Asset Protection Trusts

Posted Sunday, September 30, 2018

Not long ago, family trust asset protection schemes were thought to be reserved for the wealthy. Today it appears that if you find the right coupon, you can get asset protection trusts with a Happy Meal. And to make matters worse, there are several misconceptions and myths about what a trust does and does not do. Not everyone needs a trust but then again your unique circumstances might need the benefits of asset protection trusts. Note the plural use of trusts- Yes, you might actually need more than one. Let’s tell a story first.

Many estate planning attorneys run trust mills and simply jam your square peg into the everyday estate planning round hole by using a family trust for asset protection. Consider this- which month has the most death rates? January with 244,000. Second place? December with 242,000. Let’s say you die this winter of excess Green Bay Packers celebration, and your spouse waits the obligatory four or perhaps six weeks of mourning, does a crash diet and then hits match.com.

Let’s say your spouse remarries. We all tell our spouse, “Of course honey, should I die, I want you to be happy with someone else.” It is the right thing to say of course, but do we really mean it? Anyways, let’s say your spouse marries another person, yet dies early from a random cement truck. Karma is wonderful. But watch out..

Without proper estate planning, a person you never met might own all your assets. In other words, your kids might not get one darn penny of the money you worked so hard to accumulate, preserve and eventually transfer. Some other match.com person who fell for the photos from 1998 is now sitting on a pile of money that you earmarked for Junior. Yuck.

Recap- You die. Spouse remarries. Spouse dies. New spouse has all the money. Kids could be out.

A Will does not solve this problem. Generally speaking, most states have rules preventing you from disinheriting your spouse. Using a family trust for asset protection and transfer might not elegantly solve this problem either. Remember the plural use of asset protection trusts? Yes, a trust for you and a trust for your spouse, separately, could be the answer.

Bottom line, you need help from an estate planning attorney who can guide you through this. Please contact us for additional information on how to find one.

We just exposed a possible problem with the one size fits all approach to estate planning with family trusts (a single trust scenario). Another misconception is the asset protection nature of trusts. Most trusts are created as revocable, and the main purpose is truly probate avoidance instead of creditor shielding. Huh?

When revocable living trust is created, commonly you name yourself as the trustee. This allows you to maintain control over all the assets within the trust. If your home is titled in the name of the trust, you can sell it, burn it down, paint it purple, etc. Assets are placed into the trust for your benefit. A revocable living trust as the name implies allows you to also revoke the trust and shut it down. Because of these “features”, common living trusts do not shield assets from creditors and lawsuits.

There are more robust estate planning schemes that can protect your assets. Irrevocable trusts (note the “ir” part), limited liability companies (LLCs), family limited partnerships, and using certain assets such as homes and retirement accounts that have built-in protection in certain states. Again, you need help from an estate planning attorney. Contact us to get connected with trusted attorneys who will be your advocate.

We discussed some of the gloom and doom of your garden variety trust situation. What are some of the benefits? First, trusts avoid probate. For example, if you own a rental in California, have a ski condo in Colorado and live in Florida, your heirs will need to start probate proceedings in three states. Expensive. Time-consuming (12-18 months). Probate is the process of transferring your assets to your heirs. Wills DO NOT automatically avoid probate.

Another benefit is the robustness of asset transfer. Wills are often contested, and trusts typically hold up when someone complains. Probate proceedings are public as are most court related matters. A trust allows for the private transfer of your assets to your heirs. Money makes people crazy, and the last distraction your heirs need is a bunch of vulchers.

Consider that the average inheritance is spent in 18 months. If you want to ruin a 30 year-old’s life, give him/her a million dollars. Asset protection trusts can stretch your assets to your heirs over time. For example, beneficiaries get $20,000 per year until they all reach the age of 50, and then the trust distributes the remaining assets. Your imagination is the only limited factor.

There are also some really cool things you can do with charities. William and Anna Vilas gave 63 acres to the city of Madison, Wisconsin under the condition that it be used “for the uses and purposes of a public park and pleasure ground.” William was a law professor at the University of Wisconsin and had a son named Henry who was five years old and died from diabetes. Today the Henry Vilas Zoo has over 750,000 visitors and doesn’t charge for admission or parking as stipulated by the asset transfer. Very cool.