Please first refer to the earlier discussion in this book about the different types of trusts, including the differences between revocable and irrevocable trusts. Most of the “asset protection” trust structures (if we’re talking about asset protection for the maker of the trust) involve irrevocable trusts. This is consistent with the law in most states (and countries) and follows the basic and true premise that for you to protect an asset, you’re normally required to put that asset into an irrevocable trust, which means you’re required to surrender some measure of your rights to that property.
For example, if you want to protect your personal residence from a possible credit claim (no currently known claims—you’re just being cautious), you can transfer the ownership of your residence to an irrevocable asset protection trust. As part of establishing and maintaining this asset protection trust, your estate planning attorney will help you comply with the various requirements of the trust. In this context, in exchange for the asset protection of the residence, you may have to give up your right to sell it and move to Arizona a few years down the road. At the same time, you can continue to live in your home rent free for the rest of your life, and your spouse can do the same.
You can also designate what happens to your home after you and your spouse die. But again, you were required to give up something in exchange for this legally valid asset protection. This is a very simplified description of the elements of an asset protection plan using an irrevocable trust structure.
Contrast the prior example with the “have your cake and eat it too” products that are marketed and sold online, at seminars, and elsewhere. There are many variations, but often, those hawking these “magic bullet” structures advertise that it’s possible to protect most if not all your assets from taxes and creditors while retaining total control over all your property. Most often, these arrangements involve “offshore trusts,” which means that somewhere in the proposed plan there is one or more trusts, limited liability corporations, or other legal entities governed by the laws of a country other than the United States (often one of the Caribbean islands).
Finally, these “bullet proof” structures are usually very expensive and are marketed most heavily to doctors, dentists, and other professionals worried about being sued for big money. The inflated price of these estate plans is justified by preying on the fears of these professionals, telling them that it’s not a matter of if they’re going to get sued but when. Further, given such proximate danger, what’s $15,000 or even $40,000 or more in legal fees to ensure the protection of their valuable estate? Finally, such asset protection salesman normally require an annual fee of $500 to $5,000 or more to “monitor” and “safeguard” these offshore asset protection structures. Let me be clear—I do not believe or engage in this type of salesmanship, nor do I believe in the legality of this type of “planning.”
I’m not saying there are no reputable, legitimate estate planning attorneys who properly utilize some offshore asset protection structures in legally valid ways and manners that are highly beneficial for their clients. There are, they do, and they do. But there are also a good number (too many) of “snake oil” salespeople out there who are very good at marketing, very persuasive in their seminar speeches, and all too good at convincing people to part with tens of thousands of dollars in exchange for a bunch of smoke and mirrors that result in a worthless (but very expensive) stack of papers that provides absolutely no asset protection or any other type of protection.
Many states have passed asset protection statutes that permit residents of the states and others who are not residents to legally and legitimately establish asset protection trusts governed by the laws of the state. Utah is among such states; it has a “domestic asset protection trust” (DAPT) statute. Utah’s DAPT statute is among the best in the nation as far as benefits to makers of trusts under the statute and related protections, with a comparatively small number of formalities and restrictions. As with other estate planning tools and techniques, however, remember that there is most definitely a right and a wrong way to go about this. Also remember that your local bankruptcy, dog-bite, personal injury, and real estate attorney (i.e., one who handles all those things and more) is most likely not competent or qualified to set up an asset protection trust for you. This is specialized work that when done right can provide valuable protections.
Finally, in all instances, be not only skeptical but also very concerned about anyone (attorney, accountant, or other) who tells you he or she can help you shield your assets from state or federal taxes. Such “creative” tax structures, domestic and offshore, have resulted in more than a handful of people, including attorneys, earning a one-way trip to federal prison. If you’re ever approached by such an individual, run the other way!
To clarify, this is not the same thing as legitimate tax planning very common in the world of estate planning and practiced by most estate planning attorneys, accountants, and tax advisors. Normal tax planning involves just that—thoughtful planning through the use of legally valid tax elections, entity formation, and asset allocation. What I’m warning about here is the “asset shielding” and “asset hiding” done by some for tax evasion purposes. In the case of the former, legitimate planning, tax forms are filed and everything is clearly disclosed to the state and the IRS. In the case of totally illegal tax evasion, there’s a lot of sneaking around, hiding, and keeping of “secrets.”