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Utilizing an asset protection trust to shield assets in divorce

Most of our readers are familiar with using a prenuptial agreement to protect oneself from loss of assets in divorce. Prenuptial agreements are useful because, when wisely negotiated and properly executed, they effectively trump state law regarding property division. Prenups have become standard fare in Hollywood and among the wealthy, but even those of modest wealth can benefit from prenuptial agreements.

Prenups are not the only way to protect assets in the event of divorce, though. Another less known approach is to establish an asset protection trust prior to marriage and stock it with assets one wishes to protect. Asset protection trusts can be executed either overseas or in the United States. In the latter case, they are referred to as domestic asset protection trusts. 

There are currently 15 states which honor asset protection trusts, and one does not have to be a resident of one of these states to set up a trust there. Alaska is one of these states. Domestic asset protection trusts are a form of irrevocable trust, which means creditors cannot access assets placed in the trust. The difference between asset protection trusts and normal irrevocable trusts, though, is that the individual who establishes an asset protection trust is recognized as a discretionary beneficiary.

One of the key things with setting up an asset protection trust, though, is to ensure you get the timing right. Because of the risk of being accused of fraudulent transfer, one needs to be sure that such a trust is not set up under circumstances which could be interpreted as an attempt to shield assets in anticipation of divorce. In Nevada, for instance, assets transferred within two years of divorce are presumed to be fraudulently transferred.

In setting up an asset protection trust, it is important to work with an experienced attorney to ensure everything is done properly and without risk of fraudulent transfer allegations.

Source: Huffington Post, “Protect Yourself in a Divorce Using a Domestic Asset Protection Trust,” Robert Pagliarini, May 22, 2014. 

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