No matter how much control you feel you have over your assets, they are almost always at risk of lawsuits and creditor attacks when not secured in the correct type of trust. Time and time again, people fall victim to the misconception that putting assets in a revocable living trust automatically protects them from creditor claims, and this isn’t true.
While some level of control over your assets is undoubtedly desirable, relinquishing control can help you better protect your assets and give you more financial freedom. It may initially be tough to loosen your grip over your assets, but putting them in an asset protection trust is the best way to safeguard them from creditors, lawsuits, and judgments.
What is an Asset Protection Trust?
An asset protection trust is a type of self-settled spendthrift trust that offers protection from creditor attacks. It is a valuable wealth protection tool that can even help prevent lawsuits from happening.
In a typical asset protection trust, the settlor or grantor who creates the trust is also the trust’s beneficiary. That said, the creator of the trust no longer has direct control over their assets. Instead, a trustee appointed by the settlor of the trust oversees the assets.
Because the trust’s creator no longer owns the assets put into an asset protection trust, they cannot be subject to lawsuits or creditor claims. If you technically own no assets, there is nothing for creditors to seek from you. You can put anything from cash, securities, cryptocurrency, companies like LLCs, and real estate into an asset protection trust.
One common feature of all asset protection trusts is that they are irrevocable. This feature is often misunderstood. While it is true that once the trust is established it is irrevocable, which means it is effectively permanent and cannot be changed, a well-drafted trust will allow you to change the terms of the trust, through the use of a trust protector, to suit your stated objectives for creating the trust. If more severe changes are desired which are beyond the power of the trust protector, a well-drafted trust will also provide you with the flexibility to remove assets. So, while the trust is permanent, if necessary, you can remove all or some of the assets from the trust and put them into a new trust that has more desirable terms. While these are extreme measures, it is comforting to know you have these options available to you should you encounter extreme circumstances.
There is a common misconception that putting your assets into a revocable trust automatically protects those assets from the reach of creditors. In reality, many different types of trusts exist, but only irrevocable asset protection trusts protect you from liability claims.
In fact, a revocable trust offers very little, if any, protection against creditors. There are ways to defend revocable trusts against creditors, such as making the trust jointly owned. Although, simply having a joint-owned trust does not put the trust in its entirely out of the reach of creditors.
While a revocable living trust should be included in your estate plan, it should not be used to protect your assets.
What are the Benefits of an Asset Protection Trust?
For the most part, asset protection trusts offer similar benefits to an estate plan, with the added benefit of protection against creditor claims and lawsuits. That said, an asset protection trust is not an alternative to an estate plan, nor are the two in competition. Instead, we counsel a client with a comprehensive approach, evaluating asset protection, estate planning, tax planning, and any other legal or financial concerns together. This is how we’re able to offer maximum protection against creditors, lawsuits, and unexpected threats as they may arise.
We blend these concerns together into a master asset protection plan backed by asset protection strategies that offer you the following benefits:
- Safeguarding your assets from creditors and lawsuits
- The ability to designate who will inherit your assets
- Minimizing expensive estate taxes
- Maintaining privacy over your assets and the transfer of your wealth
- Planning for incapacity
- Sidestepping the lengthy and complicated probate processes
Although you no longer own your assets on paper, once they are put into an asset protection trust, you do retain some level of say-so. For instance, you can retain the ability to remove and appoint trust protectors who in turn have the ability to remove and appoint trustees. We refer to this as indirect control, which is exactly the level of control you need to make your trust and asset protection trust. So, if your trustee does not do as you instruct, your trust protector can remove and replace your trustee with a different trustee who will. And if your trust protector does not do as you instruct, you can remove and replace your trust protector with one who will. In reality, these are very extreme measures that are very unlikely to be necessary. Your trustee and trust protector are on your team, and are there to help you. You are paying them for their services and they will almost always do as you instruct.
One time when your trustee and trust protector will not do as you instruct is when you have been compelled by a court to instruct them. For instance, if a court orders you to instruct your trustee to transfer assets in your trust to a creditor, your trustee will not follow this instruction as the terms of a well-drafted asset protection trust will provide that your trustee is not to follow any instructions that are made under duress. Often referred to as a “compulsion clause” or “duress clause”, this is an indispensable term of your asset protection trust that allows your assets to remain safe and protected, even when facing a court order to the contrary.
Another common feature of a well-drafted asset protection trust is that they are typically “directed trusts”. A directed trust is one in which you retain the right to advise your trustee as to how to invest the trust assets. The trustee of a directed trust will only invest assets as instructed by you. For instance, you can instruct your trustee to open a brokerage account and invest in certain equities and bonds. If you prefer not to work through your trustee, you can instruct your trustee to form an LLC to be owned by your trust, to name you as the manager of the LLC, and to transfer a certain amount of funds into the LLC. As the manager of the LLC, you can then invest those funds with a brokerage and purchase the desired equities and bonds yourself, with no involvement from your trustee.
These are just some quick examples of how you can use your asset protection trust to invest your assets. You can invest in nearly any asset class you desire, from real estate to businesses to cryptocurrency to commodities. There is tremendous flexibility and many different ways to structure your investments.
Asset protection trusts can also help you plan for rising long-term care costs, such as nursing homes, assisted living, and home caregiver fees, something a standard estate plan may not offer. An asset protection plan protects any assets in the trust from long-term care costs. Note that asset protection trusts must be established well in advance of a need for long-term care.
Who can Benefit From an Asset Protection Trust?
Asset protection trusts aren’t the right fit for everyone. Individuals who benefit most from asset protection trusts are those who have accumulated significant wealth, say $5 million or more, which makes you a more attractive target for creditors who are looking to capitalize on your financial success.
Likewise, certain people who have a career or lifestyle that makes them more likely to be sued should consider putting assets in an asset protection trust – such as doctors liable for medical malpractice claims, business owners liable to creditors and employment lawsuits, or real estate investors who are likely to be named in a lawsuit for just about anything that happens at any one of the many properties in their portfolio.
Still wondering if asset protection is right for you? If your career or lifestyle fit the following descriptions, you should consider securing your assets in an asset protection trust:
- You have a high net worth, or you work in a high liability profession (e.g., surgeon, general contractor, etc.)
- You have high visibility, which makes you easily trackable, traceable, and easy to collect from – especially if you sit on corporate or non-profit boards or your financial worth is publicly available
- You have a profession which is subject to heavy government regulations that may be difficult to fully comprehend or keep track of in terms of compliance (e.g., a pilot, a truck driver)
- You are an employer, and you may potentially be personally exposed to lawsuits filed by company employees
- You have a stake in a business that holds assets or generates profits (e.g., real estate development or owning rental properties)
- You have significant status – enough to give the impression of substantial wealth
Don’t Wait to Secure Your Wealth in an Asset Protection Trust
When it comes to protecting your assets, you need to be proactive, not reactive. Establishing an asset protection trust well before lawsuits and creditor claims are even in sight is the best and safest way to preserve and protect your wealth.
Remember that asset protection trusts are costly and irreversible once established, so it’s essential to consult with an asset protection and trust attorney to get it right the first time. If you are seeking a comprehensive solution to your asset protection needs, the asset protection lawyers at Sollertis help clients every day to organize, set up, protect and grow wealth. Take the next step to protecting your assets better with less control, and contact our law office today.