Asset Protection Planning
(Including Domestic and Offshore Trusts)

"I Thought Asset Protection Was Shady!" Because many view asset protection in a negative light, it might be helpful to start with what ethical asset protection is NOT. Ethical asset protection is not about hiding your assets from known creditors or the government and it is not an avenue to evade taxes. If that is what you are looking for, we will not be able to assist you.

Ethical Asset Protection. In our litigious society, prudent planning should always take into consideration the protection of one's legacy and assets. At its heart, tax planning is a form of asset protection. Our planning process includes consideration of the potential for future creditors, such as hospitals, plaintiffs in personal injury lawsuits, and ex-spouses. These future creditors could be your creditors, your child's creditors, or even the creditors of a grandchild who has yet to be born.

Protecting Your Legacy. There are steps you can take now to help prevent a future creditor of your child or grandchild from taking your family's legacy. For example, leaving your legacy in trust for your family (rather than simply giving them the assets) is a good start at asset protection. To take it a little further, you might even consider creating your trust in certain states, such as Delaware, South Dakota and Nevada, where the laws governing asset protection are far superior to the asset protection offered in California (where even inheritances can be susceptible to a judge's determination as to what is "equitable" in a divorce). Simply put, you can provide protection for your loved ones that they cannot provide for themselves.

What About My Own Creditors? If you are a professional, such as a doctor, lawyer, accountant or architect, the sad fact is that you may one day be facing creditors of your own. Or, maybe you find yourself in a car accident that leads to an expensive legal battle. No one likes to think of a life's work evaporating in one lawsuit. Creating an irrevocable trust for the benefit of others and not yourself can help shield such assets from your later creditors, particularly if you establish the trust in an asset protection state or foreign jurisdiction well in advance of any creditor issues arising.

Domestic Asset Protection Trusts. What if you may need assets for your own needs someday? A trust you create yourself that includes you as a permissible beneficiary is commonly referred to as a "self-settled trust." A California self-settled trust will provide no asset protection against your own creditors. However, certain states, including Delaware, South Dakota and Nevada, do allow self-settled asset protection trusts to shield your assets from your own creditors provided various requirements are met. Such requirements typically include a trustee resident in the asset protection jurisdiction, as well as a trust provision stating that all distributions are to be made at the discretion of the trustee. In other words, you do not have the right to demand a distribution (and neither will your creditors). Self-settled asset protection trusts in states like Delaware are often referred to as "Domestic Asset Protection Trusts" (as contrasted with offshore asset protection trusts).

Offshore Asset Protection Trusts. Offshore Asset Protection Trusts became popular several years ago because many foreign jurisdictions recognized self-settled asset protection trusts at a time when no state in this country did so. Once states like Delaware began to allow domestic asset protection trusts, the use of offshore trusts decreased significantly, particularly in light of burdensome U.S. reporting requirements and unfavorable taxation of such foreign trusts. Offshore trusts can still be useful in the right situation, such as complex life insurance planning or pre-immigration planning.

Beware of Greed. While domestic asset protection trusts are a viable planning tool, they should not be abused. For example, you should not place ALL of your assets in such trusts. And, you should view them more as a nest egg rather than a source of assets to meet your day-to-day needs. Frequent distributions to you by the trustee may give inference to some sort of orchestrated plan between you and the trustee.

Business Entities. Asset protection does not solely consist of using trusts. Business entities such as limited liability companies (LLCs), limited partnerships (LPs), and corporations are traditionally accepted forms of asset protection. As a general rule, creditors of such entities are limited to the assets owned by such entities and may not pursue the personal assets of the entity owners. However, as is the case with most legal matters, these entities should be created and operated correctly in order to maximize the asset protection shield they provide. In addition, consideration should be given to establishing the business entity outside of California as those states providing good asset protection laws also will offer stronger protection for entities as well as other benefits.

Insurance. You should not overlook the most common asset protection tool – insurance. Be certain that your home and vehicles are adequately insured (not just the legal minimum). And, consider an umbrella policy for other unforeseen liabilities. We do not sell insurance, but we appreciate its importance and encourage our clients to verify that they have adequate coverage.

Keep it in Perspective. Remember that asset protection is one component of a comprehensive estate plan. And, while it is an important factor, it should rarely be the sole focus of your planning.