Asset Protection Trust

Asset Protection Trust

1. What is an Asset Protection Trust?

An Asset Protection Trust is a trust established through a deceased person’s estate plan typically for benefit of a surviving child(ren).  Although the term “Asset Protection Trust” could generally describe many types of beneficiary trusts, it usually refers to a trust established for a responsible and healthy adult beneficiary.  The trust is drafted to continue for the lifetime of the beneficiary, rather than end at a predetermined time or age of the beneficiary.

The beneficiary usually serves as sole trustee or has the right to name an independent trustee; hence, an Asset Protection Trust is commonly referred to as a “beneficiary-controlled trust.”

The Asset Protection Trust is used as an alternative to outright distribution when the amount of inheritance is expected to be substantial (generally more than $100,000).  Its protective features are promoted as gifts to the beneficiary that cannot be obtained without formal estate planning.

2. What are the benefits of an Asset Protection Trust?

By receiving inheritance in a trust, rather than receiving inheritance outright, the beneficiary can protect assets from various threats:

  • Estate tax protection.  If properly structured, the trust assets may be exempt from the federal and\or state estate tax upon the death of the beneficiary.  When calculating the taxable estate of the deceased beneficiary, the trust assets would not be counted.
  • Creditor protection.  The trust assets are shielded from creditors of the beneficiary, even if insurance is insufficient to satisfy a judgment obtained by lawsuit.  The trust can be drafted to provide enhanced levels of protection, if desired.
  • Divorce protection.  The trust assets are separate property of the beneficiary and may not be converted to community or marital property during marriage.  This prevents an ex-spouse from penetrating the trust should the beneficiary’s marriage end in divorce.
  • Family protection.  The trust may be drafted to ensure that family assets pass to the next generation rather than to surviving spouses who may remarry.  This protects the intent of the original owners, who may want the assets distributed to grandchildren.    

3. When is the Asset Protection Trust established?

The provisions for an Asset Protection Trust are drafted into a will or living trust document.  In most cases the Asset Protection Trust would not be funded with any assets until after the death of the original owner or death of the second spouse.  In some cases, the trust is established during the lifetime of the original owner, but this requires an irrevocable gift and usