Asset Protection vs. Living Trust

There is a difference between traditional Trust planning and Asset Protection planning. Traditional Trust planning is a straightforward process wherein a Living Trust is usually established so that, among other things, when you pass away, your assets will flow to your survivors with no need for probate.

Trust planning is good for you and your family, but not good enough to protect your hard-earned assets from creditors and ruinous lawsuits. But Asset Protection planning can provide layers of protection to safeguard your wealth and preserve your legacy.

What is a Living Trust?

A Trust is an ownership arrangement between the person who creates the Trust, called the Settlor, and the person designated to manage the Trust assets, called the Trustee. A Living Trust is one that you create while you are alive and well, as opposed to a Testamentary Trust, which can be created by your Will when you die.

When you create a Living Trust, you must then transfer your valued assets into it. The Trustee will then manage the Trust Assets according to the terms of the Trust Agreement, which dictates, among other things, how the designated Beneficiaries of the Trust will have access to the Trust Assets and/or any income they generate.

What Are Living Trusts Used For?

Living Trusts are primarily used for organizing the management of your personal, financial, and other needs if you become incapacitated, providing for your loved ones during your life and after, minimizing taxes, and enabling your assets to avoid probate.

Does a Living Trust Protect Your Assets?

A Living Trust can provide Asset Protection for the Beneficiaries of the Trust, such as your spouse or children. But a Living Trusts typically does not provide any Asset Protection for the Settlor.

This is because, unless you are using an Irrevocable Living Trust, though you relinquish legal title to the assets you put in a Trust, you retain Beneficial interest and control of those assets. Also, you can revoke the Trust at your discretion.

Because you retain access and control of the assets in your Living Trust, they are still within the reach of creditors and lawsuits and can be attached to satisfy your debts and liabilities.

What is Asset Protection?

Asset Protection is the process of implementing strategies to shield your assets from potential creditors and claimants. Asset Protection can also extend to protecting the assets that you leave behind for your loved ones from being lost to creditors, bad investment decisions, divorce, and poor choices.

Most individuals can benefit from some form of Asset Protection, but some can benefit from Asset Protection more than others. These include people who are engaged in certain investment activities or who are inherently vulnerable to lawsuits, such as real estate investors who rent out property, physicians, who are subject to malpractice suits, and high net worth individuals, who are more attractive targets for predatory lawsuits.

Why is Asset Protection Important?

When you consider that a lawsuit is filed once every 15 minutes in the United States, it's easy to see how the ever-present threat of an unexpected lawsuit can be very worrisome. Asset Protection is important because, without it, a lawsuit or civil claim could wipe out the hard-earned assets that you intend to leave behind for your loved ones.

How Does Asset Protection Work?

The goal of Asset Protection is to raise the cost and trouble someone has to go through to get to your assets. To achieve this goal, several effective asset protection tools can be used, each with its own advantages and disadvantages, including:

  • Irrevocable Living Trusts;
  • Asset Protection Trusts;
  • Limited Partnerships;
  • Limited Liability Companies; and
  • Liability Insurance

These instruments and others are often used in combination to form a comprehensive and highly effective Asset Protection strategy.

So, Why Create a Living Trust?

If a Living Trust will not provide Asset Protection for me, why should I bother to create one? There are many good reasons why you should want to create a Living Trust, most importantly:

  • Asset Protection - for your spouse and children.
  • Incapacity Planning - a Living Trust enables you to plan for periods of incapacity, and avoid the need for a conservatorship, when you become incapacitated and need someone else to handle your affairs.
  • Probate Avoidance - this is probably the biggest reason why people create a Living Trust. Probate avoidance can save your heirs time and money gaining access to your assets after you die, and allow the affairs of your estate to remain private.

If any one of these Trust planning goals is what you are looking to achieve, contact an estate planning attorney to assist you with creating a properly drafted and funded Living Trust.

Likewise, if you are looking to protect your wealth from potential creditors and claimants, have a discussion with your estate planning attorney about Asset Protection Trusts, Irrevocable Trusts, advantageous business structures, and liability insurance, which can all be used in conjunction for a highly effective Asset Protection strategy.

An experienced estate planning attorney can help protect what you have worked hard to achieve. Your attorney can answer all of your questions, including those about Asset Protection, Living Trusts, and how you can incorporate both into a comprehensive estate plan.