Asset Protection Trust
An Asset-protection trust is a term which covers several legal structures. Any form of irrevocable trust which provides for the funds within the trust to be held on a discretionary basis is considered an asset protection trust. Asset-protection trusts are set up as an attempt to mitigate or entirely avoid the effects of taxation (without tax-evasion), divorce, litigation, or even bankruptcy of the beneficiary.
The Domestic Asset Protection Trust started in Alaska and expanded to other states. Each state has their own benefits and drawbacks but the following states have Domestic Asset Protection Trusts:
- New Hampshire
- Rhode Island
- South Dakota
A Domestic Asset Protection Trust must comply with the following requirements:
- The trust must be irrevocable and spendthrift;
- At least one resident trustee must be appointed;
- Some administration of the trust must be conducted in the respective state;
- The settlor cannot act as trustee
These trusts are complex and have severe consequences if done incorrectly and can have rigorous US tax reporting requirements for taxpayers that establish off-shore trusts.