If you want to protect your assets from creditors, then one of the most effective ways to do this is through an asset protection trust.
There are two major types of asset protection trust:
• The Domestic Asset Protection Trust (DAPT) is a trust set up in another state, such as Nevada, with laws more accommodating to protecting your assets than those of California.
• The Foreign Asset Protection Trust (FAPT) is a trust set up in another country entirely, such as the Cook Islands, where your assets will be safer than in any U.S. state.
Both of these types of trusts offer some of the best asset protection available to you. Setting up a foreign or domestic asset protection trust will dramatically decrease the likelihood that your assets will be taken by a vindictive creditor, and doing so will also serve as a bargaining chip to dissuade unfair lawsuits.
However, it will probably not surprise you to learn that these trusts do not come without a price. Setting up a trust in another state or country might save you money in the long run, but it will certainly cost you in the short run.
This being the case, when is an asset protection trust worth the cost?
Well, there is no absolute rule, simply because everyone’s financial situation is so different. But in this article, we’ll give you some idea of how much asset protection trusts cost, and whether this price is right for you.
Not Everyone Needs an Asset Protection Trust
We regularly encourage clients to consider the dangers of frivolous lawsuits in today’s world, and especially within the litigious state of California. No matter how hard you try to be a good citizen, no one is immune to being sued, and even a small lawsuit could cause you severe financial hardship.
So, everyone needs to give at least some thought to asset protection. That said, not everyone will need to take measures as serious as setting up an asset protection trust.
First of all, while we all face the risk of a lawsuit, some people’s risk level is comfortably low. People who work within certain professions face a fairly high risk, while for others the chances of being sued are much lower.
If you work in a low-risk field, and live a low-risk lifestyle, then asset protection may be more of a back-burner issue for you. This doesn’t mean that you shouldn’t give the matter some serious consideration, but it does mean that you can probably get away with lower-cost asset protection strategies without going all the way to a trust.
Then there is the issue of cost. Not everyone will be able to afford the costs of setting up a domestic or foreign asset protection trust. The whole point is to protect your money, after all, and if you are spending a huge percentage of your yearly income on asset protection, that kind of defeats the purpose.
Everything in the financial world is a matter of cost-benefit analysis, and sometimes the costs of an asset protection trust will be too high, and the potential benefits too low, for it to be the right option for you.
If you are someone who earns a lower income, it is also worth considering that California does have a set of bankruptcy exemptions. While these exemptions aren’t huge compared to those offered by some other states, they will still ensure that you are allowed to retain a certain amount of equity in your property, no matter how vicious your creditors may be.
If you are lower income, then the bankruptcy exemptions will cover a much higher percentage of your assets. So don’t write off these exemptions too quickly!
How Much Will an Asset Protection Trust Cost Me?
The Basic Numbers
How much will it cost you to set up a foreign or domestic asset protection trust?
Of course, we can’t give you a precise figure here. There are a whole bunch of factors that affect the cost of an asset protection trust, and the only way to get a firm estimate is to consult with one of our attorneys and talk the situation over thoroughly.
Still, we can give you a pretty good ballpark estimate.
If you are creating a domestic asset protection trust, then the initial setup fee for the trust will be at least $12,000, perhaps more.
If you are creating a foreign asset protection trust, then the setup fee will be a good deal higher. Generally, you can expect to pay $25,000 at the very least, and probably closer to $30,000 if not more.
In addition to these initial setup fees, there will be annual maintenance fees for both types of trusts, ranging into the thousands. Here, too, the cost of a foreign asset protection trust is higher than that of a domestic one.
Who do these fees go to? Part of them will go to your attorney, while the rest will go to the offshore trust company which is tasked with much of the logistical business of setting up the trust.
Factors Affecting the Cost of an Asset Protection Trust
There are a number of factors affecting the price you will have to pay to set up an asset protection trust. While we cannot get into all of them, it’s worth going through a few of the biggest.
