Asset Protection Trust

Hi, this is attorney Gary Fales. Today I’m going to talk to you about asset protection trusts. Now there are two different types: there are offshore asset protection trusts, and there are those that are created here in the United States.

The asset protection trust concept originated on offshore jurisdictions. They permitted a person to create a trust, place their assets into this trust, and then the trust itself had prohibitions on creditors being able to attach their interests to the assets that are in the trusts.

This is great because you could essentially control many of the aspects of the trust (so you get to keep your control) but yet none of your creditors would be able to attack it and get to those assets. This is a wonderful way to protect the things that you value.

The United States is slower in coming around to letting these trusts be formed domestically. The reason for that delay is mainly because there is a concern that your creditors would be hindered or delayed in being able to get their money back. There are several states that permit these trusts now, including Delaware, Nevada, Wyoming, and South Dakota.

There is a great debate over whether or not it would be better to have a foreign or offshore asset protection trust, and whether or not there should be a domestic trust if it’s a U.S. citizen with U.S. assets.

I tend to favor using domestic trusts (although I’ve done both.) The reason for that is the costs are much cheaper with domestic trusts. For example, the annual fees are much better with domestic trusts than with foreign trusts. It costs about ,000-,000 per year just to maintain a foreign trust, and anywhere from ,000 to ,000 to create foreign trusts. Additionally, the tax requirements and filings can be quite onerous.

Domestic trust costs and levels of protection vary by jurisdiction. Some people wonder, “If it’s cheaper to create, and the domestic trust annual fees are cheaper, does that mean we’re going to get the same level of protection?” It then becomes a cost/benefit analysis.

Typically we think of foreign trusts as having more protection because the trustee is outside the jurisdiction of any type of judge. If there was a judgment against you, the foreign jurisdiction would not honor that judgment. The creditor would have to go to the other country and renew, or start a new claim all over against you in order for that claim to be heard by the judge.

My concern with the foreign trusts is that there is not a statute that a court can use in the United States that protects the trust from a fraudulent transfer claim. For example: you have made a transfer to this trust. Typically, the creditor is going to try to claim any transfer is a fraudulent transfer, even if it wasn’t.

With a Nevada Asset Protection Trusts, there are statutes to help protect you from this. For example, there is a statute of limitations that says the creditor has two years from the date of the transfer, or six months from the date of discovery of the transfer, to bring an action against the trust. If they don’t bring it within that period of time, then they are precluded from bringing any action against that asset in the trust.

While there are those types of statutes in these foreign jurisdictions, they won’t be very helpful in those situations, especially if the U.S. Court has already determined that it is a fraudulent transfer. At that point, the judge could try to enforce the creditor’s claims, creating a lot of trouble for you.

I believe that we go to the heart of fixing this problem by using the domestic trust, because we have this statute that essentially limits the creditor from making a claim. If those assets are in a foreign trust, the creditor can make the claim in the U.S. and try to get the judge to enforce it, which will not yield a good result for you. We don’t want the judge to use other means to try to coerce you into transferring assets back to the creditor. For example, the judge may try to argue contempt of court to force you to distribute those assets from the trust back to the creditor.

Thus, I prefer the asset protection trust located in the U.S. for various reasons. In particular, I think Nevada (having looked at the different states) has the best statute on point because there are no “exception creditors.” This means there aren’t any creditors that get a special treatment to attack the trust. Many other states have exception creditors.

Nevada also has the shortest window of any other state: it’s two years from the date of the transfer and six months from the date of discovery, whereas other states have either a three or even four year window. Also, it’s quite easy to use these assets in Nevada.

There is some contention I hear regarding the viability of somebody in a different state, let’s say Oklahoma, getting a judgment against them, and it’s Oklahoma courts, Oklahoma assets, Oklahoma plaintiffs and Oklahoma defendants, but these assets are going to be held in the Nevada Asset Protection Trust (obviously in a different jurisdiction.) My response is this: if you don’t use something like the Nevada Asset Protection Trust, which is so cost effective, what else are you going to use?

I know that there are other items you could try to put together, but those products and strategies can always be used inside the trust. I always like to use the trust as a first layer and then use other strategies inside that trust to continue to build thick walls, if that’s what we thought we needed to do.

It’s true that we are unsure as to what an Oklahoma court would do, but I think it’s safe to say that one of the strongest tools that we have available to us would be the use of the Asset Protection Trust. If that wasn’t comforting enough, there are other strategies in addition to the trust, which could be used in a very cost effective manner in a way that is going to protect you, not just from a crisis, but also protect you year after year. So this is Gary Fales talking about Asset Protection Trusts, and I hope it was informative. Thank you!

After graduating from law school in 2001, Gary joined KPMG’s New York City Mergers and Acquisitions Tax Practice, where he performed M&A tax due diligence, conducted extensive tax research on complex transactions and wrote technical tax memos and opinion letters, including cross-border transactions. In the spring of 2002, Gary moved back to his home town of Las Vegas where he began helping families and small businesses plan for incapacity, death and lawsuits. He is a top Nevada lawyer now.

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