The Basics of Asset Protection Trusts

Before we go into the unique advantages of a Wyoming Asset Protection Trust, we must break down the basics of Asset Protection trusts in general.

If you are laying out an asset protection plan for yourself, then you should be familiar with the asset protection trust, sometimes abbreviated as APT. An asset protection trust will, in many cases, be one of the main cornerstones of your asset protection plan.

You can use an asset protection trust to shield many different types of assets, including money, personal property (such as a vehicle), real estate and land property, financial investments, corporate shares, and more.

Now, you probably already know some things about how trusts work for estate planning purposes, and you may have established one. However, an ordinary estate planning trust will not serve for asset protection purposes.

Most estate planning trusts are revocable, which means that the settlor (you) can change the provisions of the trust, or remove assets, at any time. However, in order for a trust to offer asset protection benefits, it must be irrevocable.

With an irrevocable trust, the terms of the trust cannot be modified. It’s easy to see the drawback of this: there is much more pressure on you to get the trust right, which is why you should not set up an irrevocable trust without putting in a fair amount of planning.

However, irrevocable trusts have one major benefit, which is asset protection. If you set up an irrevocable trust properly, then it can be used to keep your assets safe from creditors and other parties who would try to take them from you.

The Self-Settled Spendthrift Trust

To be specific, an asset protection trust is a subtype of irrevocable trust known as a self-settled spendthrift trust.

There are two elements to this:

• The self-settled part means that you are both the creditor and the beneficiary of the trust.
• The spendthrift part means that the trustee has full control over your assets, and so they are effectively outside of your purview. This might sound intimidating, but it is a necessary step for you to enjoy the full asset protection benefits of such a trust.

Remember, just because the trust is irrevocable does not mean that you will not have any access to your assets. If properly structured, a self-settled spendthrift trust can give you a fair bit of leeway with regards to the assets in the trust, as we’ll touch upon below.

Where to Establish a Wyoming Asset Protection Trust

Some people think that if they want to protect their assets, all they have to do is make their trust irrevocable.

In fact, this is a very good way to lose all your assets by lulling yourself into a false sense of security. You see, self-settled spendthrift trusts are only allowed in some states, and California is not one of them. In fact, our state is one of the unfriendliest in the nation to debtors.

Don’t lose heart, though: if you’re a Californian, you can still set up an asset protection trust in one of the other states which do allow them. This is legal to do, even if the property you place in the trust is located in California. However, it takes some legal and technical know-how in order to manage this properly, and you should not attempt to do it alone.

There are several states which permit self-settled spendthrift trusts. Common destinations include Nevada, South Dakota, and Delaware. Each state’s laws are slightly different, and an attorney can help you sift through the details and figure out which state is right for you.

However, one of the best destinations for out-of-state asset protection is Wyoming. This small state has become a giant in helping people protect their hard-earned assets from would-be creditors.

Benefits of a Wyoming Trust – Protecting Assets

If you do decide to set up an asset protection trust in Wyoming, you will receive several benefits. The law is complex, and we could take a lot of time explaining the ins and outs, but some of the main benefits of a Wyoming trust include:

• Low taxation. The state of Wyoming has some of the lowest taxes in the nation. It has no state capital gains tax, nor any state income tax (on either the individual or corporate level). Even as a non-resident of Wyoming, you are eligible for those tax benefits if you establish a trust there.
• Privacy. In Wyoming, you can set up your trust so that it is not on the public record. Although the existence of your trust might still be revealed by a lawsuit, this legal protection of privacy will make it much harder for creditors to find.
• Duration. In Wyoming, a trust can last basically forever (1,000 years, to be precise). In contrast, California requires trusts to terminate after 90 years. This means that you can use Wyoming to create a dynasty trust, which may last for multiple generations, and also help to protect yourself from the generation-skipping transfer tax (a major roadblock to dynasty trusts).
• Decanting. Wyoming had loose laws on decanting, which is the process by which a trustee may move assets from one trust into another. This gives you some flexibility to change the terms of even an irrevocable trust (and another reason why you shouldn’t be too scared by the “irrevocable” label).
• Directed Trusts. Wyoming allows for directed trusts, which permit you to appoint a party other than the regular trustee to handle certain matters related to the trust. This gives you a “best of both worlds” situation – you can rely on the resources of a larger financial entity as the trustee, while allowing your advisor to guide the trust in a more personal and compassionate manner.

