Can A Trust Protect My Assets Once I’ve Been Sued?

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Can A Trust Protect My Assets Once I’ve Been Sued?

Certainly! Can a Trust Safeguard Assets from Legal Action? In short, yes. Specific types of trusts have the ability to shield assets from lawsuits. For instance, an asset protection trust can provide protection in the event of a lawsuit, but this is not typically the case with most living trusts. It’s crucial to emphasize that the trust must be drafted correctly and linked to the appropriate legal jurisdiction. Additionally, it generally requires a trustee who is not a spouse, close relative, controlled employee, or agent.

To draw a parallel, consider this question: Can vehicles achieve high speeds? Indeed, certain types can. Race cars, when properly constructed, tuned, and fueled, can outpace most other vehicles. On the contrary, while farm tractors excel in their designated tasks, they are not known for their speed. In essence, if speed is your objective, selecting the right vehicle is essential. Similarly, if asset protection is your goal, choosing the appropriate type of trust is crucial.

The Menace of Lawsuits

It’s widely known that the United States stands out as the most litigious country globally, boasting the highest number of lawyers, approximately one attorney for every 240 residents. Countless television commercials feature lawyers promoting their expertise in filing lawsuits and securing “compensation” for minor injuries. No one is exempt from the threat. When directed at you, frivolous litigation has the potential to strip away everything you’ve diligently accumulated throughout your life, a truly daunting prospect.

Many individuals turn to offshore trusts for various reasons, and safeguarding assets from lawsuits often tops the list. While trusts can indeed provide protection against lawsuits, it’s crucial to recognize that not all types of trusts offer this safeguard. A revocable trust, such as a living trust, falls short in this regard, as creditors can step into the grantor’s shoes and utilize the power of revocation. In contrast, a properly crafted irrevocable trust does not allow such intrusion.

Irrevocable Trusts

Unveiled An irrevocable trust is characterized by its resistance to easy modifications. This doesn’t imply that changes are entirely off the table, as it greatly hinges on the stipulations outlined in the trust and its drafting. For the specific objective of asset protection, the individual funding the trust, known as the settlor, and the beneficiaries lack the authority to make alterations without involving the trustee. The trustee assumes responsibilities such as overseeing the trust and managing its accounts. Unlike a revocable trust, where the settlor often serves as the trustee, this is not the case in most irrevocable trusts designed for asset protection.

It’s essential to recognize that, according to legal standards, creditors possess the same abilities as a debtor. For instance, in a revocable trust, the settlor has the freedom to change beneficiaries at their discretion. Legally, a creditor can sue the settlor, and if successful, a judge may declare the creditor as the beneficiary, enabling them to access trust assets to settle debts. While an irrevocable trust curtails the settlor’s powers compared to a revocable trust, it also limits the rights of creditors and the judiciary.

The key lies in setting up the trust according to your preferences from the outset. Fortunately, if circumstances change, the trustee can make necessary and legally acceptable adjustments. While many of us appreciate having control, it’s crucial to realize that full control granted to the settlor also means that a judge and creditors could attain the same level of control. Hence, for those seeking genuine control, establishing an irrevocable trust is the recommended approach.

Who Requires Lawsuit Protection?

If you inquire about the necessity of lawsuit protection, the common response might highlight physicians concerned about malpractice claims, real estate developers cautious about potential legal entanglements, or other high-net-worth individuals in careers susceptible to litigation. However, the reality is that anyone could find themselves facing a lawsuit at any given time. This holds true especially for those who have amassed significant assets, as the legal concept of the “deep pockets” theory often targets individuals or entities with the greatest ability to pay, even if their involvement in the lawsuit is minimal. It’s worth noting that lawsuit protection may be essential even for individuals without substantial assets but who face the risk of losing their home or grappling with mounting debts.

It’s crucial to understand that, in the eyes of a contingent fee attorney, sympathy may be as scarce as it is for a baby gazelle among a pack of lions—seeing you as the next meal. Circumstances like a contentious divorce, a car accident, a business dispute, or various other events leading to litigation can befall anyone. Few, if any, are entirely immune from such possibilities.

