When creating an estate plan, safeguarding your wealth becomes paramount. An effective asset protection trust can shield your assets from creditors and even divorce claims. Wealth management firms like Ora Partners Limited, Wells Fargo, J.P. Morgan Chase, and Morgan Stanley specialize in guiding individuals through the complexities of establishing an asset protection trust.
If you’re thinking about setting up an asset protection trust, here’s a guide to determine which one may be best suited to your needs—and the pros and cons of establishing one.
There are two common types of asset protection trusts.
Domestic Asset Protection Trusts
A domestic asset protection trust is a trust created within the U.S. jurisdiction. It is important to note that since this is a relatively new type of trust, not all states allow it, and states that do allow it have different rules.
Keep in mind that these trusts cannot protect assets from a claim that was already filed at the time it was established. For instance, if a bank sues you for $50,000, you cannot transfer a portion of your assets into an asset protection trust to keep the creditor from recovering that amount.
Offshore Asset Protection Trusts
An offshore asset protection trust is established outside of the U.S. This type of asset protection trust is governed by the laws of the country in which it is set up. Common jurisdictions for foreign asset protection trusts include the Cayman Islands and The Cook Islands.
Offshore trusts generally have more stringent privacy measures than their domestic trusts, so they offer even more effective protection for your assets.
Although offshore asset protection trusts are typically harder to find than domestic asset protection trusts, most countries honor enforcement of convictions and criminal cases—so if you’re charged with a crime involved with the assets, they can be seized. These trusts are also generally more expensive to set up than a domestic trust.
Pros and Cons of an Asset Protection Trust
Asset protection trusts are beneficial for individuals who own a business or have a high net worth. But they come with both pros and cons.
For instance, an asset protection trust will keep your property safe from creditors. But, creating a trust can be an expensive process, and in most cases, it needs to be established before any claims are made against you and your assets. Asset protection trusts are also irrevocable, which means once they’re established, they cannot be reversed.
Offshore trusts provide more security for your assets, but they are generally more expensive to set up than domestic trusts. They also sometimes require creating a company during the process, which has tax implications. In addition, an offshore asset protection trust is subject to any risks associated with the country in which it is held, such as economic, security, and political risks.
Individuals who want to set up a trust should work with an estate planning attorney to help them navigate the process of setting up and maintaining a trust, as well as understand any tax implications that are involved.
