By The Wyoming LLC Attorney Team
May 28, 2022This article explores the concept of asset protection through trusts, particularly focusing on the distinction between revocable and irrevocable trusts. It emphasizes that while both types of trusts play a role in distributing assets, irrevocable trusts offer substantial protection against creditors and estate taxes.
The answer to the question, “Does a trust protect assets” has an ambiguous answer. It depends.
Deciding how to distribute your soft and hard assets after you die can be the most challenging decision you will ever make. You want to ensure that your beneficiaries receive the full value of your assets without the IRS and/or creditors trying to obtain their slice of the financial pie.
The law has established two broad types of trusts, revocable and irrevocable, that determine how your assets are distributed to heirs. However, only one irrevocable trusts provide a “Yes” answer to our question concerning the protection of trust assets.
You have two options when it comes to establishing a trust: revocable or irrevocable . Both types of trusts describe how your assets should be distributed to the beneficiaries you name in the trust. The distribution of assets to heirs defined by a living trust is similar to how a will works. However, a living trust does not require the grantor to go through the probate process, which can be costly and time-consuming. All you have to do with a living trust is name the assets and the beneficiaries you want to receive the assets upon your death.
The most significant difference between an irrevocable trust and a revocable trust is how effective each type of trust is at protecting assets.
After you sign an irrevocable trust agreement, a creditor cannot change or terminate the trust. Every asset moved into the trust becomes the responsibility of the trustee that you name. Since you no longer control the assets, the assets are not subjected to creditor claims or estate taxes (when done properly). In addition to the tax benefits, the assets in an irrevocable trust cannot be obtained by a creditor for liquidation into cash to pay for an outstanding debt.
Although controlling your assets placed in a revocable trust is considered an advantage, the fact that you control the assets makes them eligible for the application of estate taxes. In addition, with a revocable trust, your assets do not receive the same legal protection granted to the assets put into an irrevocable trust. This means creditors and lawsuit settlements have access to your assets to pay off what you owe each party. This is because a judge can order you to revoke a revocable trust.
Now that you know that an irrevocable trust is the best way to protect your assets, how do you set up an asset protection trust.
The trustee of your trust is responsible for distributing your assets after you die. This is a big responsibility, which means you must choose a trustee who will carry out every one of your wishes. Bank and investment accounts are relatively easy to distribute. However, the distribution of more complex assets such as vehicles and real estate can be much more complicated. During the asset distribution process, the trustee is responsible for keeping the beneficiaries updated on the status of the process, especially when it comes to the distribution of assets.
A Dynasty Trust may also be used to avoid direct distributions. With this method, the assets continue to be held in trust for future generations and are distributed only as needed.
To safeguard your assets and ensure they go to your chosen beneficiaries as intended, the establishment of an irrevocable trust is recommended. However, given its complexity, establishing a trust may not be the ideal solution for everyone. If you believe that forming a trust is the right estate planning tool for you, working with a family law attorney can help you draft a legally sound irrevocable trust.