The Personal Residence & Estate Preservation Trust (PREP Trust®)
The PREP Trust® is the best trust tool for preserving all of your assets from frivolous lawsuits and contingency-fee attorneys looking to make an easy buck off of your success.
The PREP Trust® offers the strength of protection of a foreign trust, but with the simple maintenance of a US domestic trust. This means you get offshore trust protection, but without all the burdensome annual United States reporting requirements.
Read more about the PREP Trust® from the transcript of a recent presentation:
Hello and welcome. We are talking about asset protection and the PREP Trust®, the Personal Residence and Estate Preservation Trust. The PREP Trust® is a combination offshore and domestic asset protection trust.
My name is Colin Ley. I am an attorney and the co-founder of LayRoots, where we help people live more carefree. We help them with their asset protection needs so that they can live a more carefree life.
Why is asset protection important?
Asset protection is important because there is a great risk of litigation in the United States. There are many people who face a higher level of risk for lawsuits. Those include people like doctors, CPAs, even attorneys, and also real estate investors. There’s a lot of bad advice that goes around. For example I often hear advisors say “insurance is good enough” to protect you from lawsuits. That’s absolutely not true, and you can be a better advisor and source of information for your clients, by knowing a bit more about the issues of asset protection. So I want to talk a bit about asset protection and specifically about the PREP Trust®. Let’s talk about how an asset protection trust can protect your client’s personal assets from any risk or liability.
What is Asset Protection?
So what is asset protection? Asset protection is a strategy to own and structure your assets in such a way to discourage litigation or flip the tables to give the person defending the lawsuit the leverage to settle for a lower amount than they might otherwise be liable. Asset protection is effective to avoid lawsuits if it makes the attorney coming after the person work harder. If you put greater barriers in front of your assets, then attorneys are much less likely to pursue them.
So in the best-case scenario, a lawsuit just goes away and it’s never filed. They think it’s too much trouble to pursue somebody; it might cost too much money. Attorneys and potential creditors can’t tell that somebody owns assets because the assets are held anonymously in a trust. But again, asset protection plan can help prevent those lawsuits and make them go away if they do pop up. Your clients want this type of protection.
Who needs Asset Protection?
I hear some attorneys say that they don’t think their clients need asset protection, but most often that is just the personal view of the attorney. They likely have no idea what their clients want because they have not asked the question in the first place. I ask people, I ask everyone that comes into our office. We see people for other things besides asset protection, and it’s 95 percent times a concern. People are worried about lawsuits and they want to do something to protect their assets. How do they want to do it? How do they want to plan to protect their assets? They want to have a plan that is effective and protects them from many different liabilities. They also want to maintain a level of control over their plan.
It’s tough for somebody to give up control of their assets, but they don’t have to, to have an effective asset protection plan. Costs need to be reasonable, and that’s of course a subjective measurement. It depends on the person, but typically people are happier the lower the costs are, not just to set up the plan, but there’s also ongoing maintenance costs. The ongoing costs are to have people help you with your plan and keep your trust or other entities registered with the proper authorities.
And then finally, clients want easy compliance. Compliance has to do with reporting requirements mostly. Certain trusts require disclosure to the IRS. I’m talking about foreign or offshore asset protection trusts. If you have a fully foreign trust, you have to tell the IRS about it. You have to tell them what’s in it, where it’s at, and as long as you do that, the IRS is happy, but it can be a pain in the butt, and it’s something that can make the leap harder into having an asset protection plan.
So if the compliance is easy in the sense that there is no reporting requirements, people are much more happy to move forward with some good asset protection planning. Typically, the tools that we’re using to expand somebody’s asset protection plan, besides things like insurance and putting money into their protected retirement accounts, are tools like a limited liability company, LLC, sometimes LLPs, partnerships.
What are the common tools of asset protection planning?
LLCs are tools that many attorneys are aware of, but then LLCs can be combined with the asset protection trust. Unlike LLCs, a trust is a tool that protects personal assets, not just business assets and business activities. Things like a personal residence, brokerage account, and liquid assets can all be protected inside of an asset protection trust.
LLCs have been around since the late eighties, and they are entities to protect different risky assets. You can segregate assets into separate LLCs. So for example, if somebody has multiple rental properties, investment properties, they might put one property in each separate LLC. That reduces the risk from a liability from spreading from, say, one slip and fall or fire at one investment property and then having a claim against all of the other investment properties because they are segregated essentially in separate LLCs and the LLCs should have charging order protection. Charging order protection basically prevents a creditor from coming in and foreclosing or liquidating a business and taking all the assets within the LLC.
What are the benefits of an asset protection trust?
Next we have asset protection trusts. Asset protection trusts are effective at preventing or protecting against, like I mentioned, pretty much any liability if you’re outside of the US. Domestic trusts have some limitations like you can’t cheap out on child support, for example, but I haven’t yet seen that and hope to never see that. But assets within an asset protection trust can be protected because they can be moved outside of the US court system.
