What is an asset protection trust? Who needs them? Where do you set them up? Lets jump into this.
Lets start with the need for asset protection and why asset protection works. Asset Protection works by removing the economic incentive for a person, and that person’s attorney to pursue you in a court of law. The best way to protect your assets is to take legal steps to make you unattractive to potential predators. But not all systems and planning is equal.
One of the great things about being in the BiggerPockets community is the access to all the experienced and successful investors and what they have to say. “One of the great joys of being a real estate investor is to see your portfolio and net worth grow exponentially over time. But as your assets grow, so does your risk of dealing with a law suit. It’s not so much a matter of if, but when that will happen. Without the proper asset protection in place, you could lose everything you worked so hard to develop over night.” – Old Dog REI Network host Bill Manassero episode 395. “Asset protection is a key component of creating and preserving wealth, yet many struggle to understand which strategies are right for them. LLCs, trusts and bridge trusts are three key entities that can help investors protect their hard-earned assets.” – John Casmon host of Multifamily + Marketing episode 171.
You are on BP because you are investing in Real Estate or want to invest in real estate. And most are looking for cash flow. The goal of asset protection is to have it actually work. To accomplish the goal it was created for. The legal system has changed over the last 30 years. But for the worst. It’s no longer about “justice” but redistributing your wealth from the ‘haves’ to the “have not’s”. Since 1977 law firms were given the OK to advertise and that opened the floodgate to pursue more litigation and a legal industry driven by sales and profit. Since the 1960’s attorney’s were unleashed and able to be retained on “commission fees”. This opened up Pandora’s Box for predatory lawsuits. We are also fighting a judges practical authority. The power a judge actually has to make decisions.
A judge has very broad powers to reaching your assets, including seizing them, placing a lien on them, foreclosure, ordering a sheriff sell, clearing title to enable a clean sell and even wage garnishment. The problem is that judges, even without legal authority to do this, do these things by exercising their practical authority. And this can be done in direct contradiction to established statutes and case law. The result is that the court’s practical authority just took your asset or real estate with no legal authority.
So the solution to combat all this is to hinder a judge’s practical authority over your assets, so that they cannot circumvent legal processes. This is done with asset protection planning, and having asset protection trusts set up in very strong jurisdictions like the Cook Islands. These jurisdictions are outside of the U.S. courts control. A properly set up Asset Protection Plan is your best option to level the playing field.
Domestic vs Foreign Asset Protection Trusts
When you are setting up an asset protection trust you can create them either domestically in the U.S. called a Domestic Asset Protection Trust (DAPT) or offshore in another foreign country called a Foreign Asset Protection Trust (FAPT). The route you take will depend on how much protection means to you, your risk tolerance, why you are setting up asset protection, and what State you are a resident of.
The Cook Islands Asset Protection Trust came first and was created in the 1980s. Since then, it has remained the Gold Standard for Asset Protection around the world. The reason is because it is simply the best home court advantage. The Cook Islands statutory do not recognize any other jurisdiction’s court orders and, the statute of limitations in the Cook Islands is only one year, making it very difficult for a creditor to file their lawsuit on time. What ‘statutory non-recognition’ means is that any U.S. court judgment is completely worthless in the Cook Islands. The offshore trustee will tell any creditor with another country’s judgment that their judgment is not recognized in the Cook Islands. The person suing you would have to start all over and sue you in the Cook Islands, assuming that the claim is made within the one year statute of limitations, and they would have to prove their case by the highest legal standard in the world: the murder standard “beyond a reasonable doubt.” The plaintiff (person suing you) also would have to front ALL the court costs including flying in a judge from New Zealand. And if they loose, they pay your legal fees, which they most likely will by having to prove the case “beyond a reasonable doubt.”
In the U.S. we also have an Asset Protection Trust the (DAPT). They were created 10 years AFTER the Cook Islands. They were originally started in Alaska, and since then roughly 17 other states have enacted some form of Self settled Spendthrift (SSS) legislation. The benefit of purely DAPT’s are that they are less expensive than there purely foreign counter parts, but the downfall is that they fail on effectiveness, cost and control. Sadly, DAPTs will give you a false sense of security. Recently, a pattern in court rulings has been recognized where DAPTs are being pierced and their choice of law clause are being ignored.
