Setting up an asset protection trust can be an effective way to leave a financial legacy for one or more beneficiaries. This trust does one thing, and it does it well.
Asset protection trusts protect your assets from creditors.
Setting up a trust meant to protect your assets from creditors makes sense if you are concerned that your assets will be vulnerable for liquidation because of a lawsuit settlement or a judgment issued by a civil court judge.
If you are considering establishing a trust to protect your assets from creditors, you should learn how the trust works and create one that meets all legal criteria.
How Does an Asset Protection Trust Work?
An asset protection trust is different from every other type of trust because it serves one primary financial purpose: To protect your assets from creditors. The trust may also provide effective strategy for setting up future generations to run a family business, ensuring end of life wishes are met and minimizing estate taxes.
If you set up a trust to transfer assets to designated family members, you have the option to establish a revocable trust. You retain the legal power to add or remove assets and tell the trustee how to manage the assets on behalf of each beneficiary. An asset protection trust is irrevocable, which means that every asset transferred into the trust is protected and cannot be revoked by a judge.
What are the Types of Asset Protection Trusts?
You have two options for setting up this type of trust: Domestic and Foreign. A domestic asset protection trust is drafted according to the laws of Wyoming for example. You can set up this type of trust in particular states that have enacted laws that permit the formation of asset protection trusts.
Foreign asset protection means the trust protects your assets according to the laws that govern trusts in the jurisdiction where you set up the trust. If a creditor wins a lawsuit against you for not paying off a debt obligation, only the laws of the jurisdiction in which you established the trust apply to the enforcement of the court’s decision against you.
What are the Advantages and Disadvantages of an Asset Protection Trust?
By far, the most significant benefit is to protect your assets from liquidation in the event of an adverse judgement. You should consider setting up an asset protection trust if you run personal or business risks. For example, you receive legal protection against personal injury claims if you protect your assets in this type of trust. You also shield your business assets from creditors who are after you because you defaulted on a business loan or line of credit.
This type of trust allows your beneficiaries to avoid the probate process after your death. Probate is a public court supervised process which can lead to family fights and unnecessary expenses. Probate can take a considerable amount of time, as well as cost you a lot of money.
The primary disadvantage of this type of trust is that it is complex and generally requires the assistance of advisors.
The Bottom Line
Another drawback of an asset protection trust is that it can be time-consuming to set up. However, by working with a family law lawyer, you can speed up the process, as well as determine which of your assets need to be protected against creditors and lawsuit settlements. Schedule a free evaluation with us to learn more about setting up this type of trust.