Alaska was the first state to pass asset-protection trust legislation. Delaware then followed. Now there are 13 states that are all seeking this type of business because it brings business and capital to the state. What they sell is the possibility for wealth protection.
The states offering this service vary quite a bit. South Dakota, Nevada, Tennessee, Rhode Island, New Hampshire, Missouri, Utah, Oklahoma, Wyoming, Utah and Hawaii have all going after people who are worried that their assets aren’t protected from the ravages of the litigation system and other threats.
These states aren’t altruistic. They are making themselves attractive to people who have wealth because they get some of the quid while the trust settlor gets the pro quo.
As Hawaii Gov. Linda Lingle pointed out when she signed the law, the goal was "to build on proven domestic and international estate and financial planning methodologies for the purpose of attracting foreign capital."
Each state law varies significantly in its overall impact and usability. Basically, all of them allow for the protection from creditors of self-settled trusts, shortened the statute of limitations for challenges to the trusts establishment, and limited the application of fraudulent transfer laws. All the other states disallow self-settled spendthrift trusts as being against public policy.
There is also a mix of public policy in the asset-protection trust states. Nevada, for example, has no exceptions for creditors, and a two-year statute of limitations for future creditors. Alaska has a four-year statute of limitations and allows divorcing spouses as an exception. Delaware has exceptions for divorcing spouses, alimony, and child support.
Oklahoma limits the protection to $1 million. There is no uniform law or model act, and all 13 of the potential asset-protection trust state law vary significantly. This isn’t a place for amateurs to play in.
It is important to realize that asset-protection trusts cannot hide assets and don’t, in and of themselves, avoid or defer income taxes. Anything that can be known likely will be known. Tax shelters are a big no-no and there are extremely limited circumstances these days to reduce significantly the impact of income taxes.
Estate tax may be, as they say, a horse of a different color. An asset-protection trust, when used in combination with recognized other estate tax techniques, then estate tax minimization or elimination is possible.
Most times, people also use a protection trust in combination with another limited liability entity. All states have limited liability companies and limited partnership law. Some states have gone further with such new legal creatures and limited liability partnerships and even limited liability limited partnerships. These sorts of limited liability entities don't offend public policy.
Although, in Florida, the state Supreme Court recently ruled that a single member LLC could be subject to levy and sale by execution. So, don't form a single member LLC in Florida right now.
There is no U.S. Supreme Court Opinion, as yet, that proves the effectiveness of domestic asset protection trusts. Many commentators have pointed out some of the possible arguments that a judgment creditor could make in trying to get the assets held by the trust. Clearly, repositioning the assets into the same state as the asset-protection trust trustee makes for a stronger defense, particularly when combined with another underlying limited liability entity.
We are living in a troubled and tumultuous world where anyone with any sort of wealth is a target for lawsuits. The litigation industry is still alive, well, and doing more than ever. If you think you are a potential target, then maybe a domestic asset-protection trust integrated into your estate planning is just right for you.
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