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Asset protection consists methods available to protect assets from liabilities arising elsewhere. It should not be confused with limiting liability, which concerns the ability to stop or constrain liability to the asset or activity from which it arises.
Trust is a legal arrangement under which a person (usually called as a settler or granter) transfers assets to a person (usually called as a trustee) who becomes responsible for managing the entrusted assets for the benefit of others (beneficiaries). Such assets can be cash, immovable property, bonds, stocks and other valuable assets. The trustee is usually chosen among reputable and professional firms or trust banks engaged in management of properties in favour of beneficiaries. Beneficiaries receive income, allowance for living expenses, educational expenses and other assets from the trust.
The trustee can manage the trust strictly in accordance with the trust agreement. Beneficiaries are protected by relevant trust laws. Thus, it is essential to establish trusts in jurisdictions that provide relevant legal guarantees for beneficiaries.
There are many types of trusts depending on a jurisdiction. In general, a trust can be a living trust or irrevocable trust. A living trust (which is also known as a revocable trust) is set to control assets during a granter’s lifetime. Unlike a living trust, the terms of irrevocable trust (e.g. inheritance terms) cannot be changed or revoked. As a result, it usually gives more tax benefits for the granter.
Private foundations are independent legal entities that are usually set by a single individual, family or company. Thus, private foundations are self-funded and do not receive support from general public. The assets held in the foundation are managed strictly in accordance with aims and objectives of the foundation. Unlike a trust, the foundations are managed by itself (not by a separate firm or bank). The purpose of the private foundation can be a management of money and valuable properties of a family, management of assets for charitable purposes, running special programs, direction of charitable activities, providing aids in case of disaster or for other non-profit purposes.
In return for a donation, foundations are exempt from taxes which is an important benefit of this type of asset protection. The foundation’s settler usually remains to have a control over key management issues, such as foundation’s objectives and mission, appointment of the foundation board and where the funds are granted away. However, it is possible to establish a board consisting for an instance of family members or other individuals appointed by the settler to decide on key management issues. It is important that foundations have to make distribution throughout the taxable year.
The foundation can be inherited by the family and can continue to exist in perpetuity.
Investment fund is a company that collects funds from investors to form a common property and to invest in financial instruments to receive profit. Investors are usually joint stock companies, other legal entities and individuals. The funds are managed by the investment fund for the benefit of investors. In return, investors receive income in a form of percentage of equity, rate of return prorated to their invested amount.
This investment option is an ideal solution for companies and individuals to enter to securities market as assets in the securities market can be managed by licensed professionals. Besides, investors have an access to a wider range of investment instruments.
There are a few types of investment funds, including: open-end mutual funds and closed-end mutual funds. Open-end mutual funds sell equity shares to investors. Investors become members of this fund and the investment fund uses investments to buy stock or bonds. Such funds can be easily accessed by small investors.
Closed-end mutual funds issue a fixed number of shares and trade on an exchange. Thus, they are similar to stocks. A closed-end fund may trade at a premium or a discount to its NAV.
Venture funds are firms that attract investors to invest capitals in companies (startups, small to medium-sized companies) and to develop projects in return of profit. Usually funds are used to invest in scientific projects, developing new technologies and businesses. Such type of fund raising is, of course, highly risky as they do no guarantee any returns and it is vital to assume own financial risks. It is hard to predict whether new products and innovative technologies will bring any assets or succeed at all. Besides, profits from innovative business will not come quickly. In average, a project can start operating in 3-5 years. Usually, venture funds invest funds against the pledge of the shares of the newly created company. The venture funds get profits by increasing the exchange value of its shares once the project becomes profitable.
However, investments in venture funds can be highly profitable compared to other investment options. Investments are done in hundreds of different projects at various locations in the hope that some of investments will be returned. Thus, this is a good choice for investment portfolio diversification and for non-professional investors.