BERLIN – You’ve worked hard to provide financial security for your family. But the assets that are the key to your future and theirs are vulnerable to lawsuits, divorce decrees and the actions of creditors. One of the best ways to mitigate these risks is by placing legal ownership of a portion of your assets in an asset protection trust (APT), which may help shield them from the possible actions of creditors or courts. You may receive payments from the APT while safeguarding those assets that are placed in the trust.
Until a decade or so ago, APTs had to be established in foreign (offshore) jurisdictions beyond the reach of U.S. courts. That changed in 1997, when certain states began permitting APTs. Today 10 states allow residents and nonresidents alike to create self-settled APTs—that is, to set up trusts for your own benefit.
Among those states, Delaware is often a preferred jurisdiction, owing to its long tradition of business-friendly fiduciary laws and courts that have attracted many of America’s largest corporations. “Delaware has been a leader in trust fiduciary law for more than 20 years,” said Michael Neri, Director of Merrill Lynch Trust Company of Delaware. “It is now considered one of the best places to create a domestic asset protection trust.”
Delaware trusts may also be structured to help you achieve your financial or estate planning goals. For example, unlike many jurisdictions that limit the life span of trusts, Delaware allows a trust to continue in perpetuity (a “dynasty trust”). Once the dynasty trust has been established and funded, its assets are free from further federal gift, estate and generation-skipping transfer taxes and potentially could compound into great wealth over many decades. As an added bonus, in certain instances, Delaware trusts won’t incur state or local income taxes.
Confidentiality is another potential benefit. According to Neri, Delaware’s unique privacy laws give you the option of delaying information from the trust’s beneficiaries for a period of time. That allows you to protect your beneficiaries from the negative impact that anticipated wealth may have on young adults. Furthermore, Delaware trusts are not required to register with the court; if a trust is involved in a court proceeding, the court will generally seal the records to preserve the family’s confidentiality. And a Delaware trust can be used as an alternative to a prenuptial agreement.
“By establishing a Delaware trust, you can avoid many of the formalities of traditional prenuptial agreements, including the mutual disclosures,” Neri says. “You don’t even have to tell the future spouse that the trust exists.”
Yet another possible advantage of creating an asset protection trust in Delaware is the ability to separate trust functions. Investment management, distribution decisions and other administrative duties can be divided among several service providers, letting you choose top specialists for each job, Neri says.
Although APTs may help to minimize future threats to your family’s wealth, there are limits. You cannot, for example, establish a trust to block current creditors or legal actions in progress.
To understand the asset protection benefits and limitations of APTs, it’s essential that you work closely with your financial advisor and an experienced trust attorney.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)