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  1. Colorado Trusts
  2. Asset Protection Trust

Colorado Asset Protection Trust

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Jonathan Feniak, Esq., MBA

By Jonathan Feniak, Esq., MBA

    If having health, home, and car insurance as a form of protection seems obvious, then why not protect your other assets? Many mistakenly believe trusts are only for estate planning or the elderly. This is not true. You and your family may enjoy asset protection during your lifetime, with the trust becoming the foundation of an estate plan over time if you so desire.

    A trust removes an asset's title from your name. When a creditor pursues you, they cannot attach to the assets as you do not hold title. This is akin to an enhanced version of the charging order protection LLCs enjoy, but unlike when you form an LLC a trust may own and protect personal property such as your home.

    Further, the trusts are anonymous and allow you to legally hide your assets in plain sight. In terms of the public record you appear poor and are a less attractive target. These benefits are not available with a revocable living trust.

    Misconceptions about asset protection trusts include the idea you lose control of the assets, cannot name yourself as a beneficiary, or that you must establish an offshore trust. Properly formed domestic asset protection trusts prove these misconceptions are wrong.

    Colorado trust law allows so called self-settled trusts, but we generally advise clients to form a Wyoming trust. Fortunately, our attorneys are licensed in both Wyoming and Colorado so we do not outsource document drafting as other Colorado law firms do.

    How Does an Asset Protection Trust Work?

    The structure we establish for you is dependent upon your particular needs.

    • Do you have active business interests in a risky industry?
    • Are you carrying high limit insurance premiums, but are unsure whether they would pay out or be sufficient?
    • Do you want to provide for your children, or have a child that cannot reasonably manage finances?
    • Do you fear a personal credit event, such as divorce, a car crash, or bankruptcy will deplete your assets?
    • Is charity your passion?

    The most common reasons people form trusts are:

    • Asset Protection: Trusts can protect assets from creditors.
    • Taxes: Trusts can minimize or avoid many types of taxes.
    • Privacy: Trusts can be anonymous and allow for private ownership of assets.
    • Estate Planning: Trusts can avoid probate and ensure those you care for are responsibly taken care of.

    Each of these situations call for a specially crafted trust which meets your needs. The trust will protect assets while you’re alive, and can function as the foundation of an estate plan.

    Our Colorado trust attorney’s goal is to listen to your needs and find a solution that fits. Whether that’s a revocable trust, dynasty trust, irrevocable trust, self-settled, special needs trust, medicaid asset protection trust , or other type of trust, our attorneys can identify and structure a trust that will achieve all of your goals. We like to say there are as many types of trusts as there are people and their situations.

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    What is a Trust?

    A trust is structure that holds assets and lays out exactly how those assets will be used to benefit specific people or entities. Because the trust owns the assets, not the individual who places the assets in the trust or those who the assets will benefit, the assets cannot be taken by creditors.

    Every trust has three parties:

    • Grantor: This is the person who forms the trust.
    • Trustee: This person or entity manages the trust. They hold legal title to the assets for the benefit of the beneficiary. They have a fiduciary duty.
    • Beneficiary: This is the person who benefits from the trust assets even though they don't legally own them.

    A common misconception is that you cannot create a trust for yourself, i.e. be both the Grantor and Beneficiary. This limitation previously drove significant business to offshore asset protection trusts. Fortunately, over the previous 20 years numerous states have begun allowing so called self-settled trusts. These allow you to enjoy asset protection without losing control or needing to trust a third-party trustee to do the right thing.

    Assets That Can be Protected

    The benefit of a trust, versus an LLC or Corporation, is that it can be used to protect not only business assets, but personal assets too. You cannot put your home into an LLC and expect protection, but placing a home in a trust can protect your home from creditors. Assets that can protected by a trust include:

    • Personal Home
    • Real Estate Investments
    • Securities, Stocks, & Bonds
    • Intellectual Property
    • Savings & Checking Accounts
    • LLCs & Corporations
    • Alternative Currencies, e.g. Bitcoin
    • Antiques & Collectibles
    • & More

    A less common example of someone who would use a trust is someone who is getting married and is concerned that in the event of divorce, their spouse will get big portion of the money they have saved before the marriage. Many believe that a pre-nuptial agreement or pre-nup is the best way to handle this situation, but there are many problems with pre-nups. The first problem is that you must talk about divorce with your soon to be spouse before you are even married! One can only imagine the difficulty of that conversation. Second, there are many mistakes you can make that can lead to the pre-nup being invalidated including, one person feeling pressured to sign, invalid provisions, and no independent legal representation. Finally, a pre-nup will only be valid if you make full disclosure of all of your income, assets, and liabilities. Instead of asking a future spouse to sign a pre-nup, you can put your assets in a trust and thereby put them out of their reach if the marriage ends in divorce.

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    Who Sets Up Asset Protection Trusts

    Trusts have been used for hundreds of years by anyone who is serious about asset protection or leaving a legacy. They are not solely the domain of High Net Worth Individuals. We have set up trusts for many individuals and families with less than a million dollars in assets. Trust law favors those who plan ahead.

    Trusts are commonly used by those who:

    • Own businesses in risky industries
    • Question the ability of heirs to manage an inheritance
    • Bring unequal wealth to a marriage

    Colorado Estate Planning

    A Domestic Asset Protection Trust can fulfill both asset protection needs during your lifetime, and responsibly provide for your descendants. These goals are not mutually exclusive and we are happy to assist you with achieving both goals in one trust. Our Colorado Trust Attorneys specialize in crafting estate plans and trust which work during your lifetime and after.

    The Solution: Stacking the Odds in Your Favor

    Domestic Asset Protection Trusts are designed to deter present and future creditors. This deterrence may lead a creditor to decide that either bringing a lawsuit against you will be too costly and time consuming or your asset protection trust may force a creditor into settling for much less than would otherwise have been possible.

