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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.
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.