Asset Protection

Asset Protection

Real Estate, Demetri Law

Integrating Asset Protection Trusts into Your Estate Plan

Protecting assets against loss to creditors and predators or in divorce or bankruptcy has become a common goal of estate planning. This letter outlines how I can help you easily integrate asset protection trusts into your estate plan.

Third Party Asset Protection Trusts Provide Inheritance Protection

Leaving an inheritance outright to a child or grandchild without any strings attached is risky in this day and age of high divorce rates, lawsuits, and bankruptcies. Aside from this, an outright inheritance may be frittered away or end up in the hands of your child’s spouse instead of in the hands of your child or grandchildren. Finally, a beneficiary may be born with a disability or develop one later in life that may rapidly deplete their inheritance by disqualifying the beneficiary from receiving government assistance.

There are a number of different types of third party asset protection trusts that can be integrated into your estate plan to insure your hard earned money stays in your family:

  • Trusts for minor beneficiaries – Minor beneficiaries cannot legally accept an inheritance and a trust ensures that the minor’s inheritance is prudently invested and used only for the minor’s benefit.
  • Trusts for adult beneficiaries – Adult beneficiaries who are not good with managing money, are in a lawsuit-prone profession, have an overreaching spouse, might get divorced, or have an addiction problem will benefit from a lifetime discretionary trust.
  • Trusts for surviving spouses – If you are worried that your spouse will not be able to manage their inheritance, will remarry, or will need nursing home care, you can create a lifetime discretionary trust for the benefit of your spouse.
  • Trusts for disabled beneficiaries – Disabled beneficiaries who receive an inheritance typically lose their government benefits and have to spend the inheritance before requalifying. On the other hand, an inheritance left to a special needs trust may be used to supplement, not replace, government assistance and will not cause disqualification.

Self-Settled Asset Protection Trusts Are the New Frontier

Prior to the late 1990s self-settled asset protection trusts were not recognized in the U.S. and were required to be established in an exotic foreign location such as the Cook Islands or the Cayman Islands. In 1997 Alaska became the first state to recognize self-settled asset protection trusts. In addition to Alaska, to date the following states have enacted self-settled asset protection legislation: Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, and Wyoming.

In general, a properly formed and operated self-settled domestic asset protection trust permits you to transfer your own assets into the trust and retain a beneficial interest in the assets while denying your creditors access to the trust assets. While the laws governing self-settled asset protection trusts vary widely in the states that recognize them, in general these laws require the following:

  • The trust must be irrevocable.
  • At least one trustee must be a state resident or a corporation authorized to do business in the state.
  • Some trust assets must be located in the state.

In addition to these requirements, U.S. self-settled asset protection trust laws differ on “exception creditors” (creditors who can still access the trust assets, such as an ex-spouse who is owed alimony or a child who is owed child support) and statutes of limitation with regard to preexisting and future creditors (1.5 years to 6 years).

While this type of planning is still developing, when coupled with other types of asset protection planning, including liability insurance, third party asset protection trusts, and limited liability entities, self-settled domestic asset protection trusts offer an additional layer that is designed to put up roadblocks between your assets and your creditors.

Revocable Living Trusts and Asset Protection Planning

A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats. First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.

Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor ‘steps into the shoes’ of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.  There are many available drafting and planning techniques that can minimize the potential creditor or divorcing spouse from obtaining access to a beneficiary trust.  Contact us today to learn more.

Final Considerations

Asset protection trusts offer many planning opportunities for people of even modest means. We are available to answer your questions about asset protection trusts and help you integrate this type of planning into your estate plan.