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Domestic-Asset Protection-Trust Planning Benefits Investors

Domestic-Asset Protection-Trust Planning Benefits Investors
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By    |   Monday, 14 May 2018 02:35 PM

Anybody with money is a target for a potential lawsuit.

Stock markets can drop, even significantly, but recover.

Losing a major lawsuit, or a divorce battle, can leave someone destitute and so financially injured that recovery, as they say, is not in the stars.

Investors take on investment risks with their precious capital for two primary reasons:

  • To grow the base of investible assets;
  • To create a safe and secure financial future.

Investment, business, and financial advisers focus their time and efforts — and earning fees — on helping the investor build up assets .. and that is a very good thing.

But how much effort is spent on protecting their customers or client’s downside from losing it all to judgment creditors?

Protecting wealth from legal liability and other threats takes a professionally different skill set.

Estate planning is the traditional means for creating legal structures to shield wealth from dissipation from onerous taxes, feuding beneficiaries, disgruntled business partners, unhappy spouses, and nearly endless lists of other dangers to financial survival.

However, limiting legal liability exposure is well established as a legitimate public policy.

Corporations, limited partnerships, and limited liability companies, among other means, are examples of legislation intended to encourage people making investments by constraining their exposure to loss.

Numerous state legislatures elevated the use of domestic trusts, already the primary estate planning arrangement, for protecting assets.

This was in response to the offshore financial center jurisdictions that gained popularity, while earning significant fees, by attracting U.S. clients by offering foreign asset protection trusts.

The United States was slow to respond to the offshore competition for U.S. clients. But some states woke up and now compete with the offshore jurisdictions by offering domestic asset protection trusts.

Like the international version, the planning for utilizing a domestic asset protection trusts effectively is tricky.

Self-settled trusts, one in which the grantor is also the beneficiary, are troublesome.

Whenever assets are being transferred from one party to another — from an individual to a trustee — the funding could involve what is commonly known historically as fraudulent conveyance law or as updated and more correctly known, The Uniform Voidable Transaction Act.

Domestic asset-protection trust law primarily is directed to limiting the ability of a potential judgment creditor to void the transfer of assets into trust by a potential judgment debtor.

Each state’s version of their asset-protection trust laws varies in depth and breadth in altering the balance of the legal relationship between creditors and debtors.

While not perfect, these updated domestic trust laws create an additional level of possible legal protection for financial assets.

How are these domestic asset-protection trusts used in planning?

Some estate planners advise on merely funding assets directly into trust with the planning twist of having payments to the beneficiary’s subject to a discretionary decision by the trustee.

Taking it up a notch, a two-step structure funds investment asset into a limited liability company which is owned by an asset protection trust.

Still there are continuing fraudulent conveyance/voidable transaction exposures.

More sophisticated wealth-protection professionals use a hybrid-domestic asset-protection trust structure.

This involves establishing an irrevocable discretionary asset protection trust where the grantor of the trust is not a beneficiary. Instead, the trustee or a trust protector is given the power to add the grantor at some future date.

If the grantor ever has liability issues, then arguably the trust is not a self-settled trust and has no creditor attachable property interest in the trust assets.

Investors understand that we are living through uncertain economic times and the markets can be volatile.

Besides minimizing investment risk exposures, investors and their financial advisors must be reminded that planning to protect capital from loss is as important as generating returns on capital.

Investors looking to protect against their vulnerability to legal liability loss could benefit from effectively utilizing domestic asset-protection trust planning.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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Protecting wealth from legal liability and other threats takes a professionally different skill set.
domestic, asset, protection, trust, investors
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2018-35-14
Monday, 14 May 2018 02:35 PM
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