Legal Matters Postmortem

While death is an inevitability, the absence of the living does not guarantee immunity for your estate against potential lawsuits. An asset protection trust offers a means to allocate your assets to chosen beneficiaries, simultaneously serving as a deterrent against bequeathing assets to undesired individuals. Consider a scenario where there’s a strained relationship with a close relative; naturally, you wouldn’t want them to be a beneficiary of your trust. In cases where forced heirship laws are in effect, or if you reside in Louisiana, disinheritance of kin through a will or trust may not be possible. However, by siting your trust in a foreign jurisdiction that does not acknowledge forced heirship, a discontented relative would be unable to succeed in a lawsuit against the trust to claim beneficiary status.

Insurance Falls Short

Many individuals hold the belief that acquiring ample insurance coverage eliminates the necessity for an asset protection trust. However, in certain situations, such as during a divorce, this assumption may prove inaccurate. Furthermore, defining what qualifies as “sufficient” insurance can be elusive. In typical circumstances, a couple of million dollars in insurance might offer protection. Yet, in extraordinary situations, like an unexpected accusation of sexual harassment from a former employee, the insurance policy intended to safeguard assets could provide a false sense of security. It’s important to recognize that insurance companies design policies primarily to protect themselves, not necessarily the policyholder. Consequently, many insured individuals who presumed they were adequately protected found themselves confronted with disheartening statements like, “your policy doesn’t cover that.” An alternative and more robust approach to safeguarding assets is through the utilization of an asset protection trust.

Understanding Asset Protection Trusts

An asset protection trust is administered by one or more trustees and is characterized by its irrevocable nature, often featuring spendthrift clauses. The inclusion of spendthrift clauses means that creditors are barred from seizing the assets of the trust’s beneficiary until those assets—ranging from real estate and securities to cash—are officially distributed to the beneficiary.

Another notable advantage of an asset protection trust lies in its flexibility, allowing for the inclusion of a wide array of valuable assets. This encompasses not only bank accounts but also items like art, antiques, jewelry, precious metals, and a myriad of other valuable possessions. The scope of assets that can be safeguarded within such trusts is virtually limitless.

Traversing Domestic Asset Protection Trusts (DAPTs)

While many opt for offshore locations to house their asset protection trusts, Domestic Asset Protection Trusts (DAPTs) emerge as a compelling option for safeguarding assets from creditors within the United States. It’s crucial to note, however, that not all U.S. residents have access to DAPTs. Presently, only 17 states permit DAPTs, operating on an irrevocable basis and managed by independent trustees. The states allowing DAPTs include Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

The level of protection provided by DAPTs is contingent upon state laws. While certain states may prohibit specific creditors from accessing DAPT assets, exceptions exist. For instance, a former spouse or tort creditors might retain the ability to access DAPTs, particularly if the trust was established after the incident leading to the lawsuit. Consider a scenario where a doctor facing a malpractice lawsuit establishes a DAPT for asset protection; state law might still enable a plaintiff to collect a judgment from the DAPT if it was created after the alleged malpractice event.

Despite perceptions that DAPTs are easier to establish compared to offshore asset protection trusts due to their domestic nature, it’s crucial to acknowledge that DAPTs may leave asset owners more vulnerable than their foreign counterparts. The vulnerability is particularly pronounced for individuals residing in non-DAPT states. If a DAPT holds an account and a creditor initiates legal action, a court may authorize the seizure of assets. While DAPTs can prove effective in specific circumstances, life’s uncertainties underscore the importance of comprehensive protection. Relying solely on a DAPT may not always suffice in providing the level of security needed.

Advantages of Offshore Trusts

Unlike domestic trusts subject to the jurisdiction of U.S. judges, offshore trusts offer a distinct set of benefits. In the case of an offshore trust, the legal oversight lies with the judiciary of the specific country where the trust is established.

When contemplating the establishment of an offshore trust, it is advisable to choose a country with laws that are unfavorable to creditors. For instance, countries like the Cook Islands, Nevis, and Belize provide asset protection trusts with specific immunity against judgments from foreign courts or claims based on the laws of any foreign jurisdiction. This protective feature is common in many offshore trust jurisdictions, making them highly favored choices for safeguarding assets. The inherent immunity from foreign judgments enhances the appeal of offshore trusts as a robust means of asset protection.

