If you want to shield investments and property or reduce assets to qualify for Medicaid, an asset protection trust provides a viable option if you live in a state that allows them. A trust is a legal structure that owns assets under a separate name and is under the control of a trustee. Claimants to the assets will still have access unless the creator of the trust, known as the settlor, does some careful advance planning when establishing the trust.
Revocable and Irrevocable Trusts
With a revocable trust, the settlor retains the authority to change the trust, revoke it, or appoint a new trustee to manage it. In effect, the settlor keeps control over the trust property, even though there is a new legal owner. Creditors and the IRS also have access to trust assets to enforce judgments against the settlor. For that reason, an asset protection trust must be irrevocable, meaning the settlor removes his rights of ownership. For the purpose of sheltering assets, you can establish an asset protection trust in another state, or a foreign country.
Read More: Blind Trust Vs. Revocable Trust
Location, Location, Location
As the settlor, your first decision when setting up an asset protection trust is the location of the trust. If the trust remains within the United States, several considerations go into this decision. You may consider if the state levies income tax on trusts, as well as the statute of limitations for creditor claims and judgments.
Other considerations include the state law limit on access to trust assets and whether there is an exception for child support or alimony. Many states also have laws on fraudulent transfers, and if you transfer assets into a trust away from creditors, you may be subject to a fraudulent transfer action. Trust attorneys are generally familiar with their own state's laws, and also recognize a few states that offer high barriers to claims. Some states, such as Georgia, will not allow you to make your own asset protection trust.
Creating a Trust
To set up an asset protection trust, you must create and sign a document that establishes the trust. The document must name the trust, appoint a trustee, indicate the purpose of the trust, provide instructions to the trustee and name beneficiaries who will receive property on the death of the settlor.
State laws govern the validity of trusts; however, in most states, the document must be witnessed and notarized. An attorney experienced in trusts and estates, or an online legal document provider, can provide a standard structure and language that allows the trust to meet the requirements of the law.
Unlawful Trust Transfers
In setting up an asset protection trust, as the settlor, you must be aware of the laws on fraudulent conveyance. Moving assets out of the way of creditors during a pending lawsuit would be one example of fraudulent conveyance. Setting up a trust and donating investments to it just before declaring bankruptcy would be another. If a court finds fraudulent conveyance, it can allow a creditor access to assets in a trust and order other penalties. The IRS also has an extremely long reach while in pursuit of unpaid taxes.
Another alternative for asset protection is an offshore trust, established under the laws of a foreign territory. Many countries enhance such friendly havens by limiting access by foreign entities. Doctors, accountants, stockbrokers and other professionals use offshore trusts as insurance against lawsuits. With the help of an attorney, you can create an offshore trust without leaving your home, and for even greater confidentiality, through a representative.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.