Using Trusts for Protection from Creditors
What is a trust?
A trust is a legal arrangement in which the owner of property—the grantor—transfers ownership of that property to another person, persons, or legal entity—the trustee(s)—to manage the property for the benefit of a third person, persons, or legal entity—the beneficiary or beneficiaries. Generally, a trust is created by a trust document or a will in the case of grantor's death.
How can a trust protect my assets from creditors?
Once this type of "irrevocable" trust is created and funded with a portion of the grantor's assets, the grantor simply does not own that donated property anymore. So if a future creditor gets a judgment against a grantor and then tries to satisfy the judgment with property of the creditor, the property in the trust is not available, because the property is owned by the trustee(s), not the grantor. This is the case even where the grantor has set up a discretionary trust in which the grantor is among the beneficiaries at the time of distribution of the trust, to whom distributions may be made in the discretion of an independent Trustee. One danger, however, is the possibility that a court may set aside transfers to the trust if found to be made to defraud creditors.
The line between defrauding creditors and protecting assets from creditors may not be clear. That is why it is so important to seek the guidance of a Ferguson Cohen LLP attorney.
How does an offshore trust benefit me?
An offshore trust is a trust that is formed in another country whose laws are beneficial for the creation of trusts. For example, many offshore jurisdictions have relaxed the time limits for property in the trust to be distributed to the beneficiaries. These trusts do not "hide" assets (there is full, periodic reporting to the Internal Revenue Service, for example), they simply place a portion of one's assets in a place where it is harder for one's future, as yet unanticipated creditors to reach them in satisfaction of claims they assert.
In particular, many offshore jurisdictions have enacted asset protection laws to permit the grantor to be a beneficiary, as well as a short statute of limitations period in which a creditor has to bring a fraudulent transfer claim. Once the short time period passes, the creditor is forever barred from making the claim.
Using a trust as an alternative to a prenuptial agreement
If you are contemplating marriage and thinking about getting a prenuptial agreement, think about a trust as an alternative way to provide for your current children and grandchildren. Discussing a prenup with your future spouse may be awkward and uncomfortable. And what assurance do you have that a family court judge will enforce your prenup under the appropriate family law if and when the time comes? Establishing a trust for asset protection for the benefit of your children and grandchildren may be easier to talk about with your future spouse. Furthermore, if properly drafted, a trust likely provides more legal certainty than a prenup.
Developing asset protection and offshore trusts is a complex legal endeavor. To arrange a consultation with a Ferguson Cohen LLP attorney to discuss your specific needs, please call our office at 203-661-5222; ext. 15.