Can You Use Out of State Protective Trusts?May 08, 2023
There is an extremely effective asset protection trust where you can place your assets into trust, be the beneficiary of that trust, and secure those assets from divorce, lawsuits, and creditors. Unfortunately, it is not available in most states, including North Carolina, since those states do not allow you to set up a trust, fund it yourself, be the beneficiary, and have asset protection. Does that mean you can't use it? No. You can use it if there are enough ties to that other state to bring the trust under the jurisdiction of its laws.
One critical item with Domestic Asset Protection Trusts is that you have to have some specific ties to the state that you want it to have jurisdiction. For example, I know with Wyoming, there has to be at least one trustee who has ties to that specific state, be physically present, be authorized to do business in those states, and it's either an individual which usually under these under domestic asset protection has to be a resident or physically work in that state. It can also be some other kind of professional banking institution or a Trust Company chartered under that state law or authorized to conduct business there. The trustee should also have a physical office branch in the state in order to meet the corporate trustee requirement.
There are some other conditions required to have the trust fall under state law and provide the protection. Often there have to be assets in that particular state. It doesn't necessarily mean real estate, or having substantially all of the assets located there, but often having some level of assets in bank accounts or investments inside that particular state is enough to fulfill that state’s jurisdiction requirement.
Here's an example of doing it poorly, and it's analogous to what I often see when people are trying a do-it-yourself approach to setting up corporations when a business owner simply files Articles of Incorporation with the state with nothing more, and they think they've done their job to get corporate protection. That just doesn't work. You need bylaws, shares of stock issued along with stock certificates, a corporate record book, and there has to be written annual meeting minutes for shareholders and the board of directors. Without those formalities, it is very likely that a lawsuit will get through the personal protection that normally exists with corporations, and now the person or business suing you can get to your personal assets.
When it comes to a Wyoming Domestic Asset Protection Trust, the poor example would be signing the trust document, but locating all of the assets in New York, having all of your trustees located in New York, and never purchasing the mandatory personal liability insurance policy required under Wyoming law (if it is a “spendthrift trust”). If the case ends up in a New York divorce court, there is a good chance the judge will set aside the trust since it didn’t comply with the Wyoming laws it was supposedly set up under, and they won’t allow the protections normally afforded Domestic Asset Protection Trusts under Wyoming state law.
So what requirements are typical when we’re talking about Wyoming? There are actually two specific types of Domestic Asset Protection Trusts in Wyoming with different requirements. Yes, you do have to actually execute the trust document under Wyoming state law in all cases, but you also need some other provisions depending on whether the trust is a spendthrift or discretionary trust.
For a Spendthrift Trust, meaning the trustee is required to provide you with basic necessities out of principal and income, the trust must contain the following provisions to be valid (along with other trustee requirements mentioned later):
- The trust must state that it is a “qualified spendthrift trust” under § 4-10-510 of Wyoming statutes;
- Be irrevocable;
- Expressly state Wyoming law governs the validity, construction, and administration of the trust;
- Contain a spendthrift clause that restricts the beneficiary from demanding income and principal beyond what is necessary for their health, education, maintenance, and support;
- The settlor (the trustor and grantor) must have personal liability insurance equal to lesser of $1,000,000 or the value of the trust assets;
The second version, which I prefer, is a discretionary trust, meaning the trustee has complete discretion to provide you funds or not. The reason I prefer this version is that it also potentially ends up locking up the assets for public benefit programs purposes, such as Medicaid paying for nursing home care five years after you transferred the assets in. It also has far fewer requirements under Wyoming state law (again with a few more trustee requirements referenced later):
- Provide for discretionary distributions of trust income and/or principal to the settlor; and
- trust must be governed by Wyoming Law.
These are just some of the basic requirements to bring the trust under the jurisdiction of Wyoming. But there are also some other features of the trust that will have some Wyoming requirements, particularly with regard to trustee powers. So, no, just because a protective
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