Domestic Asset Protection Trusts

In the area of U. S. domestic asset protection planning, the two primary legal methods to achieve asset protection goals without going offshore are domestic asset protection trusts and family limited partnerships.

• Domestic Asset Protection Trusts

The potential for financially devastating legal judgments has been a primary motivator for U.S. citizens to create offshore trusts for their own benefit where creditors cannot attach the trust assets. In general, such asset protection trusts are not as effective in the U.S. because under the law of most states, trust assets are subject to the claims by the grantor’s creditors to the extent the trustee has discretion to distribution assets to the grantor. This is true whether or not assets were transferred to the trust in order to defraud creditors.

However under a relatively new scenario, certain "self-settled trusts" can be created under an Alaskan law without subjecting the trust assets to claims of the grantor’s future creditors. The Alaska Trust Act specifically provides that a person who transfers property in trust may provide that a beneficiary’s interest in the property may not be voluntarily or involuntarily transferred before it is paid or delivered to the beneficiary. The Act further provides that if the trust contains such a transfer restriction, no creditor existing when the trust is created, no person who subsequently becomes a creditor, and no other person may satisfy a claim out of the beneficiary’s interest in the trust unless one of the Act’s limited exceptions applies.

The Act limits uncertainty by restricting legal challenges to Alaska trusts. An Alaska trust cannot, as a general rule, be challenged or set aside on grounds "that the trust or transfer avoids or defeats a right, claim, or interest conferred by law on any person of a personal or business relationship with the settlor or by way of a marital or similar right." Under the Act, unless the settlor is 30 or more days behind in making a child support payment, the transfer of property to the trust, by law, was not intended to defraud creditors. As long as the grantor retains no power to revoke the trust or demand a distribution, creditors should not be able to reach the assets. In addition, if the grantor retains no right to veto a power of appointment or similar right, the transfer to the trust is considered complete for estate and gift tax purposes.

While it cannot be argued that a domestic asset protection trust is every bit as formidable a shelter as an offshore trust would be, there are a number of reasons why a domestic trust such as an Alaskan trust actually may be more desirable. First, a domestic trust involves a familiar legal system and less political risk. Second, the extensive “anti-foreign asset protection trust” reporting provisions of the Internal Revenue Code do not apply to a domestic trust. In addition, the hostility which in the past has been directed at offshore trusts by the U.S. Bankruptcy Court will not arise with respect to a domestic trust because of the strong domestic fraudulent transfer rules and the fact that the assets in the domestic trust are subject to the jurisdiction of U.S. courts. Finally, it should be noted that Alaska does not tax trust income at the state level, which serves as an additional financial benefit.

Even though not providing all of the practical protection that may be available through formation of an offshore asset protection trust, many U.S. citizens may prefer for their assets to remain in the U.S. by creating a domestic asset protection trust. For those individuals, an Alaskan trust, with its additional estate planning and income tax benefits may be a preferred solution. It should be noted that similar domestic trust laws have been established in Delaware, Nevada and South Dakota, though for various reasons, we believe the Alaska trust law to be the most beneficial for use by our domestic asset protection trust clients.

For additional information on domestic asset protection trusts, please call The Sequoia Group at 561.880.6885 or toll-free at 866.988.6009 or e-mail us.

• Family Limited Partnerships

A Family Limited Partnership ("FLP") can work in tandem with the significantly more powerful Asset Protection Trust to protect your assets from attack by unauthorized creditors. When done properly, the FLP is created under the laws of a state that statutorily prevents creditors from reaching the underlying assets of the FLP members. The FLP creates the protective barrier by implementing a critical legal concept known as the “charging order.” A charging order constitutes a lien on the judgment debtor's (FLP member) transferable interest in the partnership.

The fundamental word in this case is lien. Under normal circumstances, a creditor cannot force a distribution of the partnership assets and is left with a practically worthless lien. In effect, this places the desired barrier between the assets and the unauthorized creditor pursuing them. It is important to understand that the charging order, and the FLP in general, do not provide complete protection from the creditor; rather, they simply make the creditor wait to receive payment.

As a result, a creditor holding a charging order is much more likely to accept an offer of settlement that is far more favorable to the debtor than would be the case if the creditor were able to directly reach the partnership assets.

