The Best Structure for Asset Protection
As many of you may know, the typical Family Living Trust does not provide any asset protection whatsoever for the maker of the Trust or Trustor. This type of Trust can provide spendthrift provisions that will protect a third-party beneficiary’s interest from creditor’s claim, but these provisions do not protect the Trustor.
As has been previously set forth on our Website and in my book: ABA Consumer Guide to Asset Protection, Asset Protection Trusts are now very much utilized by those individuals who want to protect their assets as much as possible. Many Offshore jurisdictions provide Asset Protection Trust legislation but there are times when clients may not desire to go Offshore and that they only utilize Domestic Asset Protection Planning. Accordingly, in this regard, approximately 18 states now have legislation to a Trustor beneficiary of an Asset Protection Trust. The best states to utilize for the Domestic Asset Protection Trust are Nevada, Alaska, South Dakota and Delaware. Our firm utilizes Nevada because it is convenient to California, but also because it is less expensive to create and maintain, the Trustee fees are less and it is rated the highest protected Trust by most experts.
If properly set up and maintained, the Asset Protection Trust can be a significant barrier to creditors. This barrier may only provide significant leverage in dealing with the negotiations with a creditor, but, on the other hand, it may discourage any creditor action all together. The principal problem relative to the utilization of the Domestic Asset Protection Trust is that the non domiciliary state courts may not recognize the asset protection provisions of the Trust. Notwithstanding this, there is no question that the Domestic Asset Protection Trust provides a significant degree of protection even if it is only for better leverage dealing with a creditor.
Modular Planning with Asset Protection Trust and LLCs
The Limited Liability Company or LLC is an excellent vehicle for asset protection. There are many advantages to the LLC which are subject of other articles on our Website and elsewhere and in my book ABA Consumer Guide to Asset Protection, but the principal asset protection feature is that it is much harder for creditors to reach the assets of an LLC than if the same assets were held in the name of the owner.
In my book I give three hypothetical case studies starting on Page 53 which are all very enlightening. The Diagram below manifests the structure in specific form. Basically, the structure involves the creation of the Domestic Asset Protection Trust and of the LLC (the LLC should preferably be in Wyoming or Nevada). The ownership of the member interest of the LLC is then transferred to the Domestic Asset Protection Trust. In this manner, if a creditor attacks the owner of the property that is placed inside the LLC, the owner can argue that he/she does not own the property, but that it is owned by the Trust. Then the creditor will also have to go against the Trust.
The principal benefit of the LLC is that in Wyoming, Nevada and certain few other states, the Charging Order remedy is the sole remedy for a creditor who is going after the assets of the LLC. The Charging Order is explained in more detail on Pages 41 to 44 of my book.
The bottom line is that one of the best alternatives for Domestic Asset Protection Planning is the utilization of the Modular Structure as I have outlined above. This structure will work much better, the more connections the client has to Nevada. For example, we almost always create a Nevada LLC to hold any property and if the client is able to, we encourage the purchase of property in Nevada. However, you can put the residence directly into the Asset Protection Trust which will provide some protection from direct attack and also in negotiation with a creditor. There is a caveat, however, that you should be aware of. Bankruptcy Court judges have much more power and authority than do state court judges and the domestic structure may not stand up in a bankruptcy. If the Asset Protection Trust was an Offshore Asset Protection Trust, then there would be much more protection both in and out of bankruptcy.