Gov. Bob McDonnell signed a bill that permits asset-protection trusts in the state of Virginia. Only 12 other states in the country offer them. Asset-protection trusts provide a way for wealthy individuals to protect their assets from legal claims in the event that they or their companies are sued.
They only provide protection, however, with prudent estate planning because they are ineffective at shielding someone's assets when a potential legal claim against them has already arisen. In addition to the benefit of asset protection, an asset-protection trust allows the funder of the trust to take distributions. At the same time, future creditors are generally unable to reach those assets.
With the increasing trend of directors and officers of companies being named as defendants in investor lawsuits, asset-protection trusts have become an important tool and can be used to supplement liability coverage.
Another asset-protection option that is specifically available to married couples is to retitle their assets. If a wealthy individual such as an officer of a company is married and feels his assets are more vulnerable to legal claims than his wife's assets, he may wish to retitle his assets in his wife's name. This option, however, creates a risk that a wealthy spouse who retitles his assets will lose them if the married couple ever divorces.
When it comes to asset-protection, timing is everything. Attempting to protect one's assets after the fact is rarely successful. Indeed, when an event has already occurred which might support a legal claim, transferring assets into a trust or retitling them under a spouse's name could be considered an attempt to intentionally defraud creditors. Therefore, it is of the utmost importance to plan ahead.
Source: Bloomberg, "Wealthy Americans turn to trusts to shield assets," Elizabeth Ody, May 22, 2012
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