How to Use Trusts for Asset Protection

With any degree of wealth comes a certain amount of risk. Even if you aren’t massively wealthy, you still have assets that could come under attack, such as retirement funds, real estate, a small business, and life insurance plans. If you go through a divorce, face a civil lawsuit, declare bankruptcy, or face other scenarios in which creditors may come into play, you need to make sure you have these assets well protected.

One way to safeguard valuable assets is through a trust.

How Does a Trust Work?

At its very core, a trust is a legal agreement that allows a third party (the trustee) to hold assets on behalf of beneficiaries. The agreement stipulates when and how those assets are released to beneficiaries, and it can structure in many different ways. The trustee manages the trust and dispenses funds to your beneficiaries per the agreement’s specifications.

Since someone else holds your assets on your behalf, you don’t technically own them in the eyes of the law. Therefore, they cannot be seized by creditors in the event of a legal judgment or lawsuit if it’s structured properly.

Of course, there is far more to asset protection trusts, and they must be carefully structured in order to be effective.

Irrevocable Trusts

In order to be effective in asset protection, a trust must be irrevocable. This means that once the trust is formed, you cannot make adjustments to it or manage the assets held within it. A revocable trust, on the other hand, is more flexible, but it doesn’t offer as much protection—indeed, in certain cases, it’s treated almost as if it doesn’t exist.

Irrevocable asset protection trusts come in two primary categories:

  • Lifetime trusts, which are established during your lifetime
  • Testamentary trusts, which are set up in a will and go into effect after you pass away

Each category includes various types of trusts that are designed for different circumstances. This means a good asset protection plan will often involve more than one type of trust.

Varieties of Trusts—A Multifaceted Approach

Among the various forms of trusts are the following:

  • Medicaid Planning Trusts
  • Family Bank Trusts
  • Domestic Asset Protection Trusts (DAPT)
  • Standalone Retirement Trusts
  • Discretionary Trusts
  • Irrevocable Life insurance Trusts (ILIT)
  • Lifetime Qualified Terminable Interest Property (QTIP) Trusts

These can all benefit you in various ways, but choosing the right type of trust for your situation will depend on the following factors:

  • The types of assets you hold
  • Whether you qualify for certain government programs such as Medicaid
  • Your family situation
  • The amount of professional liability you have taken on
  • The scope and shape of your estate plan, will, and so forth

In addition to choosing the right trust for your situation, you also need to make sure it is properly structured.

Structuring an Asset Protection Trust

Trust agreements and their legal implications can be highly complex, so it’s important to make sure they are designed well. Hart David Carson LLP can provide you with the legal services you need to protect your personal assets with a trust.

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