In addition to these legal protections, there are also a couple of logistical benefits to Wyoming:

• Proximity. Wyoming is pretty close to California. It is one time zone ahead, which makes doing business across state lines fairly easy, and if you need to travel there for some reason, it is not as far as other states which allow self-settled spendthrift trusts, such as Delaware.
• Familiarity. Not many people know about Wyoming asset protection trusts, especially compared with those in more popular jurisdictions such as Nevada. This means that if someone sues you, they will likely be fighting on unfamiliar legal terrain, which places just one more hurdle in their way on top of all the legal obstacles they might face.

The Wyoming LLC

Closely related to the Wyoming asset protection trust is the Wyoming LLC (limited liability company). An LLC is somewhat different from a trust: in its structure it is closer to a corporation, with a “corporate veil” that keeps your personal assets safe from a lawsuit against the LLC (hence the term “limited liability”).

As with trusts, however, LLC asset protection benefits are particularly strong in Wyoming. Wyoming LLCs have many of the same benefits that Wyoming trusts do, including privacy, low tax rates, and a long permitted duration. Wyoming LLCs are also relatively easy and inexpensive to set up.

On top of all these, Wyoming also has one benefit unique to LLCs: strong charging order protection. This allows the “corporate veil” to essentially go both ways: your interest in the LLC is protected from a personal lawsuit. In order to get ahold of your LLC assets, a creditor must obtain a charging order.

The strength of charging orders varies from state to state, and in Wyoming, you will have probably the strongest protection in the nation. Your creditor cannot force you to make distributions, meaning that you can essentially keep them from gaining any assets just by keeping them within your LLC.

Wyoming Asset Protection Trust versus Offshore Trusts (And LLCs)

An asset protection trust established in a state such as Wyoming is sometimes called a domestic asset protection trust (DAPT) in order to differentiate it from a foreign asset protection trust (FAPT).

As the name suggests, a foreign asset protection trust is one which is established in another country, such as the Cook Islands.

(The same, by the way goes for LLCs. You can receive significant potential asset protection benefits by creating an offshore LLC in a jurisdiction such as Nevis.)

We’ve written about foreign asset protection trusts and LLCs, and their benefits and drawbacks, in some detail. The basic question is, why set up a domestic trust or LLC when you can go to the next level and take your assets offshore?

The main factors here are cost and risk. Offshoring your assets – although affordable for many who have larger investments – costs significantly more than moving them to another state. The more assets you have, and the higher your risk level, the more sense offshoring makes… but for those with more modest assets, and who face only a low to moderate threat of being sued, moving to Wyoming is often the most cost-efficient option.

In other words, a Wyoming trust or LLC gives you many of the asset protection benefits of offshoring, without the hassle of doing so.

Are Wyoming Trusts and LLCs Perfect?

No.

Asset protection plans, no matter how well-thought-out, can be breached. Nothing is ever 100% in the world of asset protection.

When it comes to moving your assets to Wyoming, there are a few cautions. First of all, some types of debts, such as child support, may not be shielded against even with a strong asset protection trust.

Second of all, as with all asset protection plans, you will have to avoid the thorny issue of fraudulent transfer, which occurs when you transfer assets with the specific intent to defraud a creditor. (This is why it is important to begin planning as soon as possible, before you face a lawsuit.)

A good legal professional can help you find your way through these sorts of minefields.

However, moving your assets to Wyoming does one very important thing: it serves as a dissuasion against lawsuits. Remember, most lawsuits don’t go to court, but are settled relatively quickly, and so much of the process of a lawsuit involves the attorneys for the opposing sides assessing the strengths and weaknesses of each other’s cases, and deciding how much they can reasonably expect from the other without a protracted battle.

A Wyoming trust or LLC sends a message to would-be plaintiffs that you are not an easy target, and that you will not surrender your assets without a fight. This will discourage them from picking on you easily, and maybe send them away entirely to go bother someone with a weaker asset protection plan.

It is of crucial importance, however, to get things right. If you do not know what you are doing with an asset protection plan, an experienced attorney suing you will see through it very quickly, and you will have gone to all that effort for nothing. That is why you should never set up an asset protection plan without professional legal help.

If you want to explore moving your assets to Wyoming, or another domestic or foreign jurisdiction, then give our firm a call today to schedule a free consultation. We have experience working with all sorts of asset protection plans, and we would be happy to hear more about your case and talk you through your various options.