A trust is a legal mechanism in which a person can secure property or money on behalf of a third party. Many people set up asset protection trusts to prevent family wealth or property from being lost in the event of bad economic situations. It is relatively easy to set up these vehicles with the help of a wealth advisor or estates attorney.

There are three parties involved with the creation of a trust. The first is the settlor, who is the person or group that wants to set up the structure on behalf of another person. The second party is the beneficiary, who is the individual or group of persons entitled to the property or money. The third party is the trustee, who is the person responsible for managing the property or money on behalf of the beneficiary, usually until the beneficiary comes of age. The trustee looks out for the interests of the beneficiary.

One concern was that creditors would try to seize the property or money from the beneficiaries to pay outstanding debts. To guard against this, settlors began to include spendthrift clauses in the terms of the trust agreements to prevent the beneficiaries from losing their estates to creditors. There have been many court challenges to determine the validity of these spendthrift clauses. The courts have generally accepted that spendthrift clauses against beneficiaries and their creditors are acceptable, but may not be enforced against the creditors of the settlor.

It is important to remember, however, that there are some exceptions to this rule. If the beneficiary has support obligations to a former spouse or a child who is still a minor, then the courts may order a trustee to satisfy those obligations from the funds held in the trust.

Sometimes these structures may be set up offshore, for example, in one of the Caribbean nations who offer certain tax benefits. These offshore trusts do not normally prevent legal action from occurring against an individual in their home country. Any court orders that are made under divorce or creditor advantage laws can still be made against an individual to re-coup funds owed. A judge may order a settlor to repatriate funds from an offshore jurisdiction if he or she determines that the settlor has control of the assets.

In such cases, the settlor is wise to seek legal counsel from a competent estates attorney, who can advise them of their options. However, it should be noted that failure to comply with such court orders may be viewed as contempt of court, which can lead to imprisonment for other penal fines. This is why it is important to have a clear separation between the settlor and those who have control over the assets, in a properly established trust.

Sometimes these structures are set up offshore, which means that they are not administered in the United States. An offshore trust structure is not completely private, however. There are still many reporting requirements and disclosure requirements that are enforced by the Internal Revenue.

Before you set up asset protection trusts, make sure you sit down with a good lawyer and discuss your intentions thoroughly. In your discussions, make sure you outline exactly who the beneficiaries are and what assets, such as property or money, are to covered.

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