One of the most effective estate planning strategies for minimizing the impact of your future creditors, lawsuits, and judgments is achieving asset protection through trusts. An asset protection trust may also discourage a lawsuit from being filed in the first place and improve the outcome of settlement negotiations. Accordingly, many clients look to trusts to protect their assets and gain peace of mind. In this blog, we will discuss how you can make sure your trust protects your assets.
Types of Trusts You Can Establish
The first thing to understand is that trusts can be revocable or irrevocable and can take effect during your lifetime or after your death.
Revocable trusts can be altered or terminated by the grantor (the person who creates the trust) at any time during the grantor’s lifetime. Also, the grantor has direct access to all the assets in the trust just like they did before they created the trust. Because the grantor has the ability to revoke the trust and complete use of its assets, revocable trusts are inadequate for asset protection for the grantor. As a result of the grantor’s power to revoke and access to property in the trust, the grantor’s creditors can successfully ask a court to step in and force distributions from the trust if the grantor owes money to the creditor.
On the other hand, the grantor cannot revoke an irrevocable trust (hence the name). The grantor also has limitations on changes to the trust terms, and most importantly, the grantor does not have direct access to the assets in the trust. Once an irrevocable trust is established, the grantor cannot revoke the trust and regain property given to the trust; access to trust assets is permanently lost (though it may be possible for the grantor to continue to live in or use real estate owned by the trust).
Thus, while revocable trusts provide no asset protection, irrevocable trusts are ideal in this regard. Moreover, assets in an irrevocable trust are better protected from future creditor attacks, lawsuits, or other threats levied against the grantor.
While you must establish an irrevocable asset protection trust to protect your assets during your lifetime, either type of trust can be designed to protect your beneficiaries.
How to Protect Your Beneficiaries
If protecting trust assets from your beneficiaries’ possible creditors is one of the aims of establishing a trust, key language must be added to a trust. This language is necessary to safeguard the assets you leave to the beneficiaries, who are frequently family members such as a spouse or children, from creditors. This language works by delegating (or withholding) authority to the trustee (the person or financial firm selected by the grantor) in how they manage the finances for the beneficiary.
A Spendthrift Provision in a Trust
The spendthrift provision empowers the trustee to withhold income and principal that would otherwise be distributed to the beneficiary if the trustee believes it will be spent or seized by the beneficiary’s creditors. This provision achieves two objectives. For starters, it stops a spendy beneficiary from wasting trust funds.
Secondly, the spendthrift provision shields trust assets from the beneficiaries’ creditors. Beneficiaries will face the same dangers as everyone else as adults: lawsuits, debt issues, divorce, failing businesses, and so forth. The spendthrift provision shields trust funds from your children’s (or other beneficiary’s) creditors by allowing the trustee the ability to withhold payments to an heir who owes money to someone else.
You Can Place Parameters on How Assets Are Distributed
In your trust agreement (the document you create that sets the rules for how your trust is managed), you can tailor your estate strategy. For example, you can specify conditions like age requirements before distribution can be made, or guidelines for how the assets will be used. For example, you can specify that the money in trust be distributed to your grandkids only when they reach the age of 21 and that the funds can solely be used for college tuition or other education before then. You could also limit how much money a beneficiary can get from the trust each year, or incentivize certain positive behavior (like regular employment), if they require extra support managing money.
Attend a Free Estate Planning Webinar
The world of estate planning doesn’t have to be a mystery. Commissioning the help of an experienced estate planning attorney can make all the difference in making sure you and/or your family are protected in the way you envision. We invite you to attend one of our informative and available on-demand estate planning workshops to learn more. Just by attending you will be entitled to a complimentary consultation with Promise Law.