An asset protection trust is an irrevocable trust that includes a spendthrift clause, with the purpose of protecting assets from creditors and other parties, so these assets can be passed untouched to the designated beneficiaries. The creditors do not go unpaid, but rather this allows them to settle with the debtors on favorable terms for both parties while avoiding the costs of court time.
States Where Asset Protection Trusts are Fully Allowed
Some states are beginning to accept the formation of these types of trusts, such as Colorado on limited terms, but as of 2019, at least the following states fully allow asset protection trusts, also known as Domestic Asset Protection Trusts:
- South Dakota
These states have a few common requirements, such as the trust being irrevocable and containing a spendthrift clause; having one or more trustees; and having some of the admin work completed within the state the trust was established in. As well, the settlor may not be able to be the trustee.
If you do not live in one of these states, you can still establish this type of trust in one of them. The only rule with this, is that the real estate or property you place in the trust must be located in the same jurisdiction that the trust is established in. There are some offshore countries which allow the creation of foreign asset protection trusts, such as the Cook Islands and Cayman Islands. Setting up this type of entity usually provides you with more privacy and security from potential domestic issues you might be anticipating.
The formation of an asset protection trust was fairly controversial when it was first invented, and is still not allowed in most states. However, more states are allowing it to be part of the estate planning process, and it can be beneficial for estates that are large and complex. Some reasons families may put a few of their assets into this type of entity include:
- Protecting the beneficiary from taxes, bankruptcy (creditors), or divorces
- Avoiding the probate process, just as any other type of trust
- Reducing your current taxable estate or inheritance
The creation of this entity involves detailed regulatory requirements, so it is highly recommended that you establish one with the guidance of an experienced estate attorney in Cherry Hill, NJ. This will help to ensure that your trust is setup correctly in respect to the laws that govern its particular jurisdiction, following all state and federal laws, and that it remains legitimate in the case that the laws change over time.
Thanks to Klenk Law for their insight into estate law and asset protection.