Accumulation of wealth can take generations, however losing it can take years, hours or even minutes. Lawsuits that can reach personal assets such as houses, cars, stocks or savings accounts are brought everyday. Entrepreneurs taking large debts that are personally guaranteed are at risk to such lawsuits. Malpractice lawsuits can also reach personal assets of doctors, lawyers, accountants and other professionals. People that have large amount of wealth or assets may choose to find ways to protect these assets from current and future creditors.
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Setting up an asset protection trust may be one of the options. These trusts can be set domestically in states such as Delaware, Alaska or Nevada. They can also be set in foreign countries such as Cook Islands, Cayman Islands or Bermuda. The general role of these trusts is to hold assets for the beneficiary interest of the creator of the trust. Upon creation of the trust the creator transfers his possessory interest of the assets to the trust, leaving the creator with no assets that can be taken away by a lawsuit or bankruptcy.
Even though these trusts may be popular with some wealthy individuals they are not as secure as they may sound. The US court may order the individual to retreat the assets from the trust and to bring them back under the US jurisdiction or deliver the assets to the court. Refusal by an individual to follow the court's direction may lead to jail time. The bankruptcy legislation has also taken a stance, in 2005, against such trusts. In section 548 the bankruptcy code allows the trustee to avoid trusts that have the creator as the beneficiary and which were set up with in 10 years of the bankruptcy. However this statute does not address whether a trust that is set by the creator not for his own benefit but for other's can also be avoided. Recently, some of the foreign countries have also obeyed US judgments and gave the permission to the US courts to reach some of their off shore accounts.
Even though these asset protection trusts may sound intriguing most of their benefits are just theoretical.
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