When it comes to asset protection, the motto of many people might be “In trusts we trust.” A trust is an entity you can create that can hold title to (a fancy way of saying “own”) assets for the benefit of yourself or anyone else you choose. There are many reasons for having trusts, from being able to have your assets managed for you, to avoiding estate taxes, to protecting your assets from the claims of creditors or people who may sue you. There are many different kinds of trusts and the terms and requirements of these many different kinds of trusts vary considerably.
Safeguards for Trusts
An important thing to remember is, as a general rule, if you can get at the assets in your trust, so can your creditors. So, if you have a living revocable trust from which you can get money whenever you wish and the terms of which you can change whenever you wish, the assets that you have in the trust are not protected from creditors. However, you can set up a trust with truly independent trustees who have sole discretion as to the right to assets in the trust and any income earned by those assets. With such a trust, you can protect those assets from the claims of creditors or people who might sue you.
A few states, led by Alaska in 1997, have enacted laws by which you can set up special trusts that can protect your assets from the claims of creditors for multiple generations. You do not have to be an Alaskan resident to establish such a trust, although you must meet specific requirements, including a provision in the law that requires anyone setting up an Alaskan Trust to have at least some money held in an Alaskan bank or other financial institution.
Qualified Terminable Interest Trust
As part of an estate plan, you can set up a special form of trust, called a Qualified Terminable Interest Trust (QTIP), that both saves on estate taxes and provides income for your surviving spouse while ensuring that the assets in the trust will pass to your children following the death of the surviving spouse. A QTIP is a good choice when you want to provide for your spouse after your death, but you have some concerns. For example, you fear that your spouse would not manage money well if left the assets directly. Or you may want to make sure that should your spouse remarry, children from an earlier marriage will be guaranteed to receive your assets after the surviving spouse has died.
For people seeking the ultimate in asset protection, offshore trusts are increasingly popular because of the combination of financial privacy laws and asset protection laws in these foreign countries. Many of these offshore trust havens are located in beautiful Caribbean islands, such as the Cayman Islands or Nevis, where it can be most enjoyable to take a trip to visit your money. The Cook Islands provide the strongest laws for protecting assets from the claims of creditors. The Cook Islands are located in the Pacific Ocean, east of Australia and south of Hawaii. My theory is that if you cannot find a place on the globe, you should not have a trust there.
Establishing an offshore trust is unnecessary for all but the wealthiest of people. In addition, although utilizing such trusts is perfectly legal, a significant number of people abuse these trusts to avoid income taxes, thereby raising the ire and the interest of the IRS. You may remember from when you prepared your income tax return the specific section where you must state whether you have an offshore trust. Even if you are operating your trust entirely properly, you may be inviting greater scrutiny of your income tax return by indicating that you have an offshore trust. And if you indicate that you do not have an offshore trust although you really do, you have committed perjury, which is a serious crime.