Asset Protection Using a Trust
Revocable Living Trusts: Asset Protection
Broadly speaking, when asset protection is the goal, a revocable living trust may not be the appropriate choice for this exact purpose. A settlor, or in other words the person who created the trust, will fundamentally hold primary control and possession of all trust assets, which also means this person may remove an asset from the trust or even change the trust’s conditions whenever they’d like, all the while the trust itself is simply there to hold title to the assets. If a creditor were to win a legal decision vs the settlor, the court may rule for the payout of the trust’s assets to settle the creditor’s claim.
While a revocable trust will not offer your family asset protection, they do have some additional benefits when it comes to estate planning. For instance, a trust can be useful for circumventing probate fees if the settlor passes away.
Irrevocable Asset Protection Trusts
For any matter which concerns correctly protecting your assets, you should choose an irrevocable trust. As the name itself suggests, once this specific type of trust is established, you will not be able to revoke it by changing its terms, nor will you have the authority to control the trust’s assets.
In this case, the trust’s assets themselves are controlled by the trustee, which is the fancy term for the person who is assigned to manage the trust, and because of this, any modifications or distributions are solely at the trustee’s discretion. When a creditor files a lawsuit against you, the assets within your trust will most likely not be considered yours. So if the creditor then wins a judgment against you, the likelihood will be much greater that any assets residing in your irrevocable trust will be well protected.
Protection Trust Using Domestic Assets
The following are two types of irrevocable trusts that will work as an asset protection vehicle: foreign asset protection trusts and domestic asset protection trusts. Domestic asset protection trusts can be formed in the U.S. within any of the states that offer legislation authorizing the formation of such trusts. Not every state provides for asset protection trusts, so it’s imperative that you meet with an estate planning attorney to determine exactly which state near you is best suited for such trusts. Nevertheless, as these trusts have grown in popularity, many states are starting to recognize the legal status of this type of trust.
We should also mention that it will be less costly to set up an asset protection trust in the U.S. than it would be to create a foreign asset protection trust. This is because this type of trust is fairly new, and so the case law concerning their status is constantly shifting, which will add an additional level of uncertainty to their capacity to correctly protect your assets. Many states mandate a limitation period during which assets which are transferred into these trusts may remain vulnerable to creditors, so be careful.