Trusts and asset protection

What is asset protection

It is a set of legal techniques dealing with securing assets of individuals and business entities from claims of creditors without perjury or tax evasion.

So now as we know, what asset protection is, let’s move on to who shall consider it

Obviously, those who have assets and the more you have the most crucial it becomes to protect your wealth from potential claims. Therefore, most people seeking advice on asset protection are high net and ultra-high net worth individuals.

An additional factor that may raise the need of asset protection is an increased risk of liability exposure, which may be connected to your business or personal life.

• owner of a significant business who is acting as a director for various corporations and is exposed to possible lawsuits
• ultra-high net worth individual who intends to marry

In both of these scenarios, we should hope for the best, but be ready for the worst.

When shall you consider asset protection planning?

As soon as possible. As you will see later, it is usually way too late to set up any asset protection plan, when you already have a creditor knocking at your door.

So now that we know what asset protection is – how can a trust work as an asst protection tool? As you can see on this slide, the key mechanism is the separation of assets. Upon the completion of the transfer of the assets from the settlor to the trustee, the settlor ceases to be the legal owner in favor of a trustee. Consequently, because the assets do not belong to the settlor, they cannot be seized by his or her creditors. As a result a trust can be used to ring-fence the trust assets from various personal claims against the settlor (e.g. in divorce proceedings or personal creditors).

We would like to present to you some of the most popular asset protection tools, such as insurance policies, limited liability companies and retirement plans and prenups.

1. Insurance policies are popular defensive tools for business owners, lawyers, doctors and other professionals. In a nutshell, a limited liability insurance shall cover the legal fees or damages you may be forced to pay in the event of an adverse legal judgment.

Is it Effective?

In general, insurance policies are good. But they aren’t truly effective for comprehensive asset protection because they are limited by design. Say that you have a limited liability insurance policy that covers you for $500,000. What happens if you are sued for $3 million instead? Therefore it’s best to think of insurance policies as supplementary asset protection tools rather than cornerstones of your overall strategy.

Why is a Trust more Effective?

As opposed to insurance policies, trusts do not have any maximum coverage and protect all assets that are transferred to the trust fund.

2. Many high-net-worth individuals also use retirement plans for asset protection. That’s because many retirement plans, can’t be accessed by creditors, even if you are found responsible for various claims or debts.

Is it Effective?

Yes, but retirement plans shouldn’t be the primary element of the asset protection strategy. Depending on the jurisdiction many retirement plans can be breached by creditors under some circumstances; for example, if you owe taxes. The immediate availability of such money may also limited.

Why is a Trust more Effective?

As opposed to retirement plans, trusts offer protection against all types of claims, tax including.

3. Limited Liability Companies (LLC) theoretically separate business and personal liability in the event of a lawsuit. For example, if your company is a limited liability company, theoretically your personal assets will be safe and secure if the lawsuit against the company is successful.

Is it Effective?

Not always. Many jurisdictions recognize a concept of so called “piercing the corporate veil” and it is possible to argue, oftentimes successfully, that there’s was no true legal distinction between you and your business. If such argument is successful, a judge can order you to pay out of your personal accounts and assets.

Why is a Trust more Effective?

If a trust is properly set up, it should be immune to “piercing the corporate veil” and offer a robust protection.

Prenuptial Agreements

A prenup is a legal arrangement that defines the rights and responsibilities of spouses if the marriage ends with a divorce. In most cases, it’s used to determine who owns what assets during the marriage and in the event of its dissolution.

Is it Effective?

Though prenuptial agreements are legally binding, prenups as agreements are subject to interpretation by the judge who will enforce them.

Also, it is important to mention that when you and your spouse sign a prenup, you participate in a highly complex and controversial engagement which may start the marriage from a place of adversity instead of cooperation.

Why is a Trust more Effective?

An asset protection trust is effective for protecting your wealth in divorce for the same reason it’s effective in protecting your wealth against other lawsuits or legal actions: it removes those assets from your control. Because of this, even if a judge were to find that you owe your spouse some amount of money or property, they could not demand that you give up the assets under the trust.

To sum up, for most high-net-worth individuals, asset protection requires a multilayered approach. Although some tools (such as trusts) are certainly stronger than others, it’s oftentimes wise to use multiple types of asset protection to double down on security. In any case it is worth underlining that a well set up trust can act as an asset protection tool and protect your assets from various claims:

• of all types of creditors
• all types of claims and
• with no maximum sum “protected”.

However, in order to achieve the asset protection goals, a trust needs to be set up properly.

Remark: The content of this article was accurate at the time of the first publication. It provides general information on the subject matter and is not intended as legal advice. For specific advice on your situation, we recommend seeking professional counsel. If you have any questions or need further information, please contact our experts at contact@mainpartner.com

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