Asset Protection for Multiple Partners and Business Owners

Dear Friends, Colleagues, and Clients,

Individuals often implement asset protection strategies to protect their personal assets from the individual’s unforeseen creditors. In today’s litigious society, it is necessary that the prudent businessperson consider utilizing asset protection strategies not only to protect one’s individual assets, but also to protect those assets owned by the company. This Client Alert will focus on two techniques used to protect the assets of both the business and the business owners from exposure to liability: (1) establishment of a foreign asset protection trust by the company itself and (2) settlement of a group foreign asset protection trust for a business with multiple business owners or associates.

Entity Asset Protection Trust

In earlier Client Alerts, we described the design and benefits of forming a foreign asset protection trust (APT), usually in the context of protecting one’s individual assets. The Cook Islands is a jurisdiction with very favorable trust laws, providing significant protection from a Settlor’s creditors even where the Settlor is also the beneficiary of the trust. A business can also form an offshore APT, which we call an “entity asset protection trust” (EAPT), and name the business entity as the sole beneficiary of the EAPT. However, the EAPT can be designed to allow direct distributions to the business owners so long as the distributions are in the best interest of the business and are made “on behalf of the business.”

If properly formed, the EAPT is considered a grantor trust for income tax purposes, meaning that the income from the trust assets is attributed to the company and not to the EAPT.

Furthermore, contributions by the company to the trust will not constitute a “completed gift,” thus avoiding any gift tax issues. The EAPT should be established for a business purpose, such as forming a separate investment vehicle for trust assets and to preserve those assets against unforeseen liability, so that the trustee may distribute assets back to the business and to the business owners without incurring individual tax liability for the owners or for the trust. Ideal assets to be held in the EAPT are the company’s liquid assets including its retained earnings and intellectual property, i.e., patents, trademarks, licenses and other similar assets.

If the trust is established for the personal planning needs of its owners, any distributions from the business to its owners will likely trigger negative income, gift, and estate tax consequences. Business owners should carefully document the “business purpose” by describing it in the company’s minutes, including the company’s beneficial interest in the trust as an asset on the company’s financial statements, and notating each distribution to a business owner as one made for the direct benefit of the company.

In addition to being the Settlor and sole beneficiary of the trust, the business can also be the trust protector. As protector, the business would have the authority to veto trustee investment and distribution decisions, allowing the business to still retain some control over the trust assets. Moreover, naming the company as the trust protector offers further evidence that the trust was created for the benefit of the business rather than for the owner’s personal benefit. Finally, the EAPT can also be designed so that these protective provisions only apply so long as the business is controlled by persons that acquired his/her ownership interest through a bona fide voluntary sale or gift from a previous owner.

Group Asset Protection Trust

Another option to consider is the group asset protection trust (GAPT). This structure is particularly useful for business owners who share ownership with multiple individuals, such as is often the case with CPAs, lawyers, physicians and consultants, all of whom may be subject to future unforeseen liability claims. The GAPT is a very cost effective way to reduce the expense to each owner to create effective “firewalls” that insulate certain assets owned by the business owner and his or her family. With a GAPT, instead of the APT having a single settlor, each participating owner is a settlor with the other owners in a common or group APT. The GAPT will have a sub-APT created under the master GAPT document for the benefit of each participating group member. That way, each owner of the company can place his or her selected assets in the GAPT and enjoy the protections afforded by the APT just as though the APT was established for the individual without other members.

The downside to using a GAPT is that each Settlor of the GAPT is limited to using the same method for distributions of the trust’s assets to their intended heirs, rather than having the ability to use the customized dispositive provisions associated with individual APTs. However, at any time, the Settlor of a GAPT may split off from the GAPT and convert his or her sub-trust into a personal APT (such as when the level of assets held in the sub-trust becomes large enough to warrant formation of an individual APT). In this litigious world, the GAPT may be a very cost effective structure to provide effective asset protection planning at a very reasonable price tag.

Contact Susan Jerome, Director of Client Services, for further information ( or 800-521-0464).

Jeffrey M. Verdon , Esq.

Jeffrey M. Verdon Law Group, LLC

Posted in Client Alert.