Trusts are one of the most important tools in estate planning, and they can fill a variety of needs. An estate planning lawyer Orange County can help you iron out the details and protect your finances.
Asset protection trusts are designed to keep your assets out of reach from creditors and they’re especially useful if you suspect you may become involved in a lawsuit.
What is Asset Protection Trust and How Does it Work?
An asset protection trust (APT) is specifically designed to protect your assets from creditors. To effectively guard your assets, your trust must be irrevocable.
That means that you won’t be able to make changes to the terms of your trust, and it also means that the assets in your trust aren’t under your direct control. These features are what keep your assets safe from creditors.
Instead, an irrevocable asset protection trust places your trustee in legal control of everything in the trust. The trustee manages those assets on your behalf, but they aren’t legally considered yours.
Key Parties in an Asset Protection Trust
The grantor, also known as the settlor, is the person who creates the trust. In the case of an APT, this person is also one of the beneficiaries.
Setting assets aside in an APT means that in most situations, they won’t be considered your property and won’t be taken into consideration in lawsuits or by creditors.
A beneficiary is a person who is eligible to receive distributions out of a trust. Oftentimes, the beneficiary in an APT is yourself. That’s the case if you are trying to protect yourself from creditors.
If you’re using an APT to pass money on to family or friends after your death, someone else is the beneficiary. They can choose to leave their money in the trust until they need it, to avoid losing the money in divorce or to creditors.
A trustee can be a person or a financial institution like a bank. The trustee of your APT is the entity that is responsible for managing the trust and is also considered the legal owner, which is how those assets stay protected from creditors.
However, the trustee’s job is to distribute the assets within a trust according to the terms set. They will also handle taxes for the trust.
Why Protect Your Assets? 3 Reasons to Have an Irrevocable Trust
There are several possible reasons you may want to take steps to protect your assets. An APT isn’t a good fit for everyone, but for some people, it’s a logical choice and a great way to preempt lawsuits.
Business owners should consider creating an asset protection trust. Owning a business normally means keeping a certain amount of liquid assets, and those are vulnerable to employee-related lawsuits.
If you are in a line of work where being sued is a distinct possibility, that’s another reason to have an irrevocable trust to protect your assets. The right trust will keep your funds out of reach of anyone who files a lawsuit against you.
Lawsuits may be a concern for people with public-facing jobs or who are otherwise public figures. Serving on the board of an organization or non-profit, for example, could expose you to legal threats and other concerns.
Sometimes, an irrevocable asset protection trust is the best way to pass money on to your heirs, especially if you have concerns about their ability to handle money. A probate attorney Orange County can tell you more about using an APT as part of your estate planning.
An APT can keep the money safe for them during a divorce, for example, If your heir has special needs, an APT trust will help you provide for them without causing them to lose their state benefits.
Where Do You Set Up An Asset Protection Trust?
There are both domestic and international APTs. The domestic option can be more flexible and is generally more affordable. International APTs charge higher fees for the most part, but they also offer more privacy.
Currently, only 17 states in the US allow asset protection trusts, but it’s possible to set one up outside your state of residence. States have different laws governing trusts, so it’s best to weigh your options with a lawyer who has expertise in the area.
Some factors you may want to take into consideration include:
- State taxes
- Local asset protection laws
How Do You Create an Asset Protection Trust?
The first step to creating an asset protection fund is to find a trustee. Your trustee can be a bank or an individual. People often choose an attorney to serve as a trustee for their legal expertise.
You will then need to create a trust document with your trustee. This document creates trust as an entity that can hold your assets separate from your personal finances.
It’s a good idea to have an attorney’s input because these documents are often complex. It’s important to correctly establish your trust, otherwise, it won’t serve its intended purpose.
After the trust is established, it’s time to transfer your assets into it in order to fund the trust. For real estate and property like cars, you’ll need to change the ownership name from your own name to the trust’s name.
If there’s no documentation of ownership for a particular asset, you’ll need to list it on a document along with your other assets and sign ownership over to the trust.
The Bottom Line
If you want to keep your assets intact for yourself and your loved ones, an asset protection trust may be the solution. This option will keep your assets safe from creditors, litigation, and more.
An asset protection attorney can help you determine if a trust is the best way to protect your assets, and guide you through the process.
For a free consultation to learn more about your options, contact us at McKenzie Legal & Financial today.