Not all trusts are created equal when it comes to protecting your assets from creditors. Many people assume that putting assets into any trust will keep them safe, but most common trusts offer little to no protection. The right structure depends on your specific goals, but one option stands above the rest for individuals who are serious about preserving their wealth.
The difficulty with most people is they wait too long to implement these systems, and by the time they understand what they need, a creditor is already at the door. The structures I am going to explain exist precisely to prevent that outcome.
Why Most Trusts Fail to Protect Assets
The revocable living trust is the most common estate planning tool in America, and it offers absolutely zero creditor protection. Because you retain the power to revoke the trust and reclaim the assets at any time, courts treat those assets as if you still own them outright. A creditor can reach them just as easily as if they sat in your personal bank account.
Traditional irrevocable trusts offer more protection because you give up the right to revoke them. However, these structures historically required you to surrender so much control and access that many people found them impractical. If you cannot benefit from your own assets, the protection becomes hollow.
The fundamental challenge has always been finding the balance between control, access, and protection. For decades, you could only pick two of those three. That changed when certain states began adopting domestic asset protection trust legislation.
The Domestic Asset Protection Trust Advantage
The Domestic Asset Protection Trust is a creature of statute. Wyoming was one of the first states to adopt the DAPT into its trust code, and the legislation was designed to solve the control problem that plagued traditional irrevocable trusts.
With a properly drafted DAPT, you can be a discretionary beneficiary of your own trust while still receiving creditor protection. The trust is irrevocable, which provides the legal separation necessary for protection, but you do not have to walk away from your assets. You can still receive distributions at the discretion of the trustee, and you can still benefit from what you have built over a lifetime.
The impetus for this legislation in Wyoming was the Wyoming Trust and Estate Political Action Committee, a consortium of attorneys, accountants, and banks that have made Wyoming a legitimate onshore-offshore trust jurisdiction. The Economist magazine has described it in exactly those terms. When you combine the DAPT with Wyoming’s favorable LLC laws, you have the best trust structure for asset protection available in the United States.
What Makes Wyoming’s Structure Superior
Wyoming’s trust-friendly legislature has refined these statutes over decades. The state offers no state income tax on trust income, which provides additional benefits beyond pure asset protection. You do not have to live in Wyoming to take advantage of these laws, and many of my clients reside in high-tax states like California, New York, and New Jersey while keeping their trusts domiciled here.
Wyoming has also established a specialized tribunal to deal with trust issues. The judges and attorneys who work within this system understand the domestic asset protection trust, the private family trust company, and the statutes that created them. You will not find a court that throws these structures out because it does not understand them. This is a state that respects its laws and understands the legitimate purposes these trusts serve.
The Complete Structure for Maximum Protection
The DAPT alone is a powerful tool, but combining it with additional structures creates even stronger protection. A Private Family Trust Company allows you to maintain control over trust investments and administration without compromising the trust’s independence. The PFTC acts as trustee of your DAPT, providing both legitimacy and flexibility.
The question then becomes who owns the Private Family Trust Company. If you own it directly, you reintroduce the control issues that asset protection planning is meant to solve. The answer is a Non-Charitable Specific Purpose Trust, which can own the PFTC without any individual having an ownership interest. This structure eliminates concerns the IRS or any state agency might raise about ownership and control.
These trusts generate from old common law in England, where families would hold specific assets in trust with no individual beneficiaries. Wyoming adopted this concept and modernized it for asset protection purposes. The result is a layered structure that is as legally complex as it needs to be while remaining administratively manageable.
Who Benefits Most From This Structure
The ideal client for this structure is worth two million dollars or more and is involved in a private business or profession that carries inherent risk. Physicians face malpractice exposure that can exceed their insurance limits. Attorneys face liability from unhappy clients. Entrepreneurs face the inevitable ups and downs of business cycles that can wipe out a lifetime of work.
Families with generational wealth also benefit from this structure. A single divorce in a family worth thirty million dollars can cost a quarter of everything they have built. The right trust structure prevents that outcome entirely.
Planning Before Problems Arise
The structures I have described are powerful, but they only work if you implement them before liability attaches. Courts look unfavorably on asset transfers made after someone has a claim against you. The time to protect yourself is when everything is going well, not when you are already facing a lawsuit or a divorce or a business collapse.
This is the cheapest form of insurance you will ever have. The process is straightforward and comparatively quick. I personally wish I had known about these structures forty years ago, but they did not exist then. They exist now, and there is no reason not to take advantage of what the legislature has provided.