Using Asset Protection Trusts To Protect From Divorce

Protecting one’s assets from divorce is an important aspect of preparing for marriage in Hollywood and for an increasing number of couples, even those with modest wealth. Most people are aware of the use of prenuptial agreements for this purpose, but another potential way to protect one’s assets is to place them in an asset protection trust.

Asset protection trusts can be executed overseas or in the United States. In the latter case, they are referred to as domestic asset protection trusts. These trusts work by allowing the creator of the trust to be a discretionary beneficiary so that they still have some access to assets but are not vulnerable to creditors with respect to those assets. Currently, there are 15 states that recognize asset protection trusts. Utah is one of them.

The key to making asset protection trusts useful in the event of divorce is to ensure that the state law under which one forms the trust blocks the trust assets from a spouse. Not all states do that.

One important point to make with respect to asset protection trusts is that one must get the timing right with respect to the transfer of assets. An asset protection trust cannot be formed in anticipation of divorce. Many advisors would say that it is risky to form such a trust after the marriage has begun. Forming such a trust in anticipation of divorce is considered to be a fraudulent transfer, which can result in legal penalties.

Those who are seriously considering an asset protection trust to protect themselves in the event of divorce need to work with an experienced attorney and plan things out as far in advance as possible. Doing so will allow one to avoid the accusation of fraudulent transfer and to rest a little bit easier with respect to the assets involved.

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