We’ve been talking about the risk of litigation and how people can lose all of their assets during that lawsuit. I don’t think it is wise to recommend to people that they can rely on the same court system that can take away all of their assets to effectively protect all of their assets. There is article four, section one of the US Constitution, the Full Faith and Credit Clause. That clause requires that a judgment from one state be honored in any other state. So having a domestic asset protection trust in one state might not save you from a judgment from another state because the asset protection jurisdiction state is required to honor the judgment from the non-asset protection jurisdiction state.
Another benefit of an asset protection trust, as I briefly mentioned before, is it offers privacy for your assets. Assets become owned and titled in the name of the trust rather than your personal name. So if a person or attorney is targeting someone to sue them, maybe they’re looking to see what assets they own, if the target owns a home, if they have investment properties, brokerage accounts, that type of thing. If they are titled in the name of a trust, those assets are not going to show up on the search reports, and that alone can be effective in deterring a lawsuit from an attorney who is working on a contingency fee. Because if they’re working on contingency fee, they don’t get paid unless they win. If they don’t think they can win, they won’t move forward with the lawsuit.
What is an asset protection trust?
An asset protection trust is a self settled spendthrift trust or self settled discretionary trust, and there are a couple different approaches to these asset protection trusts. One is the international flavor of trust and the other is the domestic approach. International involves using the laws outside of the US from another jurisdiction. Domestic is using the local jurisdiction, whether it’s Nevada, Wyoming, or one of the many other states that offer asset protection trusts.
What are the pros and cons of an offshore trust?
If we compare these different approaches and jurisdictions, if we look at international trust, there are a number of jurisdictions. The most well known and most relied upon is the Cook Islands. The Cook Islands created their trust legislation back in 1984. It was, I believe, the first jurisdiction to offer this type of asset protection legislation. There are a number of benefits of using the Cook Islands trust legislation. For example, to begin with, it’s very far away. If you have to litigate the case in the Cook Islands, you’re going to be traveling very far to get there.
From the US attorney’s standpoint, you’re required to hire a local counsel there. Attorneys in the Cook Islands court system are not allowed to work on contingency fees. A creditor pursuing somebody has to pay their hourly rate, but they also have to pay a high bond to file a claim. And the reason that there’s a bond is that the loser pays the other side’s fees if they don’t prevail. So you put up your $100,000 bond right now. If you lose the case, the defendant gets to pay their attorneys for their defense out of that bond.
There’s also a shorter statute of limitations, one or two years versus domestic legislation, you’re typically looking at two to four year statute of limitations for any fraudulent transfer claims. So foreign or offshore international asset protection trusts are very effective. There’s a lot to deter lawsuits and also to give the power to the defendant. It gives them leverage to settle lawsuits and make them go away, and there’s been significant case law that has supported the effectiveness of these foreign asset protection trusts. The US government itself has been thrown out of the Cook Islands court twice while pursuing a defendant in the Anderson case. The US Government was not allowed to reach the assets of the defendant in that case, and that trust held up very well.
Let’s talk about some of the cons of the foreign asset protection trust. Foremost is the IRS reporting requirements. If you have a fully foreign offshore trust, you are required to tell the IRS all about it. You have to file a separate tax return for the trust. Your foreign trustee also has paperwork to file. You have to report the assets that are within the trust, the locations, the amounts that are held in trust, and you have to do that on an annual basis.
And if you forget or make a mistake, something happens, there are significant penalties, penalties for failing to file, based the amount is a lot. It’s either a set fee or a certain amount based on the balance of the account. So significant fines are in place if you fail to report those trusts and the assets, and that adds up in additional fees for the annual maintenance. There’s also the additional cost of having the professional foreign trustee manage your assets. They’re typically charging by the hour to handle your requests for distributions. And then, of course, annual costs of registering the trust in the Cook Islands.
So those are some of the cons. There’s additional costs at times, additional compliance. And you have somebody else in a foreign jurisdiction in control of your assets. And that’s not a bad thing, but many people who are looking to establish an asset protection trust, they worry about somebody overseas having control of the trust and their assets.
What are the pros and cons of a domestic asset protection trust?
Besides the foreign asset protection trust, you have the domestic asset protection trust. There are a number of states now that offer as a protection trust laws. They’ve been around since the late nineties. Essentially, the States saw that these foreign jurisdictions were getting in on some good trust legislation action, and they wanted to offer the same so that they could bring in some of those trust dollars, those annual maintenance costs. So some of the most well known are Nevada, Wyoming, Alaska, but there are a number of other states that offer them. There’s around 18 right now.
These are often paired with an LLC or a limited partnerships, as I mentioned before, to combine the strength of the charging order protection as well as the domestic asset protection trust. So one of the pros of the domestic option is that there is familiarity with the country, i.e. it’s still in the US. That gets a big thumbs-up from people from the US. The offshore or foreign aspect is not involved. There are minimal IRS reporting requirements. You don’t have to tell the IRS what’s in your trust if it’s all domestic, and it can be seen as less expensive, which may or may not be true if you’re using a professional trustee. Domestic trustees charges similar rates to those overseas. So the pros then are that compliance is easier, no reporting requirements, and costs might be lower.
