Because assets may be lost at the conclusion of a litigation, it is common to devise strategies to safeguard it via “asset protection”. While there are numerous tax benefits to starting a business, it also comes with added dangers. Various types of insurance and asset protection arrangements such as Limited Liabilities Companies (LLCs) are the two major strategies to secure your property from liability. Holding companies and retirement plans are examples of asset protection that come within these broad categories.

If you don't properly preserve your assets, which you fought long and hard to earn, they can be easily lost in a lawsuit, bankruptcy, or if creditors come after you for payment. It's critical to understand the rules that protect particular sorts of assets, as well as the steps you may take to safeguard your funds.

Why Would You Need Lawsuit Protection?

You may believe that only doctors, corporate leaders, and other litigious professions need to be concerned about protecting their assets. That is not the case. Your assets can be attached or garnished in a variety of situations, including when you file for bankruptcy, get divorced, or lose a civil lawsuit. Most people don't think about these things until they happen. If your adolescent gets involved in a car accident, for example, the at-fault party may pursue your assets.

How to Keep Your Assets Safe

Despite the fact that asset protection has a bad history, there are respectable options accessible. Putting as many roadblocks in the way of potential creditors before they reach your property may encourage them to make advantageous settlements rather than engage in lengthy and costly litigation.

Asset protection trusts

A domestic asset protection trust (DAPT), sometimes known as a self-settled trust, is a type of trust that allows a person to shield assets against personal creditors while still maintaining control and benefiting from them. Because not every state permits the formation of DAPTs, you must establish this sort of trust in one that does. Only 16 states, including Ohio, Nevada, Missouri, South Dakota, and Wyoming, had passed laws allowing this sort of trust as of June 2021.

Asset protection trusts allow you to place a portion of your assets in a trust managed by a third party. Most creditors will be unable to access the trust's assets, and you will be able to collect periodic payouts. These trusts may even allow you to protect your children's assets.

The following are the prerequisites for an asset protection trust:

  • It has to be irreversible.

  • The trustee must be a resident of the state or a bank or trust firm with a license to operate in that state.

  • It must only enable payouts at the discretion of the trustee.

  • A spendthrift clause is required.

  • The trust's assets must be located in the state where the trust is established.

  • The documentation and administration of the trust must be done in the state.

If you're thinking of getting an APT, make sure you consult with a lawyer who knows what they're doing. Because their trusts did not meet regulatory criteria, many people have fallen afoul of tax rules.

A DAPT usually has the following characteristics:

  • Irrevocable

  • The grantor is also the recipient.

  • A trustee is in charge of it.

  • The grantor or beneficiary cannot be the trustee, but a Private Trust Company owned and controlled by the grantor or beneficiary can.

Advantages of DAPT

When a state-mandated statute of limitations expires, a DAPT shields your assets from creditors. Because a creditor cannot use DAPT assets to pay your personal debts, the creditor is much more likely to reach a settlement that allows you to pay off your debt for pennies on the dollar.

The Downside

The main downside of domestic trusts is that your assets remain subject to U.S. legal jurisdiction, putting them at risk of court orders such as liens or judgments, as well as federal bankruptcy statutes and state regulations. Furthermore, because domestic APTs are new, they lack the credibility of established case law, which may be disastrous if your estate were to face a lawsuit or judgment.

Why Wyoming Is A Top Choice

Although establishing a DAPT protects your assets from creditors and lawsuits, it does not provide comprehensive protection. Creditors can pursue assets in a DAPT for a period of time after they are contributed in each state that authorizes the formation of a DAPT. The time it takes to get full asset protection with a DAPT might vary from many years in some areas to as little as six months in Wyoming, as mentioned on this interesting resource. As a result, it's critical to know how each state approaches asset protection statutes of limitations.

Wyoming has been a popular alternative for domestic asset protection trusts for numerous years. While Wyoming's trust statute shares many traits with those of other states, it also provides a number of benefits that are unique to Wyoming. The Wyoming domestic asset protection trust is one of the most effective in the country when it comes to protecting trust assets from creditors. A Wyoming DAPT can protect assets in almost any condition if the trust has been properly constituted and the assets that need to be protected have been timely given to the trust.

Another significant advantage of the Wyoming DAPT is the wide range of properties it can defend. The following assets can be transferred into (and protected by) a Wyoming DAPT:

  • Money and money equivalents

  • Accounts and revenues from investments

  • Real estate for investment (both income-producing and non-income-producing)

  • Land in its natural state (including undeveloped land and land with gas or mineral rights)

  • Business interests that are well guarded

Alternative Protection Options

Because the location of the trust's assets could be decisive in a tightly contested court struggle, an Asset Protection Trust is meant to have its most substantial tie to the state where the trust is formed—not the settlor's state of residence. As a result, it may be prudent to consider transferring some assets into an LLC on a case-by-case basis, such as stocks and cash accounts, valuable and dangerous commercial and recreational assets, real estate, and settlor businesses.

If a Wyoming domestic asset protection trust does not appear to be the appropriate fit for you, you have a number of additional options for safeguarding your personal assets. For example, LLCs are popular asset-protection vehicles, and Wyoming has a particularly advantageous statute in this regard. Foreign asset protection trusts, like DAPTs, have some distinct advantages.

There are alternative choices that aren't specifically designed for asset protection but provide more flexibility than DAPTs while still offering important security. A prominent example is a revocable living trust, which can fulfill both asset protection and estate planning goals. Regardless of the technologies you employ, it's critical that your asset protection strategy integrates with your estate plan and provides both security and access.

Final Thought

A DAPT is not for everyone, but it is an excellent fit for a wealthy individual who is personally liable and at risk. It's a common technique for those in high-risk occupations to safeguard their own assets. You should get advice from professionals in the field to assess whether a Domestic Asset Protection Trust is right for you. As previously stated, Wyoming is a popular choice for domestic asset protection trusts.