Volume 9, Issue 3
The Wealth Advisor
How to Easily Integrate Asset Protection Trusts into Your Estate Plan
Asset protection has become a common goal of estate planning. Asset protection trusts come in many different forms and can be used to protect property for your use and benefit as well as for the benefit of your family. In this issue you will learn how you can easily integrate asset protection trusts into your estate plan.
What is An Asset Protection Trust?
An asset protection trust is a special type of irrevocable trust in which the trust funds are held and invested by the Trustee and are only distributed on a discretionary basis. The purpose of an asset protection trust is to keep the trust funds safe and secure for the benefit of the beneficiaries instead of having those assets be an available resource to pay a beneficiary’s debts.
Asset protection trusts come in two forms: third party trusts and self-settled trusts. A third party trust is set up by one party for the benefit of another, while a self-settled trust is set up by one party for their own benefit.
Third Party Asset Protection Trusts Equal Inheritance Protection
Leaving an inheritance outright to your child or grandchild without any strings attached is risky in this day and age of high divorce rates, lawsuits, and bankruptcies. Aside from this, your beneficiaries may not have developed the financial skills necessary to manage their inheritance over the long run. There is also the very real risk that an outright inheritance left to your spouse will end up in the hands of a new spouse instead of in the hands of your children or grandchildren. Finally, a beneficiary may be born with a disability or develop one later in life that will end up rapidly depleting their inheritance to pay for medical and other bills.
There are a number of different types of third party asset protection trusts that you can establish to insure your hard earned money is used only for the benefit of your family:
You can also make trust distributions as limited or as broad as you choose. For example, you can state that the funds can only be used to pay medical bills or for education, or the Trustee can be given broad discretion to make distributions in the best interest of the beneficiary. You may also want to require the Trustee to take into consideration the beneficiary’s income and other assets before making distributions. Alternatively, the Trustee can be given the authority to deplete the trust in favor of one beneficiary to the detriment of other beneficiaries. If there are multiple beneficiaries, such as a trust for the benefit of your spouse and your children, the Trustee can be directed to give preferential treatment to one or more beneficiaries over the others.
Self-Settled Asset Protection Trusts Are the New Frontier
The basic premise of a self-settled asset protection trust is that a person can transfer their own assets into the trust and retain a beneficial interest in the assets to the detriment of their creditors. Until the late 1990s, self-settled asset protection trusts were not recognized in the United States. Prior to this a self-settled asset protection trust was required to be established offshore in an exotic place such as the Cook Islands or the Cayman Islands. Then in 1997 Alaska became the first state to recognize self-settled asset protection trusts, followed closely by Delaware. Since then, a handful of other states have enacted self-settled asset protection legislation in some form, bringing the current total to fifteen:
Planning Tip: You should be aware that there are only a limited number of U.S. cases interpreting domestic asset protection statutes and this type of planning is still developing. Nonetheless, when layered with other types of asset protection planning, including liability insurance, third party asset protection trusts, and limited liability entities such as LLCs or corporations, a domestic self-settled asset protection trust offers another tool in your planner’s toolbox designed to put up roadblocks between your assets and your creditors.
The Bottom Line on Asset Protection Trusts
Asset protection trusts offer many planning opportunities for people of even modest means. We are available to answer your questions about asset protection trusts and help you integrate this type of planning into your estate plan.
Law Offices of Kimberly Lessing, APLC • 4740 Green River Road, Suite 117-H • Corona, CA 92880 • (951) 279-6626