Hybrid Asset Protection Trust

A hybrid asset protection trust is a planning tool that utilizes a “best of both worlds” scenario. Those worlds being domestic asset protection trusts and offshore asset protection trusts. There are pros and cons to both of these asset protection trusts. However, a hybrid trust can be both a domestic trust and an offshore (or foreign) trust at the same time! This type of trust is a flexible tool that is optimized for any given scenario.

The fundamental goal

The fundamental goal of a hybrid asset protection trust is to have one type of trust during good times, which changes to another type of trust in bad times.

The good times are what you might imagine: living the dream, carefree walks on the beach, sunshine blasting your face everyday, your friends and family love you, money steadily rolling into the business, etc, etc.

The bad times are when things aren’t quite going your way. Maybe you accidentally t-boned another driver. Perhaps your recently fired employee is suing you for emotional distress. And finally, you’re being blamed for somebody else’s bad life choices (boo-hoo). The list could go on and on.

During the good times, life is carefree. During the bad times, somebody is coming for your stuff to make themselves feel better.

Instead of discussing all the legal details of how a hybrid trust works, I think it’s fun to compare it to other things in life to help illustrate the point.

Comparing to completely unrelated things like fire insurance

Imagine an insurance policy that you could modify or buy as needed. Recently, I watched as my cell phone fell out of my hands and into Lake Union. It all happened in slow motion to me. It would have been nice if I could have changed my decision to NOT add the phone replacement service to my cell plan as it slowly bounced and slid along the dock. While the phone slid along the dock, if I could have gotten my wife to quickly buy me some iPhone insurance…okay, maybe this is not the best scenario to illustrate my point, but writing about my drowned iPhone is giving me some closure. Thanks for your sympathy.

A better example is fire insurance. Imagine if you could buy a $50,000 fire insurance policy for your $1,000,000 home. You’d save a bunch of money being under-insured while your house is not on fire. Let’s be honest, how often is your house on fire? Seems like a great idea.

Then one day, during your candlelit bubble bath, a rogue candle falls to the floor and starts a small fire. After you call in the fire brigade, you hop online and bump your fire insurance coverage up to $1,500,000 before the fire takes out your wifi router. As your house turns to ash, you’re still feeling pretty good because you know all your loses will be covered by your new insurance policy. You took action after the fire started, but before it burned your house down.

Problems with this approach

The problem with this fire insurance strategy is that: 1) nobody will let you handle insurance like this; and 2) it requires you to be vigilant. What if you don’t notice the fire start? Or what if you don’t call the fire department or bump up your insurance coverage in time? If you don’t take action fast enough and your house burns down, you’re stuck with insufficient coverage.  You will wish that you had full insurance coverage all of the time.

The best strategy is to have the most protection for everything all of the time. That way you don’t have to worry about taking action as soon as a fire starts in your house. But that may not always be practical or possible.  Maybe you can’t afford to have a large policy in place all the time or maybe the maximum possible doesn’t cover the full value that you need. Whatever the reasons, then maybe a hybrid strategy works for you.

Because…you’re in luck.  We don’t sell insurance.  That full policy stands for a full offshore asset protection plan and there are such things as hybrid asset protection plans and we offer them.

Let’s tie it all together

Having a hybrid asset protection trust is like the flexible fire insurance policy: you pay for less protection when you don’t need it, then pay for more protection if and when you do need it. When your house is not on fire, the hybrid trust is a domestic trust. This hybrid protection policy runs you $1,500-$3,000 per year. It’s cheaper and easier to maintain than a fully offshore asset protection trust.

Your “fully covered policy” (i.e. offshore trust) runs $5-10k per year. Not only that, but you have to tell the IRS every year that you have an “insurance policy” and what items are insured. Forget to tell the IRS about your insurance and you get a hefty fine.

With the hybrid plan, if you get into some sort of legal danger (i.e. fire), you can call your attorney (instead of the fire department) to see if your trust needs to be modified and converted into a fully offshore trust. This would be the equivalent of upgrading to the large insurance policy as the drapes catch on fire. You pay the additional premium when you need it and enjoy the additional protection.

The danger here is that you have to act on your hybrid trust before your whole house burns down, but luckily lawsuits move a lot more slowly than fires. If your trust needs to go from a domestic trust to an offshore trust, you have to act in time. Ignore the fire and you could be stuck with the lower protection of a domestic trust.

Or do nothing

Many people I meet choose to do nothing. If you choose to have no insurance (i.e. no asset protection plan) then you risk losing your house if and when it burns down. Or to continue the fire analogy, they think they can put the fire out themselves with the garden hose.

Our hybrid trust is the PREP Trust®. It gives you the convenience and lower “premiums” of a domestic trust when life is good, but gives you the option to bump up to fully offshore trust protection if your figurative house is on fire.

Want to learn more about our PREP Trust® and whether it would be a good tool for you? Schedule an Asset Protection Analysis now and find out.