Asset Protection Trusts

An Asset Protection Trust can be used to protect personal property, bank accounts, real property, business interests, and other types of assets from creditors and litigants. Once you transfer your assets into an Asset Protection Trust, they are no longer owned by you. The trust becomes the owner of those assets, placing them beyond the reach of lawsuits filed against you.

Placing your assets into an Asset Protection Trust that you own, removes you from direct ownership, but leaves you with the beneficial use of those assets and control over them. However, these types of trusts have some limitations.

The protection provided by an Asset Protection Trust is only applicable if the assets are placed into your trust before you are sued, or know that a claim is about to be filed against you. What’s more, an Asset Protection Trust is an irrevocable trust, meaning that after it is created and funded it cannot be amended or revoked. However, it is this irrevocability that enables a properly created Asset Protection Trust to withstand attacks from creditors.

If you are concerned about being sued in the future and wish to protect your assets from potential creditors and litigants, consult with an experienced estate planning attorney to find out if an Asset Protection Trust might be right for you.

What Is a Self-Settled Trust?

Asset Protection Trusts are self-settled trusts. This is essentially a trust that a person creates for themselves and with themselves as the beneficiary. Self-settled trusts are common in estate planning. In fact, most of the irrevocable living trusts used in estate planning are self-settled trust.

Traditionally, states frowned upon self-settled trusts, because of concerns that they might easily be used by individuals to wrongfully escape valid creditor claims. These days, however, many states have laws allowing self-settled trusts to be created to provide creditor protection for trusts and their beneficiaries.

How a Self-Settled Asset Protection Trust Works

Once assets are placed into an irrevocable trust such as an Asset Protection Trust, they can only be removed based on the terms of the trust itself. What's more, an Asset Protection Trust contains what are referred to as spendthrift provisions, which put limits on how the trust assets can be accessed by the beneficiary and others.

The most powerful of all spendthrift provisions provides protection from creditors. When these provisions are used, creditors cannot reach trust assets, even if the beneficiary uses the trust assets and/or receives income distributions from the trust. This is where an Asset Protection Trust derives its effectiveness.

How to Create an Asset Protection Trust

An Asset Protection Trust is simply a special form of ownership created by a document called a trust agreement. The terms detailed in the trust agreement outline how the trust assets can be used and the purposes for which the trust is being created.

That said, there are many pitfalls that can plague an individual who attempts to create an Asset Protection Trust without the assistance of a qualified professional. This is why it is important to enlist the services of a qualified estate planning attorney, who has experience forming Asset Protection Trusts, to assist you.

An Asset Protection Trust must contain special terms that protect the trust assets from creditors. Therefore, there are some issues that you and your estate planning attorney should consider when creating your Asset Protection Trust:

  • What types of creditors and lawsuits do you want to protect against? An Asset Protection Trust will not protect you from current lawsuits. What kind of risks do you anticipate in the future?
  • In which state will you create your asset protection trust? If your state does not allow self-settled Asset Protection Trusts, you can form in another state that does.
  • Who will you choose to be the trustee of your Asset Protection Trust? Your trustee should be an individual or entity located in the state where you will form your trust.
  • What assets will you place in the trust? Some assets may have to be moved to the state where your trust is created. This can be a problem when it comes to real estate since it cannot be moved.
  • What types of distributions will you allow from the trust, and to whom? You may want to give your trustee the ability to approve discretionary distributions to you, and your loved ones as well.

Why Create an Asset Protection Trust to Protect Your Assets?

You can never be sure that you won't be sued. Also, you can never be confident that, if you are sued, you will be treated fairly by the legal system.

Furthermore, the more assets you have the more likely you are to be sued. This is where an Asset Protection Trust can help.

The protection provided by your Asset Protection Trust will remove the financial incentive for the lawsuit, making you an unattractive target for lawsuit predators. This is because a judgment written against you will not be enforceable against the assets held in your Asset Protection Trust.

This is not to say that an Asset Protection Trust will prevent you from ever being sued. However, it can make potential creditors and litigants far less likely to pursue a clam against you. After all, why would anyone spend the time, money, and effort to pursue a futile lawsuit?

Contact an Experienced Estate Planning Attorney

Given how litigious our society has become, consider how your life would be changed if a lawsuit wiped out all or most of the assets you have built up. Also, think of how you would feel knowing that you could have avoided losing your assets if you had only taken the necessary steps to properly protect them.

If you desire the peace of mind that comes with knowing that you have done all you can to protect the assets that you have spent a lifetime building up, contact an experienced estate planning attorney to see if an Asset Protection Trust makes good sense for you.