Asset-protection trusts, which allow executives and business
owners to put personal assets where creditors can't get to
them, hardly constitute a new idea. But the trusts are becoming
increasingly available—and somewhat less costly—of
late. In 2003, Utah became the fifth U.S. state to open its
financial institutions to the trusts. (Alaska, Delaware, Nevada and
Rhode Island are the others.) Traditionally, you had to work
through offshore tax havens to create the trusts. No more.
Wherever you open them, the idea is to put your money where
creditors can't get their hands on it in the case of a legal
judgment or a bankruptcy filing. You accomplish that, in short, by
putting some portion of your assets into an irrevocable trust. It
has to be run by an independent trustee who can elect to give you
payments from time to time but can't put you on a fixed,
regular schedule.
The trusts can be a good option for people with more than the
usual amount of money to protect. But there are a few caveats.
First, they're expensive. It can cost as much as $50,000 to set
up an offshore asset-protection trust, and $10,000 or more for a
U.S.-based one.
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Throw in several thousand additional dollars annually for
administrative costs and a yearly 1 percent asset-management fee,
and you're talking about a substantial investment. For that
reason, they typically make sense only for people who have $1
million or more to put in trust.
Even so, you probably shouldn't put all your financial eggs
into the trust basket. Since you won't legally have regular
access to the money anymore, you could find yourself in trouble if
you need to tap assets for anything unexpected.
Another consideration: Although domestic trusts are less
expensive than overseas ones, they haven't yet been tested in
court. If you have $2 million in a trust in Nevada, for example,
and lose a lawsuit in Pennsylvania, can creditors in the latter
state go to federal court to compel Nevada officials to honor their
decision? Trust promoters say no, but you won't have complete
certainty until a federal court takes up the question.
Finally, you can't try to set one of these trusts up if you
already know or should know about a possible liability. In other
words, if you have an inkling that you might be served with a
lawsuit or might file bankruptcy soon, you're not allowed to
shift the shells around to hide your financial pea.
Scott Bernard Nelson is a freelance writer in Portland,
Oregon, and an editor at The Oregonian.