Trusts
I dislike using trusts for asset protection purposes (except in limited situations) for the following reason. First, there is a strong presumption in the case law against self-settled “spendthrift” trusts, or trusts that allow the person creating and setting up the trust to make it difficult for creditors to reach trust assets. The policy reason is simple: allowing this to happen would mean anyone could form a trust in such a way to prevent creditors from reaching the settlor's assets. And while several states have enacted “domestic asset protection trusts” (largely to compete with various offshore jurisdictions that offer the same structure) there are important legal issues (such as the previously mentioned presumption against self-settled trusts and the full faith and credit clause of the Constitution being but two) that make these structures deeply suspect.
Second, the vast majority of non-professionally managed trusts that I have seen are not compliant with trust law – regular accountings are not given to beneficiaries, tax returns are not filed, formal distribution requests are not made etc… As such, a court may not (and probably won’t) recognize them in the event they are challenged. While it’s incredibly easy to set-up a host of structures thanks to the internet, it’s far harder to keep those structures compliant with the law, meaning that all the money spent on formation will be a bad investment in the long-run.
Third, the limited liability nature of corporations, LLCs and LPs is far more firmly entrenched in the law and is backed by a far stronger and longer case law history. Compare this to domestic asset protection trusts – which are recent creations used by few states, have little supporting case law and have large legal issues weighing against them. In short, it makes far more sense to go the conservative route and utilize the structures for which the law has strong limited liability presumptions.
That being said, the question arises for when I do think trusts make sense as part of an asset protection plan. I primarily recommend trusts as a way to segregate assets, provide them with professional management, and direct their benefits. I regularly use the analogy of a mutual fund. In this situation, the settlor can state the trust is subject to a spendthrift provision, and fund the trust with various assets. I also recommend professional management of the trust, such as a trust company or a bank trust department. This way, the settlor obtains not only the professional management of the legal side of the trust, but the benefit of a firm’s investment management.
Second, the vast majority of non-professionally managed trusts that I have seen are not compliant with trust law – regular accountings are not given to beneficiaries, tax returns are not filed, formal distribution requests are not made etc… As such, a court may not (and probably won’t) recognize them in the event they are challenged. While it’s incredibly easy to set-up a host of structures thanks to the internet, it’s far harder to keep those structures compliant with the law, meaning that all the money spent on formation will be a bad investment in the long-run.
Third, the limited liability nature of corporations, LLCs and LPs is far more firmly entrenched in the law and is backed by a far stronger and longer case law history. Compare this to domestic asset protection trusts – which are recent creations used by few states, have little supporting case law and have large legal issues weighing against them. In short, it makes far more sense to go the conservative route and utilize the structures for which the law has strong limited liability presumptions.
That being said, the question arises for when I do think trusts make sense as part of an asset protection plan. I primarily recommend trusts as a way to segregate assets, provide them with professional management, and direct their benefits. I regularly use the analogy of a mutual fund. In this situation, the settlor can state the trust is subject to a spendthrift provision, and fund the trust with various assets. I also recommend professional management of the trust, such as a trust company or a bank trust department. This way, the settlor obtains not only the professional management of the legal side of the trust, but the benefit of a firm’s investment management.
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