Using Trusts to Protect Assets

General Characteristics of Trusts - A person seeking to make use of asset protection techniques should be familiar with the following types of trusts:
  1. Revocable Trusts

  2. Irrevocable Trusts

  3. Spendthrift Trusts

  4. Discretionary Trusts

  5. Domestic Asset Protection Trusts

  6. Offshore Asset Protection Trusts

Trust Defined: a trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, and administer the trust assets and income from the trust assets for the benefit of the beneficiaries, who hold equitable title.
Every trust has at least 3 parties who are as follows:
  1. Grantor/Settlor- The person who creates the trust and transfers title of his or her assets to the trustee.

  2. Trustee- The person who administers the trust in accordance with the trust terms. The Trustee holds legal title to the trust assets.

  3. Beneficiaries- The persons who benefit from the trust assets pursuant to the terms of the trust. The beneficiaries have equitable title to the trust assets

Note: Domestic offshore Asset Protection Trusts almost always have a fourth party being the Trust Protection whose role is to approve of certain trustee decisions and to remove and replace a trustee.

Revocable Trusts
Trusts that allow the grantor/settlor to revoke the trust during his or her lifetime are referred to as Revocable Trusts. Revocable Trusts offer no asset protection benefits. In Missouri, the grantor’s creditors may reach the assets of the revocable trust. Whether or not the terms of a trust contain a spendthrift provision, during the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors. MO Rev. Stat §456.5-505.

Revocable Trusts are used for non-asset protection purposes. A Revocable Trust allows the grantor to control the assets during life and determine who will receive the trust benefits after the grantor’s death. A Revocable Trust provides for the orderly transfer of the grantor’s property at death, outside of probate. A Revocable Trust also provides for the management of the grantor’s assets during any period a grantor may become incapacitated.

Irrevocable Trusts

Irrevocable Trusts prevent the grantor from revoking or modifying the trust after the grantor establishes the trust. The grantor’s assets are irrevocably conveyed to the trustee, who holds legal title to the trust property. Consequently, the grantor’s creditors cannot subsequently reach the transferred property because the grantor no longer owns the property (subject to fraudulent conveyance and subject to how the trust is drafted). Generally, the greatest asset protection benefits will be achieved when the grantor does not retain control over the property and does not retain an interest in the trust property.

Spendthrift Trusts

A spendthrift trust is a trust that prevents a beneficiary from transferring (voluntarily or involuntarily) or assigning their rights to future payments of income or principal. In Missouri, a spendthrift trust can be drafted to prohibit the voluntary and involuntary transfer of a beneficiary’s interest of future payments of income or principal. Mo. Rev. Stat. section 456.5-502.

If a trust has no spendthrift provision, then “an assignee or a judgment creditor of the beneficiary may, without court order, reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means.” Mo. Rev. Stat. §456.5-501

Discretionary Trusts

Discretionary Trusts give the trustee the sole discretion to pay or apply to or for the benefit of the beneficiary, any, all, or no trust income or principal. The beneficiary of the trust has no legal right to the trust income or principal. Rather, the trustee has the sole discretion and authority of making distributions. Accordingly, if a beneficiary does not have a legal or equitable interest in the trust, a creditor of such beneficiary has nothing to attach.

See Mo. Rev Stat §456.5-504.1- A creditor cannot force a distribution that is subject to the Trustee’s discretion.

Domestic Asset Protection Trusts (Self-Settled Spendthrift Trusts)

General Rule: When a person who creates and transfers assets to a spendthrift trust is also a beneficiary of such trust, the trust’s spendthrift provision will not prevent the grantor’s creditors from reaching his interest in the trust.

Alaska, in 1997 statutorily amended its laws to reverse the general rule concerning a self-settled spendthrift trust. Now several states in the United States including Missouri, Delaware, Nevada, Oklahoma, South Dakota, Wyoming and Rhode Island have amended their trust legislation to allow the creation of a self settled trust.

A Domestic Asset Protection Trust (DAPT) is a trust that is formed in one of the several states that have anti-creditor trust acts and now allow Self-Settled Spendthrift Trusts (i.e., trusts that allow you to establish a trust for yourself which protect you from creditors). Each Domestic Asset Protection state has its own requirements which must be met and followed to create a valid Asset Protection Trust.

Offshore Trusts

Foreign Asset Protection Trusts (“FAPT’s) are trusts that a grantor establishes in a foreign jurisdiction that has enacted trust legislation protecting the trust assets from the grantor’s creditors (similar to self-settled trusts described above, but with greater protection).

Benefits of Foreign Asset Protection Trusts:
  1. Certain foreign jurisdictions do not recognize foreign judgments (U.S. Judgments). Creditors are forced to litigate their claims in the foreign jurisdiction.

  2. Depending on the jurisdiction, plaintiff must use attorneys licensed in the foreign jurisdiction.

  3. The time limitation to bring a cause for a fraudulent conveyance or other action is shortened.

  4. The standard to prove a fraudulent conveyance is our “criminal standard-beyond a reasonable doubt”.

  5. The substantive law of the foreign jurisdiction is more favorable to defendants.

  6. Anti-duress provisions are recognized so that a trustee will not take an order from a U.S. court if the court is compelling the grantor to act.

  7. Trustees can change the situs of the trust to a different jurisdiction if the Trust is under attack.

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