The con, the big con of the domestic option is article four, section one of the US Constitution; the “Full Faith and Credit Clause.” So let’s say you have a person in Washington state who sets up in Nevada asset protection trust, they get sued, and the person suing makes an argument in a Washington court that goes, “Hey, this is a Washington resident. Let’s apply Washington law because that’s more appropriate.”
What they’re doing is a choice of law analysis, and what can happen, and what has happened in case law, is that the judges have said, “Yeah, you’re right. Let’s apply our laws and ignore the asset protection statute from this other state.” The creditor gets a judgment in the state without the asset protection trust legislation, and then takes it to Nevada to enforce the judgment, and the court there in Nevada is required to follow the judgment and allow it to be enforced. So in that case, the Washington court has decided to ignore the trust legislation and has disregarded the protection of the trust.
There’s also bankruptcy law issues. The 2005 updates to the bankruptcy rules instituted a 10-year “look back” for transfers to a self settled asset protection trust. That means a transfer of assets to an asset protection trust can be voided if it happened in the previous 10 years. Assets in those domestic trusts are not going to be protected from bankruptcy until 10 years have past. And in addition to the domestic asset protection cons are that there are certain claims that are not protected by the trust.
As I mentioned, the foreign asset protection trust will protect you against any claim, but that is not the case with the domestic trust. Certain claims like alimony, child support, and pre-existing torts are not protected by the trust. So essentially, you can set up the trust, for example in Wyoming, and then 20 years later, you have an order to pay alimony that, for whatever reason, you decided you weren’t paying. The trust would not protect assets against that type of claim.
There has been case law that has shown that these domestic trusts are not effective. And the one I mentioned earlier is a case from 2013. It involved a Washington resident who set up a domestic asset protection trust in Alaska when he saw that his company was about to go down the tubes. And in the choice of law analysis, the judge said, “Let’s use Washington laws,” and Washington laws do not allow a person to protect their assets from their creditors. So that trust failed, and the defendant in that case was not able to save his assets.
So to recap the cons of a domestic asset protection trust: they are less effective than a foreign trust at protecting assets, and there’s less control and predictability from the US court system. Like I always tell people, you can’t rely on a US judge, who can take away your assets to also protect your assets. There’s no knowing how a case will turn out.
Combine the benefits of both offshore and domestic asset protection trusts
As I mentioned earlier, clients want an effective asset protection trust solution. They want control, control of knowing what will happen, what they can expect in litigation, but also they want to have some control, well, they often want to have a lot of control in the management of the trust. Clients want control of the assets and the distributions. They want it all and they can have it all if they want. The less control they have, the better, but typically people are feeling better about setting up a trust if they know they can at least start out in control of everything.
Clients want costs to be low. They want costs to be as low as possible, cost both for setting up the trust and for maintaining it on an annual basis. And finally, they want easy compliance; they don’t want to have to file additional tax returns or make a lot of additional reporting or any additional reporting to the IRS.
What is a PREP Trust®?
Because of all those client desires, we offer our PREP Trust®. Essentially, we are harnessing the best of both offshore and domestic asset protection laws. The PREP Trust® (Personal Residence and Estate Preservation Trust) is an asset protection trust that is both an offshore trust and a domestic trust. The trust has the same level of protection as an offshore trust, but the domestic aspect of the trust makes it easy to manage. The PREP Trust® is a tax neutral, domestic grantor trust for the purposes of the IRS. That means there is no tax return to file or other IRS reporting requirements typically required of offshore trusts. If a legal threat emerges after the PREP Trust® is established, the trust can become a fully offshore trust and remove itself from the US court jurisdiction.
Assets within the PREP Trust ® can also remain within the US. A lot of people think setting up an offshore asset protection trust requires you to ship all of your assets off out of the country. That is not the case. They can stay in the US with your current bank or brokerage. These accounts are simply retitled into the name of the trust.
There is no initial acting foreign trustee. There is one that is set up to step in if needed in the event of a lawsuit, but the client can start out as the initial trustee. From the client prospective, managing the trust is similar to a revocable living trust. Clients can begin as the trustee in control. They feel good about that. It helps them get into the asset protection world and this checks the boxes of being effective and lets the clients stay in control while also distancing themselves from the assets so they no longer own it and control it personally. They control it through the trust.
Maintenance costs of the PREP Trust® are lower than a normal offshore trust. Offshore asset protection trust trustee fees typically run between $5,000 and $10,000 per year. That is nowhere near that amount to maintain the PREP Trust®. Finally, compliance is easy; there are no foreign reporting requirements. The bonus to the PREP Trust® is that it lets you avoid probate. It works in conjunction with the client’s regular estate plan. After death, the PREP Trust® can slide into that existing estate plan. It lets you easily maximize tax exemptions. It’s also easy to distribute assets to both the client and other beneficiaries. That could be a spouse, children, charity, or whatever that might be. It’s easy to do within this PREP Trust®.
Want to learn more about our PREP Trust® and whether it would be a good tool for you? Schedule an Initial Consult now and find out.