It is important to know all the different aspects of asset security because the laws surrounding protecting wealth are always changing. Texas asset protection trusts may appeal to high-net-worth individuals (HNWIs) or even ultra-high-net-worth individuals (UHNWIs). But are they worth it? Let’s explore.
Texas Asset Protection Trusts: The Basics
Under Texas law, certain types of trusts are allowed to protect against risks of having assets taken by creditors or used in lawsuits against you. What separates one from the other are revocable trusts and irrevocable trusts. Both will serve estate planning purposes, but only one of them provides real asset protection.
Revocable Trusts
They are flexible structures as they allow you to keep control over your assets during your lifetime. Left mainly to bypass probate and make administration of estate easier, they offer almost no asset protection.
Irrevocable Trusts
These trusts can never be altered after being established or revoked without the approval of the beneficiaries. The strength of asset protection lies in that they remove ownership from the grantor and protect assets from creditors under Texas law.
Advantages of Texas Asset Protection Trusts
Texas asset protection trusts have a number of advantages that make them a worthwhile tool for wealth protection and long-term financial security. These trusts allow us to leverage the advantages that Texas law gives us to help protect assets from creditors, plan to make ourselves Medicaid eligible and help protect a legacy for future generations.
Particularly, they are of interest to high-net-worth individuals who wish to minimize and reduce exposure to risk and provide an effective estate planning strategy.
Shield Assets from Creditors
The assets in Texas Irrevocable trusts are truly protected because they are out of your legal ownership. These assets are private, and generally a creditor cannot access them unless he or she can prove fraudulent intent – a high hurdle for most creditors.
Long-Term Care Planning and Medicaid
If structured properly, Texas irrevocable trusts will not only help to qualify your loved one for benefits but also will exclude his or her assets from the grantor’s estate after the Medicaid look-back period has expired. It protects wealth and maintains eligibility for long-term care.
Legacy Preservation
Through these trusts you are able to dictate how assets are distributed to beneficiaries over time. They help keep generational wealth by insulating funds from creditors or poor financial decisions of heirs.
Tax Benefits
There is no such thing as a Texas state estate tax, but HNWIs may still be affected by federal estate tax exemptions. Taxable estates can often be reduced so as to minimize liability, by placing assets in an irrevocable trust using strategic exemptions.
Texas Asset Protection Trusts Have Downsides
Texas asset protection trusts are definitely advantageous for protecting wealth, but they’re not without their drawbacks. If a domestic trust is something you are looking to use as part of your financial strategy, then knowing these drawbacks is essential.
Still, it’s important to note that these trusts can be very effective if they are understood correctly, but while they’re relatively favorable under Texas law, they aren’t perfect.
Protection runs the gamut from limited protection against aggressive creditors to the complexities of administration, and Texas asset protection trusts may be lacking for those individuals really trying to achieve full, long-term security.
Domestic Creditor Protection Is Limited
For that reason, even though Texas has some reasonably friendly trust laws relative to adjoining states, domestic asset protection trusts (DAPTs) are categorically inferior to offshore alternatives. Protection is filled with gaps, and U.S. courts have a long history of siding with creditors.
Loss of Control
With irrevocable trusts your ownership of the assets is taken from you. But it can be frustrating for grantors who wish to adapt their financial strategy to changing circumstances.
Complexity and Cost
Because of the legal and tax expertise required to set up and manage a Texas asset protection trust, the trust must be set up by a qualified, experienced attorney with access to tax specialists. In their absence, these trusts will inadvertently place an asset at risk because of poorly structured or badly documented.
Susceptible to Legal Challenge
Texas trusts, like all U.S. trusts, remain subject to court orders. Even irrevocable trusts can become the target of creditors that claim fraudulent intent, thereby unraveling the protection you worked so hard to establish.
