Using an Irrevocable Trust for Asset Protection - Federal Lawyer
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Using an Irrevocable Trust for Asset Protection

For high-net-worth individuals looking for ways to protect their assets, there are several options available. But, one of the most effective options is establishing an irrevocable trust. Not only can irrevocable trusts offer strong asset protection, but they can also assist with tax planning and estate planning. As a result, many high-net-worth individuals choose to make an irrevocable trust a central component of their asset protection strategy.

Nick Oberheiden
Attorney Nick Oberheiden
Irrevocable Trust for Asset Protection Team Leadenvelope iconContact Nick
Alina Veneziano
Attorney Alina Veneziano
Irrevocable Trust for Asset Protection Team Lead
Attorney & CPAenvelope iconContact Alina
John W. Sellers
Attorney John Sellers
Irrevocable Trust for Asset Protection Team Lead
Former DOJ Trial Attorneyenvelope iconContact John

When forming an irrevocable trust for asset protection purposes, there are several important considerations involved. These range from understanding the meaning of the term “irrevocable” within the asset protection context to choosing where to form your irrevocable trust. While making informed decisions about your asset protection strategy requires custom-tailored legal advice, here is an overview of some of the key factors high-net-worth individuals should consider when choosing how best to move forward:

What is an Irrevocable Trust?

The first thing to know is that the term “irrevocable trust” is somewhat deceiving. The concept behind an irrevocable trust is that it places assets beyond the reach of creditors by also placing the assets beyond the reach of the “grantor,” or the individual who establishes the trust. This, fundamentally, requires that the trust be “irrevocable,” because otherwise the grantor could simply revoke the trust at whim and gain access to the trust’s assets as desired.

So, ostensibly, an irrevocable trust prevents the grantor from using the trust to shield assets without also facing the same limitations as the grantor’s creditors.

In practice, however, irrevocable trusts are not so restrictive. While it is important that high-net-worth individuals who use irrevocable trusts for asset protection purposes respect the formalities of the irrevocable trust structure, this structure can be modified and manipulated. This is a key characteristic that makes irrevocable trusts much more appealing to many people. For example, while individual circumstances vary, potential options for grantors to regain control of assets placed into an irrevocable trust include:

  • Reserving authority to modify the terms of the irrevocable trust
  • Forming the irrevocable trust in a jurisdiction that allows for statutory revisions
  • Decanting your irrevocable trust, or “pouring” assets from the trust into a new asset protection “vessel”
  • Seeking judicial approval to terminate the irrevocable trust (some jurisdictions have laws that facilitate termination without significant burdens of proof)
  • Working with the grantor’s selected trustee to amend or dissolve the irrevocable trust

Of course, this might not be a concern. You may be more than happy receiving income from an irrevocable trust without concern for having access to the trust’s assets directly. Or, you may be happy using an irrevocable trust as both an asset protection tool and an estate planning tool—with the trust’s assets to be eventually distributed to your children or other beneficiaries at the time of your death. But, when developing an asset protection strategy, it is good to know that you have options, and to keep these options in mind should your financial or family circumstances change in the future.

Another important factor to keep in mind is that irrevocable trusts are created under state law in the United States and under foreign laws abroad. While some states have adopted uniform trust laws, there are also states that have adopted unique laws that are more asset protection-friendly. Nevada is a notable example. Likewise, in many of the foreign jurisdictions that are popular for offshore asset protection, the trust laws include favorable provisions that allow grantors maximum control over the assets in their irrevocable trusts while still providing robust asset protection benefits. For example, in the Cook Islands, grantors can generally work with their chosen trustees to dissolve irrevocable trusts without judicial involvement—as long as the necessary terms are in place.

When Should You Use an Irrevocable Trust for Asset Protection?

Deciding when to use an irrevocable trust (as opposed to a different asset protection vehicle) requires a careful assessment of your individual risks and needs. While forming an irrevocable trust makes sense in many circumstances, high-net-worth individuals should not assume that any particular strategy will work for them. Making assumptions isn’t really a strategy at all. Instead, making informed decisions about whether to use an irrevocable trust for asset protection involves working closely with an experienced attorney who can help you make informed decisions and develop a strategy that is custom-tailored to your specific circumstances.

