What would happen if you were sued? What would life be like if you lost it all? You don’t need to be a millionaire to be the target of a lawsuit. With more than 70,000 lawsuits being filed every day in this country, would you believe that the majority of the named defendants are actually owners of small to medium businesses, and individuals with relatively small net worth? Are you willing to risk everything, and hope you don’t get sued?
Let’s look at one method for protecting your assets, called the Domestic Asset Protection Trust. A trust is defined as a legal relationship where one person, referred to as the Trustor or Settlor, transfers something of value, known as the assets, to another person, known as the trustee, to hold for the exclusive benefit of yet another person, also called the beneficiary.
When dealing with Domestic Asset Protection Trust you need to know that not every US jurisdiction, or state, will permit these types of trusts. Domestic Asset Protection Trusts are often known as Alaska Trusts, Delaware Trusts, or Nevada Trusts, particularly because those are the states that have been leaders in crafting anti-creditor legislation, designed to protect individuals. Having said that, there are many distinctions and variations when it comes to trusts. The various distinctions will impact how the trust is taxed and also the rights of the people who have access to the trust. With the right wording, jurisdiction, and features, you can essentially create a very effective Asset Protection Trust which will leave your assets totally secure, should you become subject to an unforeseen legal matter.
When looking at an Asset Protection Trust, understand that this is where Settlors create a trust for their own benefit. Clear and concise legal wording within the trust will limit access to assets, which protect the assets in case a creditor or court attempts to take control over the assets. To be truly effective, your Asset Protection Trust needs to be irrevocable and authored in a manner that could withstand the staunchest US court.
Because an Asset Protection Trust is considered a grantor trust, when it comes to taxes it won’t provide relief on taxes owed. If there is income earned by the trust, it is passed to the Settlors. Beneficiaries of an Asset Protection Trust are permitted to enjoy the assets of the trust for their own benefit. The only time this would be interrupted would be if an Event of Duress, also known as any action or activity that impacts or might impact the financial solvency of the trust, occurs. Clearly, a lawsuit would be considered an Event of Duress.
In the event of a lawsuit, certain provisions become active and they in essence block the courts or creditors from acquiring the assets of the trust. The clients are still able to access the assets of the trust, even during an Event of Duress.
This is why a properly structured Asset Protection Trust is so important. It can eliminate the possibility that you will suddenly find yourself cash poor, unable to access your assets to pay the mortgage, the car payment, or for your children’s school tuition.
If you do not have your assets in a trust, and you are sued. You could find yourself unable to access your bank accounts or other financial resources, no matter if you are victorious in court or not. And if you lose the ability to access your money, you and your family are going to feel the impact directly. A Domestic Asset Protection Trust can avoid this unfortunate situation.