What is involved in creating an asset protection trust, and who should consider taking this step? An asset protection trust serves a number of purposes, but as the name implies, its primary purpose is to protect the assets of an individual or family.
What Is an Asset Protection Trust?
An asset protection trust holds the assets of an individual or family and keeps these assets out of the reach of creditors. There is also usually a motivation of keeping the assets of a family from estate taxes. Very few states recognize asset protection trusts, and there are important limitations on what can be done with assets once they are placed into this trust. First of all, an asset protection trust must be irrevocable, which means that once it’s created it’s very difficult to change. Another typical limitation is a “spendthrift clause,” which limits the ability of family members to use the assets of the trust as security for investments or debts.
You should consult an estate planning lawyer if you are considering taking such a step. It can have far-reaching implications for your financial management.
Who Should Create an Asset Protection Trust?
Obviously, creating an asset protection trust is a complex set of transactions, and should not be undertaken lightly or for the wrong reasons. Here are some qualifying reasons to consider setting one up.
Exposure to adverse creditor action is one factor that might motivate you to set up an asset protection trust. If creditors are threatening to take your family assets, holding them in such a trust may give you more leverage in reaching a settlement with them. But since setting up this trust also involves considerable expense, the extent of these creditor’s claims should be carefully considered against this cost.
Concern about estate taxes is another reason to create an asset protection trust. But there is a degree of wealth that is subject to estate taxes even if an asset protection trust is created, so you need to consult an estate planning lawyer to understand what your options are.
Finally, it’s important to understand that such a trust is irrevocable. This may greatly limit your options should your situation change. It is incredibly difficult to change an irrevocable trust.
An asset protection trust is an appropriate vehicle for high wealth individuals who need to shield assets from creditors and/or estate taxes. They have important limitations and they don’t work for every situation. Talk to a Sacramento estate planning lawyer before counting on this as an option.
Thanks to the Yee Law Group for their insight into estate planning and asset protection trusts.