The FLP accomplishes the goal of interposing a barrier, while still allowing you to control, use and derive the benefit of those assets, at least to a point; however, it is not a complete barrier. If the creditor is not inclined to settle, they will remain in line to receive any eventual distributions from the partnership. In the interim, you are deprived of your use and enjoyment of those assets. In effect, this creates a standoff.

So when is an FLP adequate asset protection? That depends on the level of protection sought and the amount of assets to be protected. In general, if your asset level is around $250,000, an FLP alone is a safe strategy. However, when your assets are well in excess of $250,000, the deterrent effect of an FLP alone is insufficient to achieve the desired goals. The more assets available, the greater incentive a creditor has either to wait or attempt to crack open the FLP. This can happen, and courts often find ways to allow creditors to penetrate the barrier created by an FLP.

For the most part, the Sequoia Group does not recommend sole reliance on the FLP for comprehensive asset protection. While an FLP may be employed to consolidate and manage certain assets, an Asset Protection Trust is the preferred option to maximize deterrence and protection.

Call our office at 561.988.6885 or toll-free at 866.988.6009 to arrange an appointment and learn more about domestic asset protection and the benefits it offers.

THE SEQUOIA DOMESTIC TRUST^™

The Sequoia Domestic Trust^™ is a unique domestic asset protection trust which has been developed by The Sequoia Group to specifically serve the asset protection needs of those individuals who have a total combination of non-real estate assets valued at less than $5 million. The fundamental purpose of The Sequoia Domestic Trust is to provide significant asset protection at a reasonable cost to those individuals who may not give serious consideration to forming an offshore asset protection trust because of either the relative cost or a reluctance to place assets offshore.

Since The Sequoia Domestic Trust^™ is a domestic trust established in either Alaska or Nevada, it is not subject to the Internal Revenue Code provisions that for foreign ("offshore") grantor trusts. The trust specifically provides that any interest in the trust held by a beneficiary may not be voluntarily or involuntarily transferred before distribution to the beneficiary. By including this transfer restriction, no creditor existing when the trust is created, no person who subsequently becomes a creditor, and no other person may satisfy a claim out of the beneficiary’s interest in the trust. By employing the special provisions of The Sequoia Domestic Trust^™, as long as the trust settlor (or grantor) is not in default on a child support payment, the transfer of assets into the trust is not, by law, intended to defraud creditors. As long as the settlor retains no power to revoke or terminate the trust or demand a distribution, creditors of the settlor will not be able to reach the assets held in the trust.

There are a number of reasons why the Sequoia domestic asset protection trust may be more desirable than the traditional offshore asset protection trust. First, the legal system regulating operation of the trust is more familiar. Second, the extensive "anti-foreign asset protection trust" reporting provisions of the Internal Revenue Code do not apply. In addition, the trust is not subject to the onerous provisions of the U.S. Bankruptcy Code that are directed at offshore trusts. Finally, neither Alaska nor Nevada impose tax on trust income at the state level, thus allowing the trust assets to appreciate without the settlor incurring state tax liability on any gain.

While an offshore asset protection trust can cost $5,000 to $25,000 in initial legal and administrative costs, and can take considerable time to finalize, The Sequoia Domestic Trust^™ can be established for an all-inclusive initial fee of only $2,500. This fee includes all legal work in drafting the trust, as well as preparation of all documents required to assign or transfer assets into the trust. In addition, because it is a domestic asset protection trust, The Sequoia Domestic Trust^™ can be established in less than a month. If the client wishes to set up a corporation or limited liability company to operate a business, that entity can be established in the same state as the trust, for a reasonable additional fee, and the shares of the entity can be held by the trust.

We believe the creation of The Sequoia Domestic Trust^™ provides an entirely new and completely effective opportunity for individuals with total wealth of less than $5 million to benefit from a level of asset protection similar to that of a complex offshore asset protection trust, but at considerably less cost. In these difficult economic times, the availability of this innovative trust is extremely appealing.

Asset protection legal services for clients in Miami, Ft. Lauderdale, Boca Raton, Palm Beach, Jupiter, Naples, Fort Myers, Sarasota and cities throughout Florida.