In its second season, “House of the Dragon” has been a smash hit. It has included betrayal (lots of betrayal), epic dragon fights, and the spiraling consequences of making estate planning decisions based on myths. 

While it makes for great TV, myths definitely don’t belong in estate planning. 

There are many common myths and misconceptions about the different facets of estate planning, but one area where they are especially persistent is in the role of asset protection trusts. Let’s explore the realities behind the common myths about this tool and how they can (and can’t) be used.

What is an asset protection trust?

An asset protection trust (APT) is a specialized trust designed to protect personal assets from creditors and legal judgments. One prominent type, the domestic asset protection trust (DAPT), is irrevocable, meaning its terms cannot be altered once established. DAPTs allow the grantor to also be the beneficiary, maintaining some control over the assets. 

20 states have domestic asset protection trust statutes, but DAPTs offer advantages like:

• Asset protection: Assets belong to the trust, shielding them from predators, creditors and judgments.
• Retained control: The grantor retains some control over asset use.
• Shorter challenge window: This is state-dependent but the window is generally shorter than other trusts.
• Higher burden of proof: Creditors face a “clear and convincing evidence” standard.
• Wide range of assets: They protect various assets, including real estate, investments, and intellectual property.

However, DAPTs vary by statute, although some jurisdictions have immediate protections from claims that come into existence after the creation and funding. Additionally, for grantors concerned about future legal action, privacy could be a drawback because asset details might need to be disclosed if sued.

Between the variations, privacy concerns, and lack of federal protections, careful planning with an experienced attorney is essential. 

Myth: asset protection is for older or wealthy people

High net worth and older individuals may come to mind first when you think of asset protection strategies but don’t disqualify yourself if you don’t fit that mold. 

Asset protection trusts are not exclusive to the ultra-wealthy nor do they apply only to folks who have been building assets for a long time. Anyone with valuable assets, which can include real estate, savings, and business interests, can benefit from asset protection strategies. Protecting your assets is essential regardless of your wealth level, and if you are looking at your lifetime ahead, your assets might be even more critical to protect now. 

Myth: asset protection is illegal or unethical

This is a big one, so let’s bust this myth once and for all. 

One of the most pervasive myths is that asset protection is synonymous with illegal or unethical activity. Asset protection is completely legal if done correctly, and your trust is set up in compliance with applicable laws by a knowledgeable attorney. 

Something to think about, and certainly something your attorney will ask about, is the timing and intent behind the trust’s creation. Trusts can and should be established before any claims or lawsuits arise. Attempting to move assets into a trust once there’s an active claim can make your activities appear fraudulent in the eyes of the court, and your trust can be in danger of being invalidated. 

The right legal professional will help you get ahead of threats and make sure everything is set up to meet the letter of the law.

Myth: the IRS will audit you if you implement asset protection trusts

Along those lines, you might worry about putting yourself at risk of an audit after setting up a trust. This is another case of the misperception that APTs are usually affiliated with illegal or fraudulent activity, and we can dispel this myth as well. 

When your trust is set up legally and transparently, you eliminate the risk factors for an audit, such as suspected fraud, tax evasion, or lack of compliance. Working with the right attorney will reduce or eliminate these factors and any other red flags the IRS looks for when auditing illegal or non-compliant activity.

Your lawyer should advise you on best practices for ensuring your trust is legal and doesn’t involve any unnecessary complex changes to asset ownership and structure that can trigger an investigation. A legal professional can also help you navigate the choice between domestic and foreign trusts and weigh the protections they offer versus their complexity.

Myth: if you have a will, you don’t need an APT

There’s a good reason the saying isn’t: “Where there’s a will, there’s no need for an APT.” 

APTs serve different purposes than your last will and testament. APTs can shield your assets from creditors, claims, and lawsuits, whereas your will cannot. These trusts can also help bypass the probate process, which means that while the details of your will become public, the details of your APT can remain private. 

Another (very critical) difference is that a will takes effect after death, and assets in an APT can be protected and managed during your lifetime. 

Both can be crucial to your estate planning, but wills and APTs ultimately serve different purposes. Combining the protection of both with the help of your attorney can be a comprehensive strategy for safeguarding your wealth and peace of mind.

Myth: APTs can’t be changed once they’re set

While it might not be as easy as ABC to alter APTs, they aren’t entirely inflexible. 

For your protection, these trusts are designed to be irrevocable, but there are two key ways that they remain adaptable. A trust protector can be granted the power to make certain changes, like replacing trustees or adding to the terms of the trust. 

Your attorney can also advise you on including specific provisions in the document that allow for alterations or modifications that meet certain criteria.

The role of the Uniform Fraudulent Transfer Act in asset protection

In most U.S. states, the Uniform Fraudulent Transfer Act (UFTA) has been adopted in some form, either through legislation or court rulings. Texas is no exception, with its own version outlined in the Texas Business and Corporations Code that closely mirrors the UFTA. 

The UFTA, and its Texas counterpart, is designed to provide strong protections for creditors. The act categorizes creditors into two groups:

1. Present creditors: Those whose claims existed before the transfer.
2. Future creditors: Those whose claims arose during or after the transfer.

Both types of creditors can seek to void transfers if they were made with the intent to hinder, delay, or defraud any creditor. Importantly, the intent doesn’t have to be proven for the specific creditor making the claim—just that there was intent to defraud any creditor.

Creditors don’t need to prove actual fraudulent intent either. Courts can infer intent from “badges of fraud,” such as:

• Insolvency
• Transfers to insiders
• Retention of control after the transfer
• Transferring most of the debtor’s assets

Work with an experienced attorney for APTs

Your APT is just one aspect of a comprehensive estate planning strategy. Your attorney may also suggest complementary tactics, like creating family limited partnerships (FLPs) and limited liability companies (LLCs). A thorough plan might include APTs, FLPs, LLCs, and more.

Our experienced asset protection attorneys at The Law Offices of Shann M. Chaudhry, ESQ., can guide you through the best strategies for securing your wealth and protecting the legacy you’ve built. Contact us to learn more and schedule a consultation to ensure your earned assets are protected for today and tomorrow.