Asset protection is a phrase that gets tossed around quite a bit, typically in grandiose fashion. We hear about asset protection trusts in celebrity divorce proceedings or when a wealthy businessman moves their wealth offshore to escape creditors. However, asset protection isn’t reserved for the rich and famous; it’s a valuable tool for anyone that’s amassed even modest wealth. Asset protection protects assets like bank accounts, real estate, stocks, investments, businesses, and more from legal threats. If you find yourself in an ugly lawsuit over a car accident, a Domestic Asset Protection Trust (DAPT), a type of self-settled trust, allows you to protect your hard-earned assets from legal action. Unlike other trusts, DAPTs will enable the trust’s creator to double as the beneficiary, making them a simple and flexible option for clients who want personal protection from creditors and lawsuits. This attractive option isn’t available in all states, however. Hence, it’s essential to know which states allow DAPTs, what to consider when selecting a state for protection, the top six best asset protection states in the US, and the best states for LLC asset protection. Keep reading to find out more.
To shield your assets from creditors and/or lawsuits, a DAPT represents the most effective strategy to accomplish your goal. However, only a handful of states allow the creation of a DAPT, including:
The obvious downside of forming a DAPT is its lack of recognition in many states. If you live or get sued in a state that does not offer explicit protections to DAPTs, there is a risk that your assets may not be protected, although the legal waters are murky here. In some circumstances, however, those risks are worth it. You should always consult with an attorney specializing in trusts before making a decision.
There are several factors to consider when selecting a state for asset protection, including state income taxes, the state’s statute of limitations for future creditors, the state’s statute of limitations of discovery for pre-existing creditors, spouse/child support exceptions for creditors, and any other pre-existing torts/exceptions for creditors.
Moreover, clients should consider the purpose of the trust. During a consultation with an estate planning attorney, you should ask yourself, “From which creditors do you want to protect your assets?” “Who will be the trustee of the trust?” “What property will be put in the trust?” and “What payments do you expect to get from the trust?”
Your reasons for creating the trust can’t be to avoid current creditors. The trust can shield your assets only from potential future creditors, and some states have a waiting period. Additionally, you will need to choose an individual or corporate trustee who resides in the state where the trust is created in many cases. Next, while assets like cash, stocks, or bonds may be easy to move from state to state, you can’t move physical property, which is an important consideration. Lastly, trusts limit your access to funds so that you can only receive distributions from the trust, which may not align with your financial goals.
Alaska’s self-settled trust laws are some of the best in the US. One of the main benefits of Alaska DAPTS is protection from creditors. Unlike other states’ DAPT laws, Alaska has no special group or “class” of creditors, which means creditors must prove “actual fraud” before assets from the trust can be attached in a judgment.
Additionally, Alaska’s DAPT has a provision wherein creditors cannot seek a court order to attach assets or distributions in the trust. Neither can they seek a court order compelling the trustee to provide a distribution for the creditor.
Delaware is another excellent option for this type of trust. A grantor in a Delaware DAPT may assign themselves as a discretionary beneficiary of the trust to get assets back in an emergency or avoid the gift tax, when applicable.
A federal transfer tax will occur in many states if the grantor makes a gift that incurs gift tax and lives at least three years after making the gift. In these cases, their estate must pay the estate tax. However, if the gift is made through a Delaware DAPT, the transfer taxes may be avoided.
Similarly, if a grantor’s state of residence imposes an inheritance tax, they may be able to reduce that by making a gift before their death. Delaware also provides a three-year seal for trust privacy.
Nevada was one of the first states to pass legislation allowing for the formation of self-settled trusts and is the shining star of the asset protection community. With no state income, estate, and inheritance taxes in Nevada, it’s an attractive place to open a DAPT.
Nevada Spendthrift Trusts are not subject to a personal or corporate federal income tax and are not subject to other states’ income taxes. In Nevada, the rights and privileges of a DAPT are clearly defined by statute and do not depend on court decisions or interpretations for the validity of the trust.
What’s more, the state of Nevada does not charge registration fees, annual reporting fees, or any other recurring fees for the trust to remain valid. In addition, the trusts are also not required to maintain a resident agent in the state of Nevada.
South Dakota has favorable laws for those planning to protect assets for multiple generations. South Dakota has no state income tax or capital gains tax, so assets within a trust can be sheltered from state taxation.
South Dakota also reigns supreme in terms of privacy, as it is the only state in the country with a total seal forever, providing the best trust privacy statute in the United States.
Finally, South Dakota has industry-leading directed trust provisions that enable trustees to work with outside investment managers and nontraditional assets in trusts.
Another state that tops the list for best asset protection states is Tennessee. Tennessee’s incredibly flexible trust laws allow individuals to create a trust for their benefit, which would be protected from creditors.
Assets in a Tennessee DAPT can remain in trust for 360 years, providing creditor protection for future generations.
Tennessee DAPTs also avoid income tax on the income generated by the trust.
A self-settled trust in Wyoming protects you and your beneficiaries from the claims of creditors, which helps ensure that your wealth is passed on throughout the generations. A unique advantage to Wyoming is the opportunity to create a purpose trust. Unlike a traditional trust, these trusts are designed to fulfill a unique goal you may have, such as preserving an art collection.
While most states limit the number of years a trust may exist, Wyoming allows a trust to last for 1,000 years, providing greater asset protection and may avoid estate taxes.
If you decide to form a Limited Liability Company (LLC), you’re likely concerned with liability protection for your personal assets from your business’s creditors and legal liabilities. Generally, your LLC is considered a separate legal entity and as its owner, you are not personally liable for its debts or legal liabilities. Yet there are numerous exceptions under state and federal laws.
For example, with an LLC, your home, car, or bank account would be safe from a business creditor, while your business assets would not be safe. Additionally, you may still be personally responsible for your own conduct that harms third parties, LLC loans that you personally guaranteed, or payroll taxes that your LLC failed to pay to the IRS. It is essential to put together asset protection strategies before any claim or judgment surfaces against your LLC. A DAPT can be the perfect solution to safeguard you from harm; however, only a small handful of states offer protection to single-member LLCs:
If you’re considering DAPTs or other forms of asset protection, it’s essential to speak to a law firm that understands your legal needs and how to best achieve them. At Blake Harris Law, we have considerable experience helping our clients set up Domestic Asset Protection Trusts and other forms of asset protection structures. In doing so, we help our clients shield their economic interests.
Our skilled attorneys are the perfect choice if you’re searching for qualified legal professionals that can help you develop robust asset protection solutions for you and your family. If you would like to discuss what kind of asset protection is right for your situation, please contact Blake Harris Law to schedule a free, no-obligation consultation.