Using Trusts in Asset Protection Planning
UPDATED: June 19, 2018
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Living trusts are used by millions of people who wish to keep their assets from going through probate when they die. Most living trusts, however, are not adequate for protecting assets from creditors because the trusts are revocable. This means that the person setting up the trust can revoke or change the terms of the trust at any time. If you have a revocable trust, and you can get control of the assets, the courts have consistently held that your creditors can also get control of those assets.
Trusts that are irrevocable can be more successfully used to protect assets. Once you set up an irrevocable trust, you cannot change the terms or revoke it. In essence, you have given your assets away; they are no longer available to satisfy claims against you. A judgment creditor cannot get to these funds.
Types of Trusts Used for Asset Protection
People have used trusts to protect their assets for generations. There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:
- Spendthrift trusts- A spendthrift trust is a trust created for a beneficiary whom the grantor or trustor (person who creates the trust) considers irresponsible with money. The trustee can be one and the same as the trustor, or it can be a third party. The trustee keeps control of the trust income, doling out money to the beneficiary as needed, and sometimes paying third parties (creditors, for example) on the beneficiary's behalf, bypassing the beneficiary completely. Spendthrift trusts typically contain a provision prohibiting creditors from seizing the trust fund to satisfy the beneficiary's debts. These trusts are legal in most states, even though creditors hate them.
- Discretionary trusts– A discretionary trust is an irrevocable trust that allows the trustee the discretion to make or not make distributions of benefits to the beneficiaries. It provides asset protection for both the trustor and the beneficiary.
- Support trusts– An irrevocable trust where the trustee is to provide for the beneficiary’s support (housing, food, school tuition, etc.), but not luxuries. It can be mandatory or discretionary.
- Personal trusts– A personal trust is a trust that you create to ensure your assets are managed according to your wishes. It will only protect your assets from creditors if it is irrevocable.
- Self-settled trusts– If you create a trust for your own benefit, you have established a “self-settled trust”. If the trust instrument contains provisions that prevent your creditors from reaching your interest in trust assets, the trust is known as a “self-settled spendthrift trust” or more commonly, an “asset protection trust”.
- Asset Protection trust – An asset protection trust is the name for an array of trust arrangements established for the sole purpose of protecting assets from the claims of others that might arise through legal action.
Getting Help Establishing Your Trust
Since certain claims can pierce protective trusts set up in the United States, (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, and the Cook Islands). Some of these do not honor judgments made in the United States. For further information about setting up an offshore or foreign trust, contact an attorney or financial expert in the area of asset protection. Be sure to understand what claims your assets are and are not protected from before you establish any trust.