We often get the question, “How does a trust protect my assets?” We must emphasize from the onset that if you have access to your trust assets, your creditors will have access to those assets as well.
There are trusts that protect your assets, but the most common trust, the Revocable Living Trust, does not protect your assets.
- Revocable trusts, which you continue to control, do NOT have asset protection. If you can control the terms of the trust or the trust assets, there is no asset protection.
- When you die, your revocable trust becomes irrevocable and the assets are protected as to the creditors of your beneficiaries (i.e. surviving spouse and children.)
- Irrevocable trusts, through which you relinquish control, have asset protection.
If a trust is irrevocable, in general, assets cannot be taken by the beneficiaries’ divorcing spouse, bankruptcy trustee, lawsuit creditor (i.e. malpractice claim or car accident plaintiff), or nursing home.
The Revocable Living Trust and Asset Protection
During your lifetime, your own Revocable Living Trust does not offer asset protection. Instead, you need comprehensive insurance, strong business planning, prenuptial/marital agreements, and, perhaps, irrevocable trusts.
However, when you die, the assets in your Revocable Living Trust can be held in trust (now, an irrevocable trust because you are deceased; you’re no longer around to change it.) Those assets held in trust have asset protection as to your beneficiaries’ creditors so long as:
- The assets remain in the name of the trust, and
- Your beneficiary is not the sole trustee of his or her own trust share.
The Irrevocable Trust and Asset Protection
Irrevocable trusts, which you cannot control, are beyond the control of your creditors. This means that the assets are protected and cannot be taken from you.
Irrevocable trusts are often used to protect assets from the nursing home, to own life insurance, and to protect assets for multiple generations.
A Note About Federal Estate Tax Reduction as a Form of Asset Protection
Although the term “asset protection” is typically used to refer to protecting assets from creditors and lawsuits, federal estate tax reduction is a form of asset protection as well.
After all, tax planning is used to prevent the reduction of your assets. Both the Revocable Living Trust and the multiple available irrevocable trusts are commonly used to avoid or minimize the federal estate tax.
- The Revocable Living Trust can be drafted to contain language that prevents the assets from going directly to the spouse at the Trustmaker’s death.
Instead, the assets go into a trust for the benefit of the spouse and children. This is called a “credit shelter trust” or “AB trust planning” or a “Family Trust.”
- Irrevocable trusts save federal estate tax dollars by owning assets; because the Trustmaker doesn’t own or control the assets at her death, they are not subject to taxation as part of her estate as long as the Trustmaker does not maintain some form of control or the ability to invade or enjoy the principal, among other IRS regulations.
Where to Get Asset Protection Legal Help
Asset protection is part of a comprehensive estate plan; consult with our qualified estate planning attorneys to determine how asset protection techniques can protect you and your family. You can reach our estate planning lawyers at 856-857-6007. Your next step is to contact our office. We look forward to hearing from you.