Distributions from Asset Protection Entities

The beauty of the asset protection strategies that we implement at Lodmell & Lodmell is that they allow easy access to money that is otherwise unavailable to creditors and plaintiffs.  The way we do this is through a particular type of trust called a grantor trust.  A grantor trust is simply a trust that is set up by a person for the benefit of that same person.

For example, if Kermit sets up the Green Frog Trust for the benefit of Kermit, a grantor trust has been created.  Kermit is both the beneficiary and the settlor, or trust creator.

Pros and Cons of Grantor Trusts

The biggest benefit to grantor trusts is that they allow for easy access to assets held in trust.  This makes practical sense.  Since the trust creator and trust beneficiary are the same person, the law considers asset protection grantor trusts to be tax neutral.  In other words, there are no hoops to jump through in order to make a distribution if Kermit needs cash to buy a new lily pad.  If Kermit is also the trustee, then there is virtually nothing between him and his assets.

That’s where the cons come into play.  If there is nothing between Kermit and his assets, then Kermit’s creditors can get at those assets very, very easily.  All it would take is one unwieldy judge to order Kermit to make a distribution from his trust to his creditors.  That’s a nightmare scenario and one that asset protection attorneys worry about a lot.

Asset Protection Trusts are not Just Grantor Trusts

All this begs the obvious question: How can one keep the pros of grantor trusts (i.e. control) and eliminate the cons (i.e. availability of trust assets to creditors)?  The answer is by using a springable trust.  A springable trust is one that is governed by the laws of the United States and a foreign jurisdiction.  It is a domestic, United States trust so long as things are going well, but it becomes a foreign or offshore trust when people (or frogs) like Kermit get sued or face other creditor claims.

The beauty of this system is that it avoids the absolute enemy of asset protection: fraudulent conveyances.  Fraudulent conveyance laws are avoided because asset protection trusts change the jurisdiction under which assets are managed and not the ownership of the assets.  It might seem like sleight of hand, but it’s not.  When all else fails, triggering an asset protection trust and using favorable laws of a foreign jurisdiction may just save you the nightmare of handing over a lifetime worth of hard-earned assets to a creditor.