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Asset Protection • Planning Trusts

planning matters • with PVW Law

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asset protection planning has become a standard part of any estate plan. There are a variety of techniques that can be used for asset protection planning. Among those techniques are a variety of different types of trust. The best trust for your plan depends on your specific asset structure and goals.

Spendthrift trust. A spendthrift trust protects assets by placing control of them beyond the reach of both the beneficiary and creditors. This is accomplished by preventing the beneficiary from assigning the right to distributions to a creditor and by preventing the creditor from attaching the trust assets. Spendthrifts may not be created by a settlor for the settlor's own benefit. A spendthrift trust may not work against a beneficiary's spouse, former spouse or child who has obtained a judgment for support or maintenance.

Offshore asset protection trusts. Because the laws of many U.S. jurisdictions are creditor friendly, offshore asset protection trusts evolved. The advantages of offshore asset protection trusts include practical and psychological barriers to creditors pursuing claims, the lack of full faith and credit toward U.S. judgments, settlor-friendly laws and higher creditor expenses.

Foreign trusts can be complicated and expensive to set up. A recent tax compliance act imposes reporting requirements on U.S. beneficiaries of foreign trusts.

Domestic Asset Protection trusts. A variety of states now have laws permitting domestic asset protection trusts. The states that have adopted such laws vary as to the specific requirements. Those establishing a domestic asset protection trust should consider the particular rules of the jurisdiction being considered such as the extent of power a trustee can retain and still have the trust considered irrevocable, the degree of due diligence required before transferring assets to a trust, the availability of failsafe provisions, liability protection for trustees and attorneys and whether assets will be protected from different types of claims.

One of the challenges of asset protection trusts include whether a state that recognizes such trusts will give full faith and credit to a judgment from a court in a state that does not recognize such trusts. Some commentators take the position that self settled spendthrift trusts violate the Constitution. Dynasty trusts are perpetual trusts that are established in a state that has abolished the Rule Against Perpetuities, which resulted in distribution of a trust interest at a certain point (no later than 21 years after a life in being at the time a trust interest was created).

Dynasty trusts are utilized to maintain assets in trust over generations of heirs and to perpetuate the asset protection features of using a trust. The dynasty trust is subject to a fair amount of criticism.

Discretionary trust. Even without going to the length of an asset protection trust, a discretionary trust can offer asset protection planning features by providing the trustee absolute discretion to make distributions of income and principal to a beneficiary without reference to an ascertainable standard. Not all states define discretionary in the same manner.

For more information visit www.pvwlaw.com


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