    Placing your assets in a domestic asset protection trust structures your assets in a manner designed to simultaneously prevent seizure by third parties while still allowing you to benefit from those assets.

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    What States Allow Domestic Asset Protection Trusts

    There are currently 13 states which allow Domestic Asset Protection, a.k.a. Self-Settled, Trusts. It is important to keep in mind the following when it comes to forming a trust:

    1. State laws govern trusts
    2. Anyone may form a trust in any state
    3. States must respect each other's laws.

    Thus, you may form a trust in a state of your choosing and it cannot simply be invalidated because it doesn't conform to another state's laws, usually the state you or your creditor resides in.

    The first Domestic Asset Protection Trust (DAPT) statute was ratified by Alaska in 997. This is why such trusts are still often referred to as Alaskan Trusts, regardless of where they're formed. To this date, no creditor has pursued the assets in a DAPT through the whole court system. This is, presumably, due to the fact creditors assumed the trust they were targeting would ultimately stand up to scrutiny.

    There are two things that you must keep in mind. First, if you reside in one of the number of states with DAPT laws then a properly created and funded DAPT will almost certainly work to protect your assets from creditors. Nonresidents, on the other hand, still face the uncertainty of what will happen should a creditor refuse to settle a debt and pursue the matter all the way through the court system. This uncertainty, though, creates doubt in your creditors mind as to whether the possible eventual pay off is worth the effort and cost of going after your trust assets.

    An asset protection strategy should be considered successful when:

    1. The creditor avoids filing a lawsuit altogether
    2. The creditor settles for less than is owed

    Don't allow the perfect to be the enemy of the good, a little bit of uncertainty about how a court might decide a case involving a nonresident asset protection trust should not deter you. Often those who fear any uncertainty engage in no asset protection at all, and then the only certainty is that you'll have no protection from creditors. While no asset protection strategy provides a 100% guarantee of success, the goal is to use all available techniques to stack the odds in your favor.

    Types of Colorado Trusts

    While each trust is a custom drafted document, there are a few general types of trusts and trust characteristics that are often used. Some trust types, in no particular order, are:

    • Dynasty Trust: A trust designed to last over many generations. These can take care of grandchildren, or charities far into the future. The maximum allowed lifetime is 1,000 years;
    • Self-Settled Trust: An asset protection trust where the person who creates the trust is also the beneficiary. These were previously only available offshore, but a number of States now allow them;
    • Charitable Remainder Trusts;
    • Land Trusts;
    • Revocable Living Trusts;
    • Spendthrift Trusts;
    • Offshore Trusts; and
    • Domestic Asset Protection Trusts.

    The above trusts may all be generically referred to as a family trust. That is, the trust is formed for the benefit of your family regardless of whether it's revocable or irrevocable.

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    Choosing a Trustee

    A trustee is in essence the trust's manager. Every trust is required to have one. For most trusts, it is within your power to appoint and remove the trustee as you see fit. Historically, only a public trust company was permitted to act as a trustee for an asset protection trust, but recently select jurisdictions have begun allowing Private Trust Companies ("PTC"):

    Public Trust Companies are professional institutions specializing in asset protection, wealth management, and related areas. They fulfill all required duties and typically charge the trust approximately 1% of Assets Under Management (AUM) each year. These are also called independent or 3rd party trustees.

    A Private Trust Company is a company specially formed to serve as trustee only for your family's trust or trusts. They can manage one or many family trusts. They provide more direct control, while lowering costs and enhancing privacy.

    Sometimes a blended approach, in which a Private Trust Company manages the trust during your lifetime and then a Public Trust Company takes over on your death, is appropriate. A blended approach provides direct control of your assets while minimizing cost during your lifetime, and prevents your children from infighting or financial recklessness when you are no longer around.

    Revocable vs. Irrevocable Trusts

    A revocable trust does not offer asset protection. It can provide privacy, be used to avoid probate, and assist with larger estate planning goals. However, the reason it does not provide asset protection is because it can be revoked at anytime with the assets in it used to pay off creditors if a judge so demands. For this reason only irrevocable trusts provide asset protection.

    Hearing the word irrevocable can cause concern because of its seeming permanence, but it is this permanence which prevents creditors from reaching assets held in an irrevocable trust.

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    Our Colorado Trust Attorney

    We are passionate about what we do. Our family history includes a company which survived two world wars, the depression and a near fatal accident. None of these things kept us down. What did finally do the company in was an untimely divorce and estate taxes. We don't want this to happen to you.

    We offer a number of affordable trust packages that can be customized to meet your needs. Because we are a law firm, we are not offering "do it yourself" documents. Our experienced trust attorneys will guide you through every step of the process to ensure your trust is effective and meets all of your goals. Contact us to set up an appointment through the contact form below.

    Why should you care about asset protection? People assume a "credit event" won't happen to them, but of the following list, chances are most of us will experience at least during our lifetime. Such events include, but are not limited to:

    • Frivolous Lawsuits: car accidents, unhappy clients, disgruntled employees, slip-and-fall "accidents" etc;
    • Aggressive Creditors: You made a small mistake, but now they want your first born child as payment;
    • Divorce: A DAPT may be used as an alternative to a pre-nuptial agreement;
    • Bankruptcy: Ten years after a trust is formed, the assets inside cannot be reached by a federal bankruptcy court

    Each of the above is an opportunity for a third party to attack your assets. Some of these events are foreseeable and others aren't, but given such odds it makes little sense to roll the dice and not plan in advance with a domestic asset protection trust. There are many types of trusts such as revocable living trusts, charitable remainder trusts, and personal property trusts. You can learn more by visiting our blog, or scheduling attorney time with one of our estate planning experts.