Considerations Regarding Travel in Offshore Trusts

One notable factor in the realm of offshore trusts is the requirement for creditors to physically travel to the country where the trust is established to pursue legal action under that nation’s laws. To illustrate, if your asset protection trust is located in the Cook Islands, an idyllic archipelago in the South Pacific Ocean northeast of New Zealand, any creditor seeking access to your assets must embark on a substantial journey to the Cook Islands. This journey entails a 14-hour flight from New York, which includes two stops. Subsequently, the creditor must navigate the legal system of the Cook Islands, necessitating the engagement of a Cook Islands lawyer.

This logistical challenge significantly diminishes the likelihood of a creditor successfully gaining access to assets held in a Cook Islands trust. The legislative framework governing trust laws in the Cook Islands is specifically crafted to provide robust asset protection from lawsuits, reinforcing the formidable defense against external claims on trust assets.

Statute of Limitations on Fraudulent Conveyance in Offshore Trusts

It’s crucial to distinguish between fraudulent conveyance, a civil issue, and fraud, which is a criminal offense. In the context of asset protection, a court might link a fraudulent conveyance to the act of placing assets into a trust to shield them from potential creditors. When exploring offshore trusts, it’s advisable to seek those with concise statutes of limitations for fraudulent conveyance. Most offshore jurisdictions typically impose a statute of limitations ranging from one to two years, but certain jurisdictions, like Belize, offer almost instantaneous protection from fraudulent conveyance claims.

Taking the Cook Islands trust as an example, it provides swift asset protection with a one to two-year statute of limitations for fraudulent conveyance claims. This means that a creditor has one year from the formation and funding of the trust or two years from the underlying cause of action, the event triggering the lawsuit, to file a lawsuit in the Cook Islands. Consequently, by the time a plaintiff pursues a lawsuit in the Cook Islands after litigating the case domestically, the statute of limitations is likely to have expired.

However, it’s essential to clarify that the expiration of the statute of limitations doesn’t imply a lack of asset protection within the first one to two years. Instead, it means that courts will likely reject hearing a fraudulent conveyance claim after this period. Additionally, the burden of proof falls on the creditor, requiring them to demonstrate, within the specified time limit, that the trust was established with the sole intent of defrauding not just any creditor but that specific creditor in question.

Burden of Proof in Offshore Trust Jurisdictions

In contrast to the “preponderance of evidence” standard commonly used in most U.S. civil matters, the Cook Islands and Nevis employ a more stringent “beyond a reasonable doubt” standard, similar to that found in criminal trials within the United States. This distinction makes offshore trust jurisdictions inherently defendant-friendly. Notably, in certain countries like Nevis, the party losing in court is usually responsible for covering their own court costs. Additionally, creditors often face the requirement of posting a substantial bond before initiating a lawsuit.

Furthermore, it’s important to highlight that offshore trust jurisdictions, such as Nevis, do not operate under a contingency fee system for attorneys, unlike the practice in the United States. In these jurisdictions, losing parties are typically accountable for their legal expenses, which can act as an additional deterrent for creditors pursuing legal action. This legal landscape contributes to the overall defendant-friendly nature of offshore trust jurisdictions, providing an added layer of protection for individuals utilizing these trusts.

In conclusion, the choice of the right trust can indeed protect assets from lawsuits, particularly when considering offshore trusts. The significant investment in time, effort, and expense, combined with the low likelihood of success, deters most creditors from attempting to access assets held in offshore asset protection trusts. Even if they do pursue legal action, the outcome often involves incurring substantial legal fees without achieving their intended goal. Therefore, opting for such a structure can effectively safeguard the fruits of one’s hard work, providing a secure and protected environment for assets.

For further information on establishing an asset protection trust, please fill out the consultation form on this page or contact one of the provided phone numbers.

By |2024-01-12T10:46:47-05:00January 12th, 2024|Blog, Trust|0 Comments

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