April 2013
Protect Assets Now or Later with a Trust
There are many potential threats to your net worth — or to the legacy you leave for your heirs. Among them are overall economic forces, a volatile stock market and taxes. Another important threat to consider (especially if you’re an entrepreneur or in a profession that can lead to frivolous litigation) is creditors. And if your heirs are in such lines of work or are simply not good at managing money, creditors could ultimately take a large bite out of the assets you’ve gifted or bequeathed. One solution is to place assets in a trust.
Trusts 101
Trusts can be a great way to protect your assets — but the trust must become the owner of the assets and be irrevocable. That is, you as the grantor can’t modify or terminate the trust after it’s set up. This is the opposite of a “revocable trust,” which allows the grantor to modify the trust. Once you transfer assets into an irrevocable trust, you’ve effectively removed all of your rights of ownership to the assets and the trust. The benefit is that, because the property is no longer yours, it’s unavailable to satisfy claims against you.
Placing assets in a trust won’t allow you to sidestep responsibility for any debts or claims that are already outstanding at the time you fund the trust. There may also be a substantial “look-back” period that could dissuade you from creating such a trust. So it’s a good idea to set up an asset protection trust long before a potential threat to your assets arises.
Safeguarding family assets
If you’re concerned about what will happen to your assets after they pass to the next generation, you may want to consider a “spendthrift” trust. Despite the name, a spendthrift trust does more than just protect your heirs from themselves. It can protect your family’s assets against dishonest business partners or unscrupulous creditors.
The trust also protects loved ones in the event of relationship changes. For example, if your son divorces, his spouse generally won’t be able to claim a share of the trust property in the divorce settlement.
Several trust types can be designated a spendthrift trust — you just need to add a spendthrift clause to the trust document. This type of clause restricts a beneficiary’s ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets. But a spendthrift trust won’t avoid claims from your own creditors unless you relinquish any interest in the trust assets.
Bear in mind that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, it’s possible for government agencies to reach the trust assets to, for example, satisfy a tax obligation.
You can gain greater protection against creditors’ claims if you give your trustee more discretion over trust distributions. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, give the trustee full discretion over whether and when to make distributions.
Relocating a trust
Offshore trusts are similar to domestic trusts with the exception that they’re located in a foreign country — one with more favorable asset-protection laws.
When using an offshore trust, you may keep the trust assets in the United States. But relocating them to the country where you establish the trust generally offers greater protection. This is why offshore trusts are typically funded with cash or securities that can be readily moved, rather than with real estate or other property that could be seized by a U.S. court.
Why you can trust in trusts
Whatever type of trust you’re considering, make sure you work closely with your financial advisor and your attorney. They can provide insight on which trust will work best in your circumstances and can help you navigate the more intricate issues.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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