Trusts are not only for the rich.  Anyone with minor children (and even children in their 20’s) should consider a trust for their family.

If any property passes to a child under your will, from a bank account "payable on death" or otherwise, the child will generally get all of that money at age 18.  The same holds true if you have named a child under a life insurance policy, IRA or other retirement account.  Even if money is held in a Uniform Gift to Minors Account, the child gets everything at age 18.

Some people are very responsible and financially sophisticated at that age.  But let’s face it — many are not.  A lot of teenagers and twenty-somethings would rather party than manage their investment portfolio.

Many parents do not think about how much their children could inherit at age 18.  While most Americans are strapped for cash and living paycheck to paycheck, the value of their estates (including house, life insurance, retirement accounts, etc.) could be substantial.

By creating a trust, funds can be held by a trustee and used to pay education, housing and other expenses.  Any remaining balance can be distributed at a later age.

While I deal with many more complex asset protection vehicles, a fairly simple family trust arrangement can prove to be a huge benefit.  It can greatly increase the odds that your hard-earned money will not be wasted away in the event of your death.

An article by Kate Murphy in the September 2, 2010 New York Times provides a good discussion of homestead exemptions.

"Homestead exemption" can have two completely different applications.  Some states and localities use that term to refer to real estate tax breaks for senior citizens and others.  The term can also refer to the extent to which your house is shielded from creditors.  For example, Florida shields virtually all the equity in your house from most creditors.  Other states provide little or no shelter for your home.  Having your permanent residence in a state like Florida can provide great advantages from an asset protection standpoint.  I provided some detailed information on this topic in a post on June 30, 2009.

Dwight Merriam, chairman of the state and local government law section of the American Bar Association, makes an important point in the New York Times article: each state is different and anyone concerned about having the homestead exemption available to them should check carefully and perhaps engage an attorney to advise them. 

Whenever I am working with a client on asset protection matters, the client’s home is generally at the center of our discussions.  So I am always glad to see homestead exemptions getting some media attention.

The United States Securities and Exchange Commission recently filed suit against two Texas brothers (Sam and Charles Wyly) alleging an elaborate securities sham to fraudulently sell offshore assets.  Sam Wyly is on the Forbes list of billionaires.  According to a front page article by David Segal in the August 23, 2010 New York Times, Sam and his brother Charles had a maze of 58 trusts and shell corporations in two well-known tax havens– the Isle of Man and the Cayman Islands.  Sam and Charles Wyly have denied the charges filed by the S.E.C. in a 78 page Complaint.

The New York Times article about the Wyly brothers is definitely worth reading.  The story provides some valuable lessons for those interested in asset protection planning.  One lesson is to choose your professional advisors carefully.  According to the New York Times, in 1991 the Wyly’s attended a seminar on overseas trusts taught by a lawyer named David Tedder, who boasted that no creditor had ever pierced the asset protections his firm had established for clients.  Mr. Tedder would later, in an unrelated matter, be convicted of money laundering and conspiracy; and he was sentenced to 5 years in prison.  Charles Wyly is quoted in the New York Times article as saying "We relied on people we thought were fine attorneys and accountants."

A second lesson from the Wyly’s situation is that careful attention is needed not only when offshore entities are established, but also after they are operating.  That is, formation of one or more entities could be perfectly legitimate; but movement of funds and other assets may have tax and other implications that have to be addressed.

The Wyly brothers clearly seem intent on fighting the S.E.C. allegations. But no matter what the outcome of this particular case, it holds some useful lessons for anyone interested in asset protection.

Alaska was the first state in the United States to pass a domestic asset protection trust statute.  Prior to 1997, this type of protection could only be obtained in offshore jurisdictions such as the Isle of Man.  A number of other states — including Delaware — have subsequently enacted similar statutes.  There is now an ongoing debate about the advantages and disadvantages of offshore versus domestic APT’s.

I recently came across a good summary of these issues by Jeffrey T. Getty and Kalimah Z. White.  Their article is several years old, but I recommend this link for what I think is a good general discussion of domestic asset protection trusts and their pluses and minuses compared to offshore trusts.

Keep in mind that so-called asset protection trusts (APT’s) are a possible alternative — but certainly not the only alternative — to shield you assets from creditors.  Whether or not such an arrangement is right for you depends on a number of factors, including your willingness to surrender some degree of control over the assets placed in such a trust.

It has generally been assumed that when a creditor of an LLC member gets a judgment against that member, the only thing the creditor can do is to get a so-called "charging order".  Such an order does not give the creditor control of the LLC — just a right to receive distributions if and when they are made.  This is one of the advantages of an LLC over a corporation for asset protection purposes.  If you own shares of a corporation, a creditor can generally gain control of those shares much more easily than it could gain control of an LLC interest.

But on June 24, 2010, the Florida Supreme Court ruled in the case of Olmstead v. Federal Trade Commission that because the Florida Limited Liability Company Act does not specifically make a charging order the exclusive remedy of a creditor, the creditor can use other remedies to gain control of a single member LLC interest.  This means a creditor can gain total control of the LLC.  Even worse, the Court’s logic raises at least some concern about protection of multi-member Florida LLC interests.  Two dissenting justices on the Florida Supreme Court strongly disagreed with the decision and accused the majority of justices of rewriting the Florida statute.