Then, of course, there is the question of whether you need an asset protection strategy at all. However, as a practical matter, the answer to this question is relatively straightforward. If you have substantial assets that you don’t want to lose and want to preserve for future generations, implementing an asset protection strategy is essential. From professional liability concerns to concerns about one of your children causing a serious car accident (for which you may be held personally liable), there are plenty of reasons to take the cautious approach and put an asset protection strategy in place.

What Are the Alternatives to Using an Irrevocable Trust for Asset Protection?

Assuming that you need an asset protection strategy, before settling on forming an irrevocable trust you will also want to consider the alternatives. Depending on your individual circumstances, using one (or more) of these alternatives could be both a more suitable and a more cost-effective way to protect your hard-earned wealth. One of the keys to effective asset protection is taking a custom-tailored approach. What works for someone else won’t necessarily work for you, and failing to give due consideration to your specific needs can leave risks unaddressed while also preventing you from securing the maximum protection available.

So, what are the alternatives to using an irrevocable trust for asset protection? Some examples of potential alternatives include:

  • Forming a domestic limited liability company (LLC)
  • Transferring ownership of assets (i.e., transferring ownership of real estate to “tenants by the entirety” with your spouse or partner)
  • Combining LLCs and ownership transfers for even greater asset protection
  • Purchasing substantial liability insurance coverage
  • Leveraging other offshore asset protection tools

Keep in mind, it may make sense to use an irrevocable trust (or multiple irrevocable trusts) in addition to using one (or more) of these alternatives. For example, while liability insurance can provide protection from professional liability, personal injury, and wrongful death claims, you may still need an irrevocable trust to protect yourself against other potential claims or complaints. Similarly, while it may make sense to place some of your assets into a domestic LLC that you own and manage, it may also make sense to place other assets into an offshore irrevocable trust that is even further out of reach from governmental authorities as well as potential commercial and judgment creditors.

Additionally, certain assets may not be eligible for placement into an irrevocable trust. For example, even in Nevada, where the law heavily favors the use of irrevocable trusts for asset protection purposes, retirement accounts, vehicles, and offshore assets are ineligible to be placed into an irrevocable trust. As a result, while forming an irrevocable trust may be a necessary component of an asset protection strategy, it may not be sufficient on its own.

Should You Form a Domestic or Offshore Irrevocable Trust?

A final key consideration involved in forming an irrevocable trust is deciding where you want to form it. As we mentioned above, different states have different trust laws, and many foreign jurisdictions have asset protection-friendly trust laws as well. In some cases, forming a domestic irrevocable trust will be sufficient to meet individuals’ asset protection needs. In others, the additional benefits of moving assets offshore will be desirable (or necessary).

Choosing to form an offshore irrevocable trust has both pros and cons as compared to forming an irrevocable trust in the United States. Some of the unique benefits of forming an offshore irrevocable trust include:

  • Offshore irrevocable trusts can provide greater protection and privacy in many cases
  • Creditors often have a higher burden of proof to establish a fraudulent transfer
  • Many foreign jurisdictions have shorter statutes of limitations for creditor claims
  • Many foreign jurisdictions have adopted other grantor-friendly laws as well

Some of the limitations that are unique to offshore irrevocable trusts include:

  • U.S. taxpayers have a duty to disclose their offshore assets to the federal government
  • Instability and unrest can be concerns in some foreign jurisdictions
  • Offshore irrevocable trusts can be more costly to form than domestic irrevocable trusts
  • Offshore irrevocable trusts can be more costly to maintain than domestic irrevocable trusts

When it comes to protecting your wealth for the future, an informed and strategic approach is key. Whether this approach involves forming a domestic or offshore irrevocable trust depends on your individual circumstances. To decide whether forming an irrevocable trust is right for you, schedule an appointment with a senior asset protection lawyer at Oberheiden P.C.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Schedule an Appointment with a Senior Asset Protection Lawyer at Oberheiden P.C.

If you have questions about using irrevocable trusts for asset protection purposes or would like to know more about asset protection in general, we invite you to get in touch. To speak with one of our senior asset protection lawyers in confidence, please call 888-680-1745 or request a complimentary consultation online today.

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