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How Does an Asset Protection Trust Work?

How Does an Asset Protection Trust Work?

By: Barry E. Haimo, Esq.

May 18, 2015

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HAIMO: An asset protection trust, like any other trust, is created for the primary benefit of the beneficiary. It is administered according to the terms of the trust agreement. The designated trustee administers the trust in accordance to those terms for the benefit of the designated beneficiaries. A [self-settled] asset protection trust is no different, only the creator is the beneficiary, and also possibly the trustee.

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But what exactly is an asset protection trust? To understand this estate planning tool, you must first learn about the three roles that are involved with any kind of trust: the creator, the trustee, and the beneficiary.

The creator of the trust (sometimes called the settlor or grantor) is the person who puts their assets into the trust in the first place. The trustee is the person who is responsible for managing the assets in the trust after it is set up. And the beneficiary of the trust is the individual who will eventually receive the assets contained within the trust.

It’s important to realize that these three positions do not necessarily need to be different people—it’s possible for one person to perform all three roles. In fact, in an asset protection trust, the creator and the beneficiary are commonly the same person. Sometimes, this person performs the role of trustee as well.

Why Create an Asset Protection Trust?

Typically, an asset protection trust is meant to shield your assets from creditors and/or other outside parties.  Individuals who create asset protection trusts as part of their estate plan usually are seeking to shield their property from creditors. These trusts can also help you to reduce or avoid federal estate taxes if structured and executed properly.

Asset protection trusts are used in estate planning because outside interests can file claims against you during life and against your estate when you pass away. But this tool also extends beyond the realm of estate planning, and can be used in any context where you want to protect your assets from financial predators.  

How an Asset Protection Trust Works

There are two main types of trusts – revocable and irrevocable.

With a revocable living trust, the creator retains the power to modify the trust, revoke it, or appoint a new trustee. Basically, he or she still has power over the trust under the law. Because of this, revocable trusts offer no asset protection benefits. As a result, creditors are able to access the trust to enforce judgements against the creator.

Asset protection trusts, however, are irrevocable trusts.  The law and the tax code consider an irrevocable trust to be a wholly separate legal “person.” This “person” or entity is what owns the assets in the trust. By creating an asset protection trust, you give up your power to modify or revoke the trust, nor can you directly appoint a new trustee. Because you are no longer exerting any “dominion and control” (as is important in the tax code), no one filing a claim against you — your creditors, ex-spouses, or anyone else – can reach the assets contained in the trust to settle a judgement.

When it comes to asset protection, there are many ways to skin a cat. Asset protection trusts may be useflu, but are ont the only way to protect assets and wealth. If you are interested in learning more about asset protection trusts and other estate planning vehicles, contact us today for a consultation and we can discuss the options that are best for your particular situation.

Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose
Email: barry@haimolaw.com
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