Beware Asset Protection Trusts

Asset protection planners and several states have worked for the last couple of decades to develop trusts that will protect assets from creditors. The ideas were to make asset protection more affordable and also to keep in the U.S. assets that were being transferred to overseas trusts in jurisdictions with strong asset protection reputations. But it might not be working, as this article points out. A Florida court recently ruled that an ex-spouse could get access to the other ex-spouse’s trust. In another case, an asset protection trust in Alaska was defeated in a court case.

There’s some debate among attorney about just how much of a precedent these cases set. But they should make something clear to people seeking asset protection. It’s long been known that asset protection trusts aren’t really impregnable. What they do is frustrate creditors and make it more difficult and expense for them to obtain someone’s assets. If a creditor is persistent and willing to spend the money on legal fees, there’s a good chance an asset protection trust can be invaded if the trust was set up by the person who owes the money. Keep that in mind when evaluating asset protection plans.

Typically, a creditor is not allowed to garnish funds in a discretionary trust if the trustee does not make distributions to the beneficiary. However, the court determined the ex-spouse, as an “exception creditor,” could seek garnishment of distributions from the discretionary trust to satisfy the former husband’s alimony obligation.

“The reason we put things in trusts is so people can’t bring a claim,” said Mia Frabotta, a partner in the family law and trust estates practice for McCarter & English in Boston. “However, there are exception creditors, such as ex-spouses and children of the beneficiary, and that means the court can allow that class of people to make a claim. What this really does is takes Florida’s law to the next level.”