Setting Up an Asset Protection Trust: Step by Step Guide
Asset protection trusts are amongst the most important legal tools available to those who wish to keep what they own safe from attack. While the majority of individuals will have no need for such a trust, certain circumstances call for the use of legal instruments like these to ensure that you retain control over your assets.
There are a number of parties from whom you may need to protect your assets. Many people, for example, consider establishing asset protection trusts in order to minimise their tax burden, although this is a more common practice in the United States. In the UK, the most frequently cited reason is a desire to keep assets safe from attack by creditors.
Consider your requirementsAsset protection trusts are, by their very nature, uniquely vulnerable. The very fact that you are trying to protect your assets in the first place suggests that the trust is likely to come under attack. As a result you must have a clear idea of your purpose in mind from the outset, in order to ensure that the documents are properly drafted.
If you are using an asset protection trust in order to minimise a tax bill, you should remember that there are very limited ways in which this can be achieved. Protecting assets from creditors is rather easier, but is still a complex proposition.
Inter vivos or testamentary?You may then have to choose between an inter vivos or testamentary trust arrangement. An inter vivos trust can be established when the settlor is still alive, and often has this individual as the trustee and beneficiary. A testamentary trust, on the other hand, is established on the death of the settlor. Inheritance Tax trusts could be thought of as testamentary asset protection trusts.
You should remember that there are two types of inter vivos trust – revocable and irrevocable. Revocable inter vivos trusts are of little use for asset protection purposes, as your assets will remain under your control and will legally be treated as having remained under your ownership. However, settling assets in an irrevocable inter vivos trust will mean that you have absolutely no control over that property. You should seriously consider the implications of this before taking any such action.
Don’t rely on pro forma deedsThe trust deed is the document that establishes the trust. The wording of this document is of the utmost importance for the protection of your assets, and will need to be drafted with a view to your specific circumstances.
There is a range of pro forma or standard format trust deeds available. Indeed, it is possible to pick them up from major stationers. But asset protection trusts are normally established to deal with a very specific problem and, as a result, these documents are unlikely to perform their task as well as a professionally drafted trust deed. You should always seek professional legal advice where practicable.
Finally, it is worth considering the moral aspect to asset protection trusts, and their alternatives. If you are establishing such a trust because you are concerned about attacks from creditors, you should think about other ways of tackling the problem. Try talking to your creditors and seeing if you can reach a negotiated settlement; this will render the trust unnecessary.