In 1998, despite arguments that the concept of an asset protection trust conflicted with US public policy, Alaska passed its own asset protection trust statute. This was steadily followed by 15 additional states. These jurisdictions decided that asset protection IS good public policy; that it is legal and proper for individuals to take measures to protect their wealth from unknown future creditors and predators. Asset protection is a legal and worthy objective, provided “fraudulent transfer” is not pursued by a debtor acting with the intention to delay, hinder or defraud a known creditor.
Domestic asset protection trusts come with the benefits of lower maintenance costs, local trustees, reduced tax filings, fewer federal disclosure forms, and a reduced perception of impropriety. However, several cases have moved through US courts to reveal the Achilles heel of domestic asset protection trusts which originates in Article IV, Section 1 of the US Constitution, which states:
“Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state.”
In other words, a judgment in one state must be honored by all other states. In stark contrast, Offshore Trusts are prohibited from recognizing foreign judgments. Results-oriented U.S. judges have broken domestic trusts several times.
Courts in one state will apply local law instead of the stated law of the trust, thereby neutering the domestic trust’s effectiveness. A trust that is a steel box in one state can quickly become a wet paper bag in another.
Unfortunately, the short history of domestic asset protection trusts seems to indicate that they should not be relied upon because they have proven to be ineffective when seriously challenged by capricious and unpredictable US courts.
Learn about the concepts of a Trust, Irrevocability, Spendthrift Provisions and much more.
It is important to understand that the fundamental purpose of the legal tools employed in asset protection planning is neither to hide personal or business assets nor to deprive the U.S. Government of taxes derived from the income earned on those assets. Rather it is to shield assets from unforeseen attacks by dubious creditors or plaintiffs.
State laws, Federal laws, insurance policies, trusts, limited partnerships, and limited liability companies will each provide some benefit, but separately cannot protect ALL assets.
Vulnerable assets can be protected through the utilization of a comprehensive plan. This often includes an Asset Management Limited Partnership ™ (AMLP) together with a carefully crafted Bridge Trust ®. Collectively these tools provide a significant shield for your vulnerable assets, keeping them safe and out of the grasp of predatory creditors.
Each Integrated Asset Protection Plan is customized to our client’s needs. Designed by experts at Lodmell & Lodmell, these legal structures are designed to preserve and protect your wealth.
L&L’s asset protection services begin with no obligation and a confidential review of your financial resources, including your risk level, assets classifications, and personal objectives. Contact us to get started.
Legal Tools & Strategies
Asset Protection Trusts and LLCs
The Bridge Trust®: Offshore Protection with Domestic Simplicity
The Bridge Trust® combines the strengths of the offshore asset protection trusts, while avoiding their weaknesses. It is an Asset Protection Trust registered offshore but which is domesticated for tax and administrative purposes.
The Asset Management Limited Partnership™
The Asset Management Limited Partnership™ (AMLP) centralizes the management of liquid assets – cash, savings, investments and securities – while placing a legal barrier around them.
Foreign Asset Protection Trusts (FAPT)
A centerpiece of Asset Protection legal strategies, this type of Trust can be created and funded by a client (self-settled) who retains the benefits of trust property while simultaneously creating the highest level of protection from creditors. There are two important categories: International & Domestic. The first version began outside the United States as the Foreign Asset Protection Trust.
Domestic Asset Protection Trusts (DAPT)
Similar to its foreign counterpart, the Domestic Asset Protection Trust contains “spendthrift” provisions which specifically disallow creditors from accessing trust property. These trusts come with the benefits of lower maintenance costs, local trustees, reduced tax filings, and fewer federal disclosure forms.
Limited Liability Company (LLC)
The Limited Liability Company’s primary role is to compartmentalize “risky” assets that should not be directly mixed with safe assets held by the AMLP.
The Nevis Limited Liability Company (LLC)
The LLC is a fantastic legal tool for integrating assets and businesses into a full estate and asset protection plan.
5 Reasons Why the Bridge Trust® is Better than a Foreign Asset Protection Trust
Limited Liability Companies are the relative newcomer to the field of corporate entities. The LLC first began in Wyoming and Florida in the 1970’s. The purpose was to create a corporate structure, which had the benefits of a corporation, without the downside of double taxation. Prior to the LLC this was accomplished by using a subchapter S election with a traditional C-corporation; however, S-Corps have significant restrictions and are therefore difficult to use, particularly in conjunction with other planning.
With the introduction of the LLC came a true hybrid with essentially all of the benefits of the Corporation with none of the S-Corp restrictions or the double tax of the C-Corp.
The Limited Liability Company’s primary role is to compartmentalize “risky” assets that should not be directly mixed with safe assets held by the AMLP. Real estate, rental properties, boats, and airplanes are all best held within an LLC to insulate owners and other valuable property from these risk-generating assets.
The LLC is normally owned 100% by the client’s Asset Management Limited Partnership™, making the LLC a disregarded tax entity that does not require its own tax return.
Learn about the concepts of a Trust, Irrevocability, Spendthrift Provisions and much more.
For the person who is not a multi-millionaire, the greatest threat to the estate is not probate. It is not estate taxes. The greatest threat is nursing home costs. It is for this reason that estate planning is essential to protect your assets from Medicaid liens should you ever require long term care. With careful Medicaid planning, you may be able to preserve some of your estate for your children or other heirs while meeting the Medicaid asset limits.
Some individuals believe that transferring assets is a viable method of protecting ones assets. The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in a trust.
A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries.” The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it.
A trust is either revocable, meaning it can be changed or ended by the trustor at anytime, or irrevocable, which is typically permanent and unalterable.
Revocable Trust
A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
Irrevocable Trust
An “irrevocable” trust is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be applied to benefit your or your spouse. At your death the principal is paid to your heirs.
This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.
Medicaid trusts must be irrevocable because the program’s rules recognize any assets in a revocable trust as financial resources, jeopardizing the trustor’s eligibility for assistance.
Testamentary trusts
Testamentary trusts are trusts created under a will. The Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are considered unavailable.
Remember, Medicaid is a joint federal-state program. While there are some federal guidelines, states have some of their own qualification guidelines, so it is important to check the laws in your state and to consult a qualified attorney when setting up the trust.