An asset protection trust works by separating legal ownership from beneficial enjoyment of the assets in the trust.
The person who sets up the trust (the Grantor) transfers assets into the trust. The Grantor then no longer legally owns those assets. He or she has given up both legal ownership and beneficial enjoyment (also called beneficial ownership) of the assets.
Those trust assets are now legally owned and managed by the Trustee of the trust. The beneficial enjoyment (i.e. who gets to use or benefit) of those assets lies with the Beneficiaries of the trust. The rules for asset protection trusts allow for the Grantor to also be a Beneficiary.
An example of separating ownership
Take for example a $250,000 investment account. The account is in Mike’s personal name. He owns it outright. He’s the legal owner who calls the shots on what happens with the $250,000 and he also has beneficial enjoyment of the money. I.e. he gets to use it if he wants to. Mike sets up a trust and retitles the account into the trust. Legal ownership of that $250k now lies with the Trustee of Mike’s trust. Beneficial enjoyment of those bucks now goes to the Beneficiaries of the trust.
Great asset protection trust laws, like in Nevis or the Cook Islands, allow Mike to be a Trustee and a Beneficiary if he wants.
Flexibility for changes
The laws also allow for flexibility. The people or companies in these different roles of Trustee or Beneficiary can change. Mike can start as a Beneficiary of the trust, but later not be a Beneficiary if there were a legal threat against him. Who sits in the roles of Trustee and Beneficiary can be modified as needed.
An asset protection trust works by dividing legal ownership and beneficial enjoyment between two different parties. Legal ownership of the trust assets goes to the Trustee of the trust. Beneficial enjoyment of the assets belongs to the Beneficiaries.
Colin Ley is an asset protection attorney and the creator of the PREP Trust® and Better LLC™. He is also the co-founder of LayRoots (along with with partner in life & business – Shreya Ley)
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