February 4, 2023

Legacy Planning: Asset Protection

For asset protection purposes such as the shielding of assets from creditors, you must be able to ‘shield’ the assets from your ownership, resulting in a situation whereby you have no legal title in the assets.

Trusts are established for many reasons. One of the most common is asset protection. The term ‘asset protection’ refers to the suite of legal vehicles and techniques available to those who wish to ensure that their assets are shielded from these unforeseen, or unforeseeable eventualities.

Trusts were developed by English common law with the initial purpose to minimize the impact of inheritance taxes arising from transfers at death and to facilitate transfers of wealth within the family unit.

Asset protection trusts have a number of significant applications for individuals with assets:
i. they may be used to shield an individual from a particularly high tax burden; or
ii. protect assets from attack by creditors, or
iii. larger corporations may find that they have fallen foul of competition laws or tax schedules; or
iv. may be adapted for almost any other potential situation. (there is a huge variety of potentially unforeseeable circumstances in which the wealth of an individual or business may be attacked.)

British courts take a notoriously dim view of asset protection trusts. If a judge decides that a trust has been established in order to avoid assets falling into the hands of creditors, it stands a good chance of being struck down.

One of the paramount aims when establishing an asset protection trust is the achievement of separation between settlor (that is, the individual establishing the trust) and assets.

For asset protection purposes such as the shielding of assets from creditors, you must be able to ‘shield’ the assets from your ownership, resulting in a situation whereby you have no legal title in the assets.

Ensuring asset protection trusts don’t fail:
a. Trustees must be clear as to trust assets and personal assets. Mixing the two, for example by paying trust expenses out of your personal account, can dilute asset protection and open the trust to a trustee in bankruptcy;
b. The trust may confer an interest in possession on the designated beneficiaries. However, in such a case, it should be made subject to overriding powers of appointment so that the interest in possession can be terminated in the event of a beneficiary becoming bankrupt or subject to some adverse claim from a creditor or a spouse. 
c. A corporate trustee should be an essential component of trust structuring. Acting as the individual trustee invites examination of the trust property on bankruptcy;
d. Establishing a trust requires careful consideration of its purpose and circumstances;

For further information and assistance please email: info@aamevol.com


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