What is an Asset Protection Trust?
A Florida asset protection trust is a trust agreement established and written by a debtor for the debtor’s own benefit that helps protect the debtor’s assets from potential civil judgment creditors.
Several states, but not Florida, have passed asset protection trust laws in an attempt to attract investment capital from people looking for legal tools to protect themselves from creditors. Creative attorneys, working with state legislators, have passed statutes that protect assets in trusts located within their respective states.
As a result, several states have amended their trust laws to provide substantial asset protection. These types of asset protection statutes are intended to help residents of all states, not just residents of the state where the laws were passed. These trusts are commonly referred to as Domestic Asset Protection Trusts.
Watch Out for Gimmicky, Trademarked Asset Protection Trusts in Florida
In almost all situations, it is difficult to protect assets from civil creditors in a self-settled trust in Florida. Unfortunately, we have seen some law firms in Florida charge a lot of money for goosed-up revocable trusts which are then given a fancy name and trademark, as if the name and trademark make the trust more effective. They do not.
Make sure you fully understand how any trust marketed to you works and understand the legal situations where the trust would not actually protect your assets.
If you think it is weird for a law firm to trademark the name of the trust, we agree.
There are almost always better tools to protect assets in Florida than trusts. Sometimes, however, an irrevocable trust may be an effective tool as part of an overall asset protection plan. But watch out for any trust marketed to you that allows you as grantor to benefit from the trust.
Domestic Asset Protection Trust
A domestic asset protection trust is a self-settled trust that is protected from judgment creditors by state statute. A “self-settled trust” is a trust where the person who creates the trust and transfers the assets to the trust is also a trust beneficiary. A living trust (used for estate planning) is a common example of a self-settled trust. Under Florida law established by a long and consistent line of court decisions, a self-settled trust does not protect the trustmaker’s beneficial interest in the income or principal of the trust from the trustmaker’s creditors.
Offshore trusts provide asset protection benefits mainly because statutes in select foreign countries state that a trustmaker’s beneficial interest in a self-settled trust formed in their country is protected from the trustmaker’s own creditors. These offshore trust statutes include other debtor-friendly provisions to encourage new trust business. Some states in the U.S. have recently enacted statutes which expressly grant these same type of asset protection benefits to self-settled trusts. Trusts created under these state statutes are referred to as domestic asset protection trusts (“DAPT”). These DAPT’s were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in order to attract businesses and assets to their states.
Most state domestic asset protection trust statutes have several common features. The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker. The statutes also require at least one trustee to be either a state resident or a corporation doing business in that state and that some trust assets must be located or deposited in the state. The DAPT statutes, like their foreign counterparts, typically provide for a position of “trust protector” who is a person with power to veto the trustee’s decisions to make distributions if such distributions may be vulnerable to the trustmaker’s creditors.
Alaska, Delaware, Utah, and Nevada are states with favorable domestic asset protection trust laws. In Utah, the general statute of limitation for fraudulent transfers to the DAPT is four years, and there is a procedure by which a debtor can shorten the limitations time to only 120 days. In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states’ DAPTs. Utah’s DAPT law also has relatively flexible trustee provisions under which a trustmaker can appoint himself as trustee as long as there is a Utah co-trustee. The Utah trustee does not have to be a bank or trust company, but it can be any individual who resides in the state. The trustmaker as trustee can retain control of investments and trust distributions.
A DAPT works well in theory, and many qualified commentators have published persuasive legal arguments supporting the DAPT’s asset protection. The legal issue in DAPT planning is referred to as “conflict of law”: If a Florida resident forms a self-settled trust in a DAPT state where these trusts are expressly protected from all creditors, will Florida courts apply the protective laws of the DAPT state which has encouraged self-settled trust protections or the Florida law opposing self-settled trust protection? Resolving the conflict between Florida’s public policy against self-settled trusts and contrary policy in DAPT states is legally complicated and involves a multi-step fact analysis.
In general, based upon principles in the Restatement of Trusts, if a Florida debtor establishes a DAPT trust, the more that trust assets, records, and parties are situated in the DAPT state, the more likely the DAPT state laws will apply. However, the more that the DAPT trust assets and parties are in Florida, the more likely Florida courts will apply Florida law. To date, no Florida court has held that a debtor’s interest in a DAPT formed under the laws of another state is protected from a Florida judgment.
There are possibilities to structure estate planning trusts in Florida to achieve asset protection. Although assets in the debtor’s own living trust, a form of self-settled trust, are not protected from the debtor’s creditors, a Florida resident may protect assets in a trust created by another person. There is authority that a debtor’s interest in a trust which the debtor forms or funds with his own non-exempt money will be protected from creditors if anyone other than the debtor is given control over trust assets. Therefore, a properly drafted Florida trust may provide the trustmaker effective asset protection even though Florida has not enacted specific asset protection trust statutes.
What is the Best Trust for Asset Protection?
The best trust for asset protection in Florida is generally an irrevocable trust, usually for the benefit of your children. An irrevocable trust typically only works for asset protection when the debtor gives up control of the asset and the beneficial interest in the asset completely. Self-settled trusts, revocable trusts, or living trusts typically do not provide any asset protection benefits, despite whatever creative marketing efforts you may come across.
Keep in mind that the transfer of assets to an irrevocable trust could be unwound as a fraudulent transfer. Using a trust for asset protection is usually only a good strategy when not facing a current legal threat.
Can a Trust Own an LLC?
A trust can own an LLC, or in other words, a trust can be a member of a LLC. Most states allow a trust to hold and receive title to almost any asset transferred into the trust by the grantor or any other individual.
However, LLCs are often taxed as S-Corporations, or S-Corps. Special rules comes into play when a trust wants to own an LLC that is taxed as an S-Corp.
A person may wish to have a trust own an LLC when the person is concerned about business succession planning and who will own their business after their death. The trust can outline exactly what happens to the LLC or business after the death of the grantor, including who will own the membership interest and how the business is to be sold or managed.
When creating a trust to own an LLC, make sure the LLC has an operating agreement that spells out the rights of the trustee of the trust. Typically, the operating agreement will assign voting rights, or even management rights, to the trustee of the trust.
What to Do Next
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