There are many risks and few advantages to using offshore trusts. There are two methods for employing offshore trusts:
- exporting the assets and
- Importing the foreign law.
Many of the advantages of offshore trusts can now be achieved by using domestic asset protection trusts without the exposure to unnecessary risk and volatility.
Asset Protection Trust
A domestic asset protection trust is an irrevocable trust an individual creates during his or her life to shelter and protect valuable assets. The domestic asset protection trust contains spendthrift provisions to prevent creditors, predators, judgments, and liens from attaching the trust property.
A domestic asset protection trust is unique from simple irrevocable trusts because the grantor of a domestic asset protection trust is permitted to also be a beneficiary, where the grantor of a simple irrevocable trust may not be the beneficiary and receive the same protection as an asset protection trust. The grantor of a simple irrevocable trust may shelter assets in the irrevocable trust, but will not have the same opportunity to benefit from the assets of the trust like the beneficiary of an asset protection trust would.
Individuals wanting the protection of these trusts must employ an attorney in his or her home state as well as an attorney in the state where asset protection trusts are allowed by legislation. Texas does not have a domestic asset protection trust law. There are twelve states that do: Missouri, Alaska, Delaware, Nevada, Rhode Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Oklahoma, and Hawaii.
Domestic asset protection trusts do not shelter individuals from fraudulent transfers. In Texas, a fraudulent transfer is defined as “a transfer made by a debtor if the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor of the debtor.”
Transfers to an asset protection trust are considered to be gifts for federal gift tax purposes. This year there is a five million dollar lifetime gift tax exemption. Following a transfer, preparation of a federal gift tax return is mandatory even if the exemption applies.
For a comparison of state laws that permit domestic asset protection trusts, see your attorney.
Assets Exempt from Seizure (Texas)
One strategy for protecting assets is to purchase assets that are exempt from seizure under state law. Texas Property Code Section 42.001 et. Seq. provides a list of property that is exempt from creditors.
- Homestead (your primary residence), except taxes, the mortgage company or the builder;
- $60,000 in personal property (for a married couple) such as:
- home furnishings, including family heirlooms;
- provisions for consumption;
- farming or ranching vehicles and implements;
- tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;
- wearing apparel;
- jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a);
- two firearms;
- athletic and sporting equipment, including bicycles;
- a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver’s license or who does not hold a driver’s license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;
- two horses, mules, or donkeys and a saddle, blanket, and bridle for each;
- 12 head of cattle;
- 60 head of other types of livestock; and
- 120 fowl; and
- household pets.
- A person’s right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, and under any annuity or similar contract purchased with assets distributed from that type of plan, and under any retirement annuity or account described by Section 403(b) or 408A of the Internal Revenue Code of 1986, and under any individual retirement account or any individual retirement annuity, including a simplified employee pension plan, and under any health savings account described by Section 223 of the Internal Revenue Code of 1986, is exempt from attachment, execution, and seizure for the satisfaction of debts.
- The following types of college savings plans:
- Any fund or plan established under Subchapter F, Chapter 54, Education Code, including the person’s interest in a prepaid tuition contract;
- Any fund or plan established under Subchapter G, Chapter 54, Education Code, including the person’s interest in a savings trust account; or
- Any qualified tuition program of any state that meets the requirements of Section 529, Internal Revenue Code of 1986, as amended
You must take affirmative steps to protect your property. You must contact an attorney of your choosing if you receive any correspondence from any court or any attorney, or any other person claiming that you owe money.
Warning: this list is full of exceptions. If you have a question about a specific type of asset, please ask. Do not rely on this webpage.
Even if you own property that is exempt from creditors, you still must defend yourself if a lawsuit is filed against you. You may even be required to disclose which assets you claim are exempt.