What is an Asset Protection Trust?

To understand what an Asset Protection Trust is, and how it works we must first look at the concept of a Trust itself. In the most basic terms:

“A Trust is a legal relationship in which one person (Trustor) transfer something of value (Assets) to a 2nd person (Trustee) to hold for the benefit of a 3rd person (Beneficiary).”

That’s it. From here we can build on the concept and add several distinctions. For example:

• When the role of Trustor and Beneficiary are the same person, the Trust is considered a special kind of trust called a Self-Settled Trust.
• When the Trust has language that limits a beneficiary’s access to the funds, these terms are called Spendthrift Provisions.
• When the Trustors, also known as the Settlors, retain a present or reversionary interest in the Trust, the Trust is considered a Grantor Trust.
• When the Settlors retain the power to revoke the Trust, it is considered a Revocable Trust, when they do not retain that power it is an Irrevocable Trust.
• When a Trust is settled (created) under the laws of the U.S. it is considered a domestic Trust, when settled under the laws of a non-U.S. jurisdiction it is considered a foreign Trust.

All of the above distinction are important when it comes to how to tax the Trust and what rights the various parties have to the assets of the Trust. They also become important when determining what rights a court has to access the Trust assets as well. And it is here that a specific combination of features, Trust language and choice of jurisdiction, when properly combined can create the powerful Asset Protection Trust.

An Asset Protection Trust is a Trust in which the Settlors (clients), settle a Trust for their own benefit, and include language that limits access to the assets in the event that a court or creditor is attempting to reach the assets through the clients in their role as beneficiaries. And, it must be irrevocable to withstand U.S. court scrutiny. In other (legal) words:

“An Asset Protection Trust is an Irrevocable Self-Settled Spendthrift Trust, typically designed as a Grantor Trust and most commonly created as a domestic Trust that converts into a foreign Trust during an Event of Duress.”

Since it is a Grantor Trust, for tax purposes it is virtually invisible. It does not increase or decrease any taxes due and any income earned by the Trust is passed directly on to the Settlors (known as Grantors when the Trust is a Grantor Trust).

The basic operations of the Trust allow the Beneficiaries access to the Trust Assets directly for their use benefit and enjoyment, unless an Event of Duress has occurred. An Event of Duress is defined in the Trust document itself and includes any action or activity that threatens the Trust assets–like a lawsuit.

In such a case, a secondary set of rules comes into play, and in particular the Spendthrift Provisions are activated in such a way that the creditor and the courts are blocked from any access to the Trust assets whatsoever. However, even during an Event of Duress, the clients remain the beneficiaries and may still indirectly access to Trust assets for their continued benefit, use and enjoyment. This might be the Trustee leasing a car for the beneficiary, or renting a home. It could also include the Trustee paying, from Trust assets, the credit card bills of the beneficiary, etc.

The net effect is that the Trust assets are permanently preserved for the Trust beneficiaries and completely protected from unauthorized court proceedings and creditors.

That is the Protection in Asset Protection Trust. There is really one one vulnerability to a properly drafted and funded Asset Protection Trust. Find out what it is at:

• What is The “Achilles Heel” of Asset Protection?