The reason for this is the foundation of the U.S. legal system. The foundation is the U.S. Constitution, which has the “full faith and credit clause.” This means that every State must give full faith and credit to the judicial proceedings and court orders of each and every State. These cases are just few recent high-profile cases where the courts disregarded the DAPT jurisdiction: In re Huber (2013), Dhal vs Dahl (2015) and Toni 1 vs Wacker (2018). The problem is residents of one state are using the asset protection of other states like Nevada, which they are not a resident of. This will not work. This is what happened in Kilker v. stillman (2012). A California resident set up and funded a Nevada DAPT. He was sued 4 years later, and the California court disregarded the choice of law clause because he was not a resident of Nevada. The case was upheld in the Court of Appeals. This link is to the case docket http://www.leagle.com/decision/In%20CACO%2020121126043 What the asset protection take away from these cases mean is that the only true gold standard of asset protection that has withheld over 40 plus years of challenges has been the Cook Island Asset Protection Trust. Even against super creditors like the IRS.
Now, most people DO NOT need a purely foreign asset protection trust. For most, this is just going to be over kill. And DAPT, though weakened, does have benefits, such as reasonable costs and less IRS reporting disclosures. The good thing is that you can actually combine the best of both worlds. You can have the flexibility of a DAPT with the strength and power of the Cook Islands in reserve by using another type of Asset Protection Trust called a “Bridge Trust.”
Best of both option
The Bridge Trust was created over 30 years ago. What you are doing is using a (FAPT) Cook Island Trust and connecting two countries together with a bridge. Then you simply cross the bridge from the U.S. to the sanctuary of the Cook Islands if or when you are ever in need with “migration clauses”.
Like all Asset Protection Trusts, the Bridge Trust is an Irrevocable tax neutral grantor trust. The trust is also a Self Settled Spendthrift trust. What this means is it is created by you, for you, as your own beneficiary. And since it is a grantor trust, you still retain some of the powers in the trust. Why you want the trust to be irrevocable is that if you are ever challenged and the judge orders you to bring the assets back to be collected on, you can’t. And you cannot be held in civil contempt for not being able to comply. See U.S. vs Grant (2008). http://www.leagle.com/decision/In%20FDCO%2020130422H56 For the purposes of IRS reporting and disclosures, the Bridge Trust is considered a domestic, not foreign trust, because it is specifically drafted to meet the two-part test of USC section 7701. This is the “control test” and the “court test.” While The Bridge Trust is classified domestically, it does not require foreign IRS tax filings or asset disclosures, and the trust costs and annual maintenance fees are lower compared to fully foreign offshore trusts.
In short, the Bridge Trust provides the flexibly of a DAPT and the strength and power of the Cook Islands for your asset protection. The way this asset protection structure works is with LLC’s created to hold your real estate and other assets that may be a cause of a potential liability, anything that has a motor, or has a key or can go boom. Next, an Asset Management Limited Partnership (AMLP) is created that acts as your asset holding company. The AMLP holds the bulk of your assets like cash, stocks, bonds, and receivables. All your LLCs are going to be held inside the AMLP. You are the general partner of the AMLP. This gives you control, use and enjoyment of the assets in the holding company.
The final step is the asset protection Trust. The Bridge Trust is going to be the minority limited partner of the AMLP, this is the non-controlling interest, but it is the ownership interest of the AMLP. This separates “ownership” from “use and enjoyment.” The Bridge Trust owns the AMLP and the assets, while you enjoy the use of the financial assets minus the liability.
Then either two things happen. Either you die, at which point your assets distribute as defined in your revocable living trust. Or, should there be a crisis (lawsuit), the Bridge Trust is triggered, and the assets cross the bridge to the safety of the Cook Islands. You are removed as the trustee, and the offshore trustee takes over with the trust protector looking over the offshore trustee. When the threat is resolved, the assets transfers back domestically with no penalty or IRS problems since the trust is a grantor trust.
The name of the game of asset protection is being proactive. Getting the system set up and in place before it is needed. Before you are being attacked. As Lane Kawaoka – the host of Simple Passive Cash Flow says “LLC’s and Series LLC’s are fine when you are just starting out or have a net worth below $1 million, but when your net worth gets at $1 million or above you will want something different. And quite frankly those LLC’s and Series LLC are kiddy stuff. They work in theory and are not entirely full proof… Get the bazooka of asset protection.”
In my opinion, start with something. Even if just a traditional LLC. Something is always better then nothing. Then as you grow and hit that $1 Million net worth mark, and or have a high-risk profession like a doctor, dentist, business owner, or your investing and cash flowing with equity then you scale up to stronger forms of protection (DAPT, FAPT, Bridge Trust). Find lawyers that specialize in asset protection, not just dabble in it or do it on the side. Vet that attorney and ask for references in the exact planning you are looking for. Ask if that proposed planning have been challenged in court, and those results.
Remember, Gross value is vanity, net is sanity and cash is king; and it is not a matter of what you have but what you keep.
By: Brian T. Bradley, Esq.
HNW – Asset Protection Attorney as featured on Simple Passive Cash Flow Podcast by Lane Kawaoka https://www.youtube.com/watch?v=-omB8-jY_7k