Are you working hard and putting in long hours to build a successful and prosperous business or medical practice? Are you carefully and frugally handling your finances so that your portfolio can become a sizable nest egg for your golden years? If so, your future is looking very bright. Or is it? Suddenly, someone files a lawsuit against you or your business without any warning and everything changes in terms of your financial security.

Does this scenario sound like something that could never happen to you? In today’s litigious society, particularly during these tough economic times, successful professionals and businesses are at great risk. In many situations, your liability insurance policy will not be enough to protect you from a claimant who feels wronged by you or your business. For extra protection you may want to consider integrating an Asset Protection Trust (APT) into your business, professional, and financial planning. 

What is an APT, and how does it work? It is a trust that is created in a state or country with laws specifically aimed at protecting assets from the claims of unwanted creditors. Some provide better protection than others. The ultimate goal is to pick a jurisdiction with laws that level the playing field against a team of litigation lawyers representing an injured plaintiff.

What factors should be considered? The most important one is the time period imposed for setting aside transfers of assets in a jurisdiction. In that regard, most jurisdictions do not allow an individual to transfer assets when a claim is threatened, pending, or anticipated, or where the transfer bankrupts the individual. With this in mind, assets should be placed in an APT before a litigation storm develops and while the individual is financially sound.

Who should consider this type of planning? Accountants, architects, engineers, lawyers, physicians, dentists and any other professional who may be sued for malpractice or negligence. Executives, officers, and directors of a corporation, partners and members in a partnership or limited liability company, and principals of any other successful business are also prime candidates. Anybody with a nest egg around $500,000 or other substantial assets should explore an APT.

Is an APT’s strength in secrecy? Quite to the contrary, the APT’s strength comes from its disclosure to creditors and any other interested party. The structure works because a good choice of law is made. Where a correct choice is made, the documentation is skillfully drafted, and the trust is properly funded with appropriate assets. An unwanted creditor will be forced to chase your protected portfolio across an ocean (and, perhaps, even several oceans) only to ultimately run into a brick wall.

Are there any adverse tax consequences in using an APT? A properly structured APT is completely tax neutral. There should be no transfer tax implications unless it is desirable in a particular individual’s situation, and the tax treatment of income should remain the same. Once the trust documents have been properly drafted and implemented, the key to maintaining a “tax neutral” position is to disclose the creation of the APT to the Internal Revenue Service and to comply with all reporting requirements in the Internal Revenue Code.

Can estate planning be done through an APT? It can be done through an APT either alone or in conjunction with other estate planning instruments. For example, it can be used as the mechanism for taking advantage of the annual gift tax exclusion, the unified credit, or the generation skipping transfer tax exemption. It can also be used in conjunction with a family limited partnership. And, the APT can do these things, while shielding your estate’s assets against unwanted creditor claims, where many traditional estate planning techniques may not be able to do so.

Most estate planning is spent on preserving wealth built by you for the next generation. It should also include protecting such wealth for your use during your lifetime. If you have not adequately protected your business, your profession, or your nest egg from the claims of unwanted creditors, you should consider consulting with a qualified professional and advisor on the subject today.