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There are some law firms promoting what is called “Bridge Trusts.” These are asset protection trusts prepared for people who want to be able to create a trust for themselves but have the money protected from creditors. The technical term for this is a “self-settled spendthrift trust.” They are also referred to as Domestic Asset Protection Trusts or DAPTs. There are currently 16 states that have statutes that allow a person to create a Domestic Asset Protection Trust for their own benefit. They are:

  • Alaska
  • Delaware
  • Rhode Island
  • Nevada
  • Utah
  • Oklahoma
  • South Dakota
  • Missouri
  • Wyoming
  • Tennessee
  • New Hampshire
  • Hawaii
  • Virginia
  • Ohio
  • Mississippi
  • West Virginia

 

In all other states, however, you are not allowed to create a trust for your own benefit that is shielded from your creditors. If you live in one of these non-DAPT states, there are different options. One is to have a “Bridge Trust.”

What is a Bridge Trust? It is a trust that you create for yourself that names you as a trustee and beneficiary. In other words, you transfer your home and personal bank account to this Bridge Trust and then you still have complete control just like before. But the Bridge Trust says that if you are in financial “duress” (like being sued by someone), you can resign and a successor trustee in the Cook Islands (near New Zealand) takes over as trustee. Once your Bridge Trust is being managed by a Cook Islands trust company, you can get a $50 million judgment against you and your assets will still be protected.

 

Or that’s the theory anyway. Here’s one potential problem with Bridge Trusts …

Assets in the Bridge Trust are NOT PROTECTED from creditors (until the offshore trust company becomes a trustee)

One of the main assets that you are instructed to put in your Bridge Trust is your personal residence. What happens if someone sues you and gets a judgment, but it isn’t so large that you want to pay the $5,000 per year trustee fee to the Cook Islands trust company? You could live for years with a judgment against you and think you’re protected.

 

Then you decide to sell your house. You think you’re protected because, after all, you have an “asset protection trust” that you paid a lot of money for. Not so fast. If you list your house for sale, the title company (or attorney handling the closing) will come back and say that there is this judgment against you that needs to be paid out of the proceeds of sale. At that point, it is too late to do anything. You were never told about this by the attorney that prepared the Bridge Trust for you. So, you’re out of luck.

Now, if you had thought ahead of time, you would have made the Cooks Islands trust company the trustee. Then that trust company would be selling the property for you. Sure, this increases your expenses. But it also protects the proceeds from the sale of the house.

 

A good Asset Protection Lawyer should be willing to help you through situations like this.

One of the big flaws that I find with law firms that sell “Bridge Trusts” is that they do not follow up with their clients. You, the client, think you’re protected and you don’t even know that you should be asking your attorney any questions. And the lawyer doesn’t reach out to you because they don’t make any extra money by doing that. I still think the Bridge Trust idea is a good one. But you can’t just assume it will protect you just because it was sold to you as an “asset protection trust.” You should be talking to an attorney about your specific situation.

Also, don’t rely on a blog such as this for figuring out what to do. The laws are constantly changing, and I don’t know anything about your unique situation. But please don’t try to learn the law by yourself or figure it out from the internet. This is a complicated area and it’s easy to make a mistake.

 


Paul Deloughery is an estate and probate litigation, and law insurance dispute consultant in Scottsdale, Arizona. Visit his website to read more of his blogs or follow him on Twitter!