The first and most obvious factor is the location of your trust. If you go to a foreign jurisdiction, such as the Cook Islands, you will pay a lot more than you would pay for setting up an asset protection trust in Nevada or another U.S. state.
Part of this is just related to the cost of doing business offshore, but one important reason why foreign trusts are more expensive than domestic ones involves the compliance costs imposed by the authorities. As you probably already know, some people (and big corporations) move their assets offshore to avoid paying federal taxes, and it’s no surprise that the government will be suspicious of anyone offshoring their money.
As a result, if you own a FAPT, you will have to fulfill certain Asset Protection requirements set by the IRS, including annually filing Forms 3520 and 3520-A.
In exchange for the higher cost of a foreign asset protection trust, though, you will get an even higher level of protection than you would from a domestic trust.
Tip: Be meticulous in your record-keeping of all financial matters to do with your trust. This is especially important if you have a foreign asset protection trust, but you should do this even if you only have a domestic trust. Even though you won’t have to fill out any special IRS forms for a domestic trust, the government may still audit you, and in any case your trust company will likely want you to keep those records.
Another important factor is complexity. Not all trusts are alike. Some clients’ assets are more complicated, with a wider array of investments, and when this is the case, the attorney will have to put a lot more time and effort into setting up the trust. The trust document itself will also vary in its complexity.
Also, don’t assume that domestic asset protection trusts are necessarily simpler. They can be very complex in their own right!
Yet another factor involves the circumstances in which you set up a trust.
For instance, let’s say that you set up a trust late in the game, when you are already in the middle of a lawsuit. When you do this, you are potentially opening yourself up for a claim of fraudulent transfer.
Fraudulent transfer occurs when you move a significant portion of your assets out of your possession in order to make yourself insolvent and thereby avoid having to pay a specific debt, while secretly retaining control of the assets with the intent to regain them later, once the debt has been avoided.
This doesn’t prevent all asset protection trusts, of course, or we wouldn’t be writing this. But it does make certain trusts problematic when they are done in the wrong way or at the wrong time.
When courts look at whether a transfer was fraudulent, they typically look for certain badges of fraud, and one of the most important of these involves timing: when the assets were transferred in relation to the debt. The later you transfer your assets, the more likely your transfer is to be found fraudulent.
So, if you want to set up an asset protection trust when a lawsuit against you is impending, or once one has already been filed, then this will make it much more difficult to set up the trust, and as a result, your fees will be much higher.
When Should I Set Up an Asset Protection Trust?
So, when is it actually economical for you to set up an asset protection trust?
Again, we can’t offer specifics regarding your personal situation. However, as a general rule, setting up an asset protection trust becomes the proper move when you have at least $1 million in assets to protect.
When it comes to offshoring your assets, the bar is even higher; generally, you would do best to set up a foreign asset protection trust when you have at least $5 million to protect.
These, of course, are only guidelines, and the amount which you spend on asset protection is up to you. Some people with amounts under $1 million still value asset protection enough to create an asset protection trust, and some people with assets over $1 million do not.
However, we believe that these are the best approximate guidelines, and most other experts in the field generally set the bar at a similar level.
The other factor to take into account is risk. Certain professions face a much higher risk level than others:
- Doctors and lawyers may be sued for malpractice.
- Business owners may be sued for discrimination.
- Real estate owners may be sued for injuries that happen on their property.
- Designers and manufacturers of products may be sued for product liability.
That’s only a partial list, and even within these fields, there are some subfields that are more dangerous than others. If you work in one of these fields, you probably already know the risks you face, but if you have any questions, it may be worth talking to a legal expert.
The higher the risk you face, the more the cost of an asset protection trust will be worth it.
There is a very simple trade-off when it comes to asset protection trusts: peace of mind versus cost.
It is not always easy to navigate the balance between these two values, and that is why the best option is to speak directly to an attorney who is an expert at asset protection. It is important to have someone who will help develop a strategy that will meet your unique needs.
Everyone’s asset protection situation will be different, after all, and the most important thing is to figure out what’s right for YOU.