Some states (like Delaware) make clear in their state statute that a charging order is the exclusive remedy of a judgment creditor.  So this recent Florida decision is of no concern to owners of single member Delaware LLC’s.  But it does raise concerns about single member LLC interests in various other states.

Like many other asset protection attorneys, I will be studying this decision in much greater detail in the coming weeks.

This case is a reminder that asset protection law is constantly evolving, so it is advisable to periodically consult with an attorney even if you already have an asset protection plan in place.

Any trust that can help protect your assets from creditors requires that you surrender at least some control over those assets. This goes for an offshore trust; a so-called "domestic asset protection trust"; an irrevocable life insurance trust; and any other trust that gives you creditor protection. If you think about it, this is just common sense. If you retain full control over the assets in a trust, than a judge could order you to hand those assets over to a creditor who has a judgment against you. This is why a revocable grantor trust (frequently used for probate avoidance) provides no creditor protection. Such a trust may be useful to avoid probate, provide asset management, and for other purposes. But it is not going to protect your assets from a judgment creditor.

Surrendering some control of your assets is not necessarily bad, as long as you are willing to do so. But each situation has to be analyzed separately. And, you must be very careful about who you are giving some control to. While this is a broad generalization, it should come as no surprise that the more control you give up, the better creditor protection you get. But surrendering control has its own risks, which should be considered very carefully.

Legitimate asset protection includes a balancing of risks and possible rewards. Always keep in mind that if a particular arrangement looks too good to be true, it probably is. 

The recent economic downturn has caused creditor problems for many wealthy Americans who never dreamed they would be in this kind of situation. A front page article in the July 9, 2010 New York Times reported that one in seven homeowners with loans in excess of $1 million is seriously delinquent. Foreclosures are occurring at shocking rates in affluent areas. One of several examples given by the New York Times is that the sheriff in Cook County, Illinois is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of the city — like Wilmette, LaGrange and Glencoe.

In the past, most affluent Americans have paid little attention to asset protection. In better times — when the real estate market and the stock market seemed to go nowhere but up — it was difficult for many affluent Americans to imagine they would ever face serious creditor problems. Those days are gone. Focusing on the downside has now become a critical part of the planning process for the wealthy. Part of that focus should include a review of how all your accounts are structured and titled to be sure you have not missed opportunities to protect certain assets from creditors. As I have said many times before: the best time for that planning is before you have any financial problems — and not once you are facing issues with creditors.

More than 30 foreign jurisdictions now have asset protection trust statutes.  The Cook Islands was the first to adopt an International Trust Act for asset protection purposes in 1989, and many other jurisdictions have based their statutes in whole or in part on Cook Islands’ law.  A number of other jurisdictions have traditionally relied on court cases (rather than a statute) to provide asset protection for trust beneficiaries.  The leading example is the Isle of Man (used by many wealthy individuals long before any offshore asset protection statutes were enacted).

Offshore laws vary widely, and there is no one jurisdiction that will automatically meet the needs of all clients.  There are varying statutes of limitations relating to fraudulent conveyances; differences in whether a U.S. judgment will be recognized or whether a new trial will be required; differences whether contingent legal fees will be permitted; and a variety of other variations.

Beware of anyone who is simply trying to sell a particular kind of trust, like a "Cook Islands Trust", or a "Cayman Islands trust".  There is no way someone can know the best choice for you without a careful analysis of your particular situation.  Whether an offshore trust is even a good idea for you in the first place requires careful analysis.

The bottom line is that there is no foreign or domestic asset protection trust that automatically meets the needs of all individuals.  Each situation must be analyzed on its own.

I recently received an inquiry from someone who will be entering law school in the Fall, and he is interested in becoming an asset protection attorney.  He asked what areas of law he should focus on.

While asset protection law has become somewhat of a specialty, it requires knowledge and experience in at least four areas of law: (i) litigation; (ii) business entities, particularly limited liability companies; (iii) debtor/creditor rights; and (iv) trusts and estates.

Asset protection involves careful judgment about what would ultimately happen in a courtroom under various circumstances.  An attorney who has participated in some trials and who has taken and defended depositions will more likely have a good idea what will happen in a lawsuit brought by one of your creditors.  Experience with limited liability companies, limited partnerships and trusts is also important.

An attorney who went to law school in the Cayman Islands will not necessarily be a very good choice as an asset protection attorney.  A good asset protection lawyer does have to know about domestic and foreign trusts.  But he or she must have a broad enough background in several other areas of law in order to provide meaningful advice about the best ways to protect your assets.

It is probably just a sign of the times, but my law firm seems to assist more and more people each year with prenuptial agreements.  These agreements are important from an asset protection standpoint.  Many of the assets accumulated during your marriage will be subject to claims of your spouse if you get divorced.  A prenuptial agreement can identify separate property and keep it separate.  It can insulate that property in the event of a future divorce.

Prior to any marriage in which either party already has significant net worth, consideration should be given to a prenuptial agreement.  This is particularly true in the case of a party who has already been divorced, who has inherited substantial family wealth, or otherwise has assets he or she wants to keep separate.

Whether or not to enter into a prenuptial agreement is a personal decision and must be based on the particular facts and circumstances of each case.  Each party to a marriage brings many things to the marriage (some good and some not so good!).  But if you want to keep certain assets protected in the event of a divorce, you need to consider a prenuptial agreement.