If you’re a business owner or resident of Delaware, you might be considering setting up an asset protection trust. After all, the more money you make, the more vulnerable that cash is to creditors and lawsuits.
Initially, asset protection trust could seem like a stellar idea. But in the real world, a Delaware asset protection trust has far more downsides than benefits. Let us explain why.
What Are Delaware Asset Protection Trusts?
At the time of this writing, several US states, including Delaware, allow the formation of self-settled asset protection trusts. Delaware asset protection trusts are like other APTs in their form and general function. For example, every Delaware asset protection trust has a:
- Grantor, the individual responsible for creating the trust and filling it with assets
- Trustee, who administrates and manages the trust, plus deals with distributions
- Beneficiary or beneficiaries, who receive distributions from the trust (the grantor can also be a beneficiary)
A Delaware asset protection trust theoretically works by taking ownership of certain key assets. For instance, say that you have a prized vehicle worth $2 million.
If you give ownership of the vehicle to the Delaware APT, then you are sued, a lawsuit plaintiff can't (theoretically) demand that you pay them by liquidating your vehicle. After all, you don't own the vehicle in the first place.
However, Delaware asset protection trusts have several big vulnerabilities that limit this functionality. It's why offshore APTs are always superior choices, particularly for high-net-worth individuals like successful entrepreneurs, doctors, and more.
Key Benefits of a Delaware Asset Protection Trust
A Delaware asset protection trust might provide some advantages depending on how it’s structured. For example:
- You could see certain tax benefits, such as the gift tax exemption. A Delaware asset protection trust can also be used for estate planning purposes in this way by helping you avoid estate taxes
- A Delaware asset protection trust can be used to avoid the probate process, keeping the entire process private for your family and, again, minimizing how much money has to be spent before your beneficiaries can inherit their money or property
- A Delaware APT may allow you to avoid the state death tax, state income tax, and more
- A Delaware asset protection trust might be more affordable compared to an offshore trust or some other alternative. That’s because you won’t have to pay extra fees or spend extra time finding the right lawyers, offshore bank, etc.
But does a Delaware asset protection trust safeguard your money and other assets from lawsuits, creditor claims, or financially messy divorces? No, as we will soon see.
Disadvantages of a Delaware Asset Protection Trust
A Delaware asset protection trust has one big disadvantage: it’s a domestic APT, which means that it’s subject to US court rulings, motivated judges, and case precedents.
In a nutshell, the US is not a very safe place for asset protection for US citizens. Plenty of cases in the past have shown that domestic asset protection trusts are only as durable as judges decide they are.
If a judge is presented with enough evidence to show that your asset protection trust should be breached to pay for something, you can bet the judge will have no problem doing just that.
Therefore, a Delaware asset protection trust is vulnerable to US creditors, lawsuits, ex-spouses, and anyone else who might want to get their hands on your money and property. Furthermore, a Delaware asset protection trust is also subject to US laws, taxes, and other elements.
If, for example, Delaware decides to change its asset protection laws, your assets could be affected for the worse. Delaware does not have a vested interest in providing a stable financial and economic environment for high-net-worth individuals in the same way that many offshore jurisdictions do.
Alternatives to a Delaware APT
If you’re truly interested in durable asset defense, the only option is an offshore asset protection trust.
An offshore asset protection trust is very similar to a Delaware counterpart. The only difference? It’s based in some offshore jurisdiction, meaning any country other than the US.
This is far from illegal. So long as it is drafted properly and by licensed attorneys, an offshore asset protection trust can be just as legal as a Delaware APT.
However, it can provide much more protection for your valuable assets both now and in the long term, enabling you to reach your wealth management goals and guarantee that your estate is still valuable for your descendants long after you are gone.
An offshore asset protection trust might cost more than a Delaware APT. But in the long run, the higher premium you’ll pay for a durable, offshore asset protection trust will be well worth it.
Think of it this way – wouldn’t you rather pay a little more money now for true protection rather than pay a cheap fee for less than stellar protection that ends up costing you in lost assets and liquid capital? The answer is obvious.
Why an Offshore Asset Protection Trust is Superior
An offshore asset protection trust is always a superior choice. Why? Because such a fiduciary vehicle isn’t beholden to US courts, judges, or even case precedents.
Think about it. An offshore trust by definition is based in some other country. So what can a US judge say to the trustee of such an instrument?
Put yourself in the shoes of a business owner who recently lost a lawsuit. You lost the legal battle, and now the judge demands that you pay $20 million in fees. However, the majority of your assets are kept in an offshore asset protection trust.
Therefore, you can legally tell the judge that not only do you not have ownership of enough assets to pay those fees, but you also can’t tell the trustee to make a big distribution right away. Offshore asset protection trusts are irrevocable, just like Delaware APTs.
Assuming that your trust is set up wisely, this is legally impenetrable. The judge can't even go to the offshore trust trustee and tell them to do what they want. The trustee is under a different rule set than the US.
Of course, there are always vulnerabilities you need to be careful of. For instance, if your trust is set up in an offshore bank that has a branch in the US, it’s possible that a judge will be able to exploit that branch to get access to your protection trust and the assets within.
However, so long as you work with the experts, your trust will be drafted with perfect language and will be created with a banking partner that doesn’t have any vulnerable branches, nor will it have a legal history with the US court system.
How to Set Up an Offshore Asset Protection Trust
With an offshore asset protection trust, how you set it up is just as important as setting it up in the first place. To that end, you should start the process by speaking to Dominion right away.
At Dominion, our officers, advisers, and legal experts have over a century of experience shared between them. More than that, we have the industry connections and experience necessary to:
- Identify the right banking partner and jurisdiction for your needs based on case precedent, reputation, and a variety of other factors
- Provide you with sound, actionable legal counsel you can use to safeguard your assets in perpetuity
- Help you draft your trust documents to make sure that there aren’t any legal loopholes or vulnerabilities that a court or future legal opponent can exploit
- And more
We'll also help you establish a solid foundation for your trust. This includes:
- Setting up a foreign LLC or foundation in the appropriate jurisdiction
- Opening a foreign bank account to house trust assets
- Strategically transferring those assets to the trust in a way that maximizes tax efficiency and legal protection
Our experience with diverse asset classes, from real estate to intellectual property, ensures that your specific portfolio is handled with the utmost care and expertise. We are 100% committed to making your asset protection plan work for you. That means not a paint-by-numbers plan but a tailored solution built for you and your needs.
Above all else, we’ll provide you with the peace of mind you need to know that your estate is secure forever. When you work with Dominion, you don’t get a temporary legal partner; you get a long-term partner who will help to administrate your trust, handle distributions, and stand up to courts and lawyers if needed.
If a court comes to us demanding to turn over your assets, we'll show them the proverbial door. That's service and security you can't get from a domestic Delaware asset protection trust under any circumstances.
Even if you were to set up your Delaware APT with perfect legal language, any trustee you appoint would still be vulnerable to strong-arming by US courts and lawyers.
Speak to Dominion’s Experts Today
Overall, you never want to rely on a Delaware asset protection trust to keep your estate safe. In the eventuality of any legal battle, such an asset protection instrument will crumble as soon as a judge or lawyer puts pressure on it. If your asset defense strategy is a castle, a Delaware APT is a castle made of glass.
In contrast, an offshore asset protection trust – particularly a Dominion-style APT – is a castle made of stone. Better yet, steel. That kind of asset protection trust can and should be trusted to protect your estate for years to come, in addition to generating income through the investment of your assets.
Want to know more? Get in touch with Dominion today.
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