Domestic vs. Offshore Asset Protection Trusts
Domestic asset protection trusts are usually not the best choice for someone wishing to safeguard $10,000,000 or more. Conversely, offshore asset protection trusts are the greatest option as they provide the finest safety for your money. The following explains why they surpass their local rivals:
Jurisdictional Immunity
The operation of offshore trusts is subject to the laws of jurisdictions over which the U.S. has jurisdiction. This drastically limits the likelihood of creditors overreaching the trust – including by aggressive litigation.
Stronger Legal Precedents
Places like the Cook Islands or Nevis have decades of case law going for trust protection, so your assets will be impervious to U.S. court orders.
Enhanced Confidentiality
Offshore structures serve as a second layer of privacy to keep from selling out your wealth and financial arrangements.
Why Texas DAPTs Aren’t Enough
Domestic trusts are inadequate even for protection in states with strong safeguards when compared to offshore options. While home to favorable legislation, the Texas trusts are precarious with a lack of insulation from U.S. court systems.
Domestic trusts generally offer no protection from a motivated creditor with enough resources to pierce the protective veil, leaving your assets exposed.
On the other hand, he says, offshore trusts are exempt from U.S. court decisions. Trustees have no obligation to obey a foreign judgment in a jurisdiction such as that of the Cook Islands. With this legal shield in place, your assets are safe in the worst imaginable scenario.
Using Trusts and Business Entities Together?
In many cases, the use of a trust in conjunction with business structures like a Limited Liability Company or Family Limited Partnership is the most comprehensive for asset protection.
Since this serves as part of a multi-layered defense strategy, it is greater than the sum of its parts. However favorable such laws are to Texas entities, they are very well known among those high net worth who are interested in advanced asset protection and estate planning.
Segregation of Assets
An LLC or FLP are two of the primary methods to separate high-risk assets. Real estate, business holdings or other potentially contentious assets that may have to be put in the middle of lawsuits or claims are kept legally separate from personal assets by placing them in an LLC.
This segregation, however, prevents creditors from targeting one or a few of the assets and leaving others exposed.
Charging Order Protection
There is strong charging order protection of Texas LLCs, allowing a creditor to attach only to a court ordered charging order altering the interest lien of the owner. Creditors, rather than being given a lien on the assets of the LLC, have a lien on distributions from the LLC. In this sense, the LLC discourages aggressive creditors – they cannot interfere with or liquidate the LLC’s operations to recover debts.
Tax Efficiency
Interestingly, LLCs and FLPs also have important tax planning benefits. Valuation discounts based upon these structures effectively reduce estate and gift tax liabilities. In addition, they simplify succession planning, maintaining control and income with the grantor and ushering control and income over to heirs in installments.
It’s Time to Get Proactive About Asset Protection
The financial landscape is changing, and threats to your wealth are always in motion. New tax rules, proactive actions of litigants and global enforcement efforts are changing the landscape of asset protection. Staying a step ahead of these changes and protecting your own financial security is proactive planning.
One of the most common mistakes that we see among HNWIs is wanting to wait until a crisis has already happened before addressing asset protection. By then, it’s often too late.
When you are being sued or having creditors circling, you begin to lose the ability to shield assets from the estate. Asset protection should be put in place as a proactive measure long before any possible problems seem likely to materialize.
Our Opinion on Offshore Trusts
At Dominion, we hold a clear view: Domestic asset protection trusts, including those in Texas, have fundamental issues. Despite some benefits, they continue to be a model that doesn’t meet the strict standards of UHNWIs.
The durability and flexibility required for true wealth governance are provided by offshore trusts supported by Dominion’s network of international attorneys and fiduciaries.
Grounded in decades of experience over a number of jurisdictions, our process is thorough and based on evidence. Our reach spreads from the Cook Islands to Switzerland so that you are not tied to one system of laws.
Is a Texas Asset Protection Trust for You?
For others, a Texas asset protection trust may help to bridge the gap to more detailed strategies. But for the wealthy, domestic trusts have generally more restrictions than benefits. Thinking beyond borders, we urge our clients to explore offshore solutions to have the highest levels of security and control.
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