Living trusts are estate planning tools used for transferring property at death. These trusts go into effect during your lifetime and allow quick distribution of assets after your death by avoiding the cumbersome and public probate process. Some trusts offer asset protection in a variety of ways. A revocable trust does not protect assets from your creditors, but when those assets pass to your beneficiary, they can be protected.
You, the "grantor," create and fund a revocable trust by retitling and redeeding your assets in the name of the trust. A "trustee" is named to administer the trust and hold property on behalf of your "beneficiary." As with all trusts, the attractive feature of a revocable trust is that it avoids probate. A revocable trust can be changed or revoked during your lifetime and you maintain control over the assets. Thus, you can also remove assets that you have placed in the trust. However, trust assets are not protected from your creditors because you are still considered the owner and have access to assets held in the trust.
Protecting Your Assets
In contrast to a revocable trust is an irrevocable trust. Assets placed in an irrevocable trust are protected from your creditors. However, there is a drawback: an irrevocable trust cannot be canceled by the grantor and assets placed in such a trust cannot be removed. These assets are protected from creditors because you no longer own or control them. If you have liability concerns, placing your assets in an irrevocable trust may be something to consider.
Assets passed to a beneficiary through a revocable trust can be shielded from his creditors by way of a "spendthrift" clause. A spendthrift clause allows you to instruct the trustee to pay your beneficiary on a set schedule. For example, a spendthrift clause can be used if a beneficiary has money management problems. Spendthrift trusts can be established to pay your beneficiary for life or until a set age. For example, the clause could instruct the trustee to pay your beneficiary $15,000 every year until he reaches the age of 30. By law, once trust assets pass to your beneficiary, they are no longer protected from creditors. However, creditors cannot demand payment of trust assets from the trustee.
Asset Protection Trusts
An "asset protection trust" is a self-titled spendthrift trust, or a trust that you can set up for yourself (and other beneficiaries). It has the creditor protections of an irrevocable trust but you maintain control and access to trust property, as with a revocable trust. You can also be a beneficiary during your lifetime. These trusts are not common inside the United States; in fact, only five states allow them.The trustee is usually a trust company not operating in the United States. These trusts are regularly established in off-shore jurisdictions, such as the Cayman Islands and the Bahamas. Assets held in trust by a foreign trustee are protected from creditors who have a U.S. court-issued judgment against you for money damages. U.S. courts have no power to enforce a judgement on a foreign trustee that has no presence inside the U.S.
- Ablestock.com/AbleStock.com/Getty Images