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Asset Protection Trusts: effective or not? P.2

In our previous post, we started looking at an article discussing the effectiveness of self-settled asset protection trusts. Generally speaking, asset protection trusts are trusts set up for the purpose of avoiding or mitigating the consequences of divorce, taxation and bankruptcy on the trust's beneficiary. A self-settled asset protection trust is one in which the beneficiary is the one who set up the trust.

We have already noted that the effectiveness of self-settle asset protection trusts depends on the circumstances, particularly whether bankruptcy is involve and whether the debtor resides in a state where such trusts are recognized.

In general, self-settled asset protection trusts will work in states that have adopted legislation upholding them, provided bankruptcy is not a factor or they were not settled within 10 years of bankruptcy. Conversely, such trusts will likely not work in states without such legislation, regardless of whether bankruptcy is involved.

One interesting point the article makes is that offshore asset protection trusts actually have a better chance of protecting your assets than domestic ones. One of the reasons for this is that domestic courts may be reluctant to rule in favor of the creditors. Another is that, even where courts do rule in favor of the creditors, the latter may not easily be able to access the trust assets. Still, there are limitations to foreign asset protection trusts.

The upshot of the whole discussion is that self-settled trusts are not the best idea. Opinions may differ on this subject, though, and it is best to speak with your attorney to determine what approaches best suit your situation.

Source: Forbes, "Easy Chart Regarding Effectiveness of Asset Protection Trusts," Jay Adkisson, November 15, 2011.

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