Many Americans think of a trust as a financial instrument that is used by the ultra-wealthy. There is also the perception that trusts allow the super-rich to avoid paying taxes. The fact is a trust can help Americans at any level of wealth to achieve financial goals. You probably have already established a simple trust by designating a child as a beneficiary on a bank account.
Let’s answer the question, “What is a trust?” before learning why you should create one and which type of trust does the best job of protecting your assets.
What is a Trust?
A trust represents a financial tool that divides the ownership of property. The holder of the legal title is referred to as the trustee, who manages the property based on the terms listed in the trust for the benefit of all named beneficiaries. Trusts can be either revocable or irrevocable. A revocable trust allows you to change the terms of a trust, while an irrevocable trust does not give you that level of flexibility. You have to follow the terms of an irrevocable trust without altering the terms.
The difference between an irrevocable trust and a revocable trust is important because some assets do not work well in an irrevocable trust.
Why Should You Protect Your Assets in a Trust
Why should you establish a trust? The answer is to protect your assets. Why do you need to protect your assets? The answer is to protect you and your family, as well as your business and investments.
Lawsuits and Creditors
With the correct type of trust, you can protect your assets from creditors and lawsuit settlements. This is especially true for business owners who have a considerable amount of assets tied up in their businesses. Running a business puts you in the legal sights of a wide variety of people, from relatives to disgruntled ex-employees. The right kind of trust protects your assets from liquidation to cover the cash value of a settlement.
The right kind of trust can also prevent your creditors from accessing your assets. This reason for establishing a trust applies to both individuals and business owners.
If you have drafted a legally valid will, your assets should pass on according to your wishes after your death. However, there can be complications that derail your financial plans. A trust offers a much greater degree of asset protection by clearly designating who gets what assets. By setting up the right trust, you prevent common issues like heirs squandering your estate, children arguing over how much they should receive, and charities that you designate to receive assets never getting them.
What Types of Trusts Protect Your Assets
There are three types of trusts that protect assets:
- Asset Protection Trust
- Bypass Trust
- Totten Trust
The most effective protector of assets is an asset protection trust (APT). It is specifically created to prevent creditors and lawsuit settlements from obtaining access to your assets. Because the trust is under the ownership of a trustee, banks and credit card companies cannot legally request possession of the assets to pay off debts. You have to set up an irrevocable trust to keep all creditors and lawsuit settlements away from your assets.
Not every state allows the creation of asset protection trusts. However, if you live in a state that prohibits them, you might qualify to establish an APT in another state. To learn more about protecting your assets and possibly setting up an APT in another state, contact the Cloud Peak Law Group to schedule a free case evaluation.