When it comes to preserving your wealth, not only for yourself but for future generations, the first step toward executing a sound asset protection strategy is to narrow down the options you have available. Should you form a trust or limited liability company (LLC), or use some other asset protection vehicle? If a trust is the best option should you form your trust domestically or overseas?
If a domestic asset protection trust (DAPT) makes sense for your personal, family, and financial circumstances, you still have one more important question to answer: In which state should you form your trust? While more and more states are enacting domestic asset protection trust statutes, not all of these statutes are created equal.
For several years, Wyoming has been a highly-favored choice for domestic asset protection trusts. While Wyoming’s trust statute has many of the same characteristics as the laws of other states, it offers a number of unique benefits as well. This article outlines some of the key considerations involved in deciding whether a Wyoming domestic asset protection trust is the best option for your wealth preservation strategy.
Wyoming Domestic Asset Protection Trusts: The Basics
Let’s start with the basics. While commonly referred to as a “domestic asset protection trust,” the trust structure used for wealth preservation in Wyoming is technically called a “qualified spendthrift trust.” This name signifies some of the key characteristics that are necessary for lifetime (as opposed to post-mortem) asset protection. With a qualified spendthrift trust established under Wyoming law:
- The person who creates the trust (the “settlor” or “grantor”) can also be named as the trust’s sole beneficiary; and,
- The settlor retains the authority to control trust investments (as an “investment advisor”) and veto decisions made by the trustee (the person responsible for managing the trust’s assets).
Both of these characteristics are fundamental to the purpose of forming an asset protection trust. If the settlor could not receive distributions from the trust or control the trust’s management, it simply would not be practical or effective as a means of asset protection.
When it comes to insulating trust assets from creditors, the Wyoming domestic asset protection trust is among the most effective in the country. Provided that the trust has been properly formed and the assets requiring protection have been timely contributed to the trust, a Wyoming DAPT can protect assets in essentially all circumstances, except:
- A child support order may be enforceable against DAPT assets;
- Creditors may be able to pursue DAPT assets that were specifically listed on an application or financial statement used to obtain or maintain credit;
- Creditors may seek to attach DAPT assets transferred in violation of Wyoming’s Uniform Fraudulent Conveyance Act (i.e. fraudulent transfers); and,
- Creditors may be able to attach DAPT assets in bankruptcy if they were transferred with the intent to defraud.
With respect to fraudulent transfers and transfers in bankruptcy, creditors’ claims against trust assets are subject to the applicable statutes of limitations.
Key Characteristics of a Wyoming Domestic Asset Protection Trust
In order to receive the benefits of Wyoming’s qualified spendthrift trust law, a DAPT must meet certain legal requirements. Most notably, a Wyoming DAPT must be irrevocable. However, the law provides that all of the following are permissible, and will not be deemed to create a de jure or de facto revocable trust:
- The settlor retaining the power to veto distributions from the trust;
- The settlor retaining the power to appoint and remove trustees and trust protectors;
- The settlor receiving income from, or the right to income retained in, the trust;
- The settlor receiving up to five percent of the initial value of the trust or its value as determined according to the trust documents; and
- The settlor receiving or using trust principal pursuant to a distribution or grant of use by a qualified trustee.
As a result, when structured appropriately, a Wyoming DAPT can provide both the protection and the flexibility required to safeguard a person’s wealth during his or her lifetime while also providing necessary access to assets and income held in the trust.
Other important considerations for establishing a fully effective domestic asset protection trust in Wyoming include:
1. Trust Administration
In order to provide maximum asset protection, the trust must be administered by a regulated bank or trust company that is authorized to do business in Wyoming (although the trust company can be located out of state). If the trustee is to be an individual, he or she must be a resident of Wyoming.
2. Investment Advisory Services
The settlor may serve as an investment advisor to the trust and may direct, consent to, or disapprove of a trustee’s actions regarding the investment of trust assets.
3. No Amendment or Revocation
As an irrevocable trust, the trust’s originating documents generally cannot be amended or revoked following the creation of the trust.
4. Transfer Affidavits
When contributing property to the trust, the settlor must sign an affidavit affirming that (i) he or she has full right, title and authority to transfer the assets; (ii) the transfer will not render the settlor insolvent and the settlor does not contemplate filing for bankruptcy; (iii) the transfer is not being made with the intent to defraud; (iv) there is no litigation pending or threatened against the settlor, excluding any that have been disclosed; (v) the settlor is not in default on child support payments by more than 30 days; and, (vi) the settlor has personal liability coverage of $1 million or the fair market value of the trust’s assets, whichever is less.
Assets that Can Be Protected with a Wyoming DAPT
Another important benefit of the Wyoming DAPT is the broad range of assets it can be used to protect. Assets that can be transferred into (and protected by) a Wyoming DAPT include:
- Cash and cash equivalents
- Investment accounts and investment proceeds
- Investment real estate (both income-producing and non-income-producing)
- Raw land (including undeveloped land and land with gas or mineral rights)
- Closely-held business interests (including shares in a private corporation or a membership interest in an LLC)
- Items of personal property (including vehicles, boats, collections, and other high-value items)
Alternatives to Wyoming DAPTs
If a Wyoming domestic asset protection trust does not seem right for you, there are a variety of other options available for protecting your personal wealth. For example, LLCs are popular tools for asset protection as well, and once again Wyoming has a particularly favorable statute. Foreign asset protection trusts offer some unique benefits as compared to DAPTs as well. Then, there are options that are not necessarily designed for asset protection, but which offer added flexibility over DAPTs while also providing important security. The revocable living trust is a common example, and one that can simultaneously serve asset protection and estate planning purposes.
Regardless of the tools you use, it is important to make sure that your asset protection strategy works with your estate plan and provides both the security and access you require. To learn more about Wyoming DAPTs and the other options that are available, we encourage you to schedule a confidential initial consultation.
Schedule a Confidential Initial Consultation at Jiah Kim & Associates
To speak with an asset protection attorney at Jiah Kim & Associates, please call (646) 389-5065 or contact us online. If a member of our firm is not available immediately, we will respond as soon as possible.
This blog post is written for educational and general information purposes only and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.