm went there and helped them draft laws that would circumvent US laws if someone in the US tried to get the assets held by the asset protection trust.

Here again, there is an alternative motive. The firms in the US that heavily marketed the “offshore asset protection trusts” made a fortune setting up the trusts. The trusts were very heavily marketed in the 1990s. Obviously, the country where the trust is located is attracting money into the country. Every body gets a pound of your flesh when the offshore asset protection trusts are used.

In fact, they usually got two pounds of your flesh. With fees often over $50,000, you had better be putting a lot of money into the offshore asset protection trust to justify the cost. Offshore asset protection trusts are not for the rich. They are for the very rich. And, usually even the very rich lose playing the game.

I worked with the family of a very nationally noted gentleman who died of cancer. I worked on his domestic issues. His prior attorneys had set him up with big offshore stuff. To be sure that he got the maximum benefits it was required that he give up ownership and control. (That’s actually the way it works with the “big time” offshore games.)

When he died, the family knew there was about $50 million someplace, but they had no ownership or control and no record of the money. It was just gone. It went away so the IRS and the man’s creditors couldn’t find it. (He was in some serious litigation when he died.) The family never got a dime. I know at least one attorney that is living well today.

The rich can’t do today what they did 25 years ago. Most of the “tax benefits” in offshore asset protection trusts have been repealed by tax and banking laws, particularly after 911 with the Patriot Act. Most of the “asset protection” benefits of the offshore asset protection trusts have been demolished or at least diminished by the courts since the early 2000s.

Thus, the domestic asset protection trust certainly has advantages, even over the offshore asset protection trust. Domestic asset protection trusts are a lot cheaper to establish, have good protection under US laws, and ownership of the trust’s assets never leaves the US.

Use of the asset protection trust is actually “down” from what it was in the 1990s and early 2000s. Carefully consider what you are doing and what you will get out of the deal before you set up either an offshore asset protection trust or a domestic asset protection trust.

Leave a Reply