Trusts are very flexible instruments. There are many different types of trusts and they can be used for many different purposes. And so the flexibility they provide is one of the recurring themes of this blog.

One of the latest ways in which this flexibility is evident is in the increasing use of domestic asset protection trusts in some states. Until fairly recently, this type of trust was little know and very few states permitted its use.

Now, however, 15 states allow owners to protect securities or other assets from creditors through domestic asset protection trusts.

One reason for the increased use of domestic asset protection trusts is that offshore bank accounts have become much less desirable as a way to shelter money from creditors. The Internal Revenue Service has been cracking down for several years on taxpayers with foreign bank accounts, and the penalties for violations of the reporting rules can be substantial.

It is not difficult to identify some basic scenarios in which a family may want to protect assets from creditors. For example, if the family owns a business, there may be concern that if a lawsuit occurs, it could lead to significant personal liability.

There are other situations where asset protection is important as well. For someone who works as a doctor or a nurse, there may be concerns about a medical malpractice lawsuit that threatens family assets.

Similarly, divorce litigation can really chew up someone’s assets if the case becomes highly contentious.

In any case, it is clear that more clients are considering domestic asset protection trusts. 

Source: The Wall Street Journal, “Creditor-Proof Trusts Replacing Offshore Accounts,” Arden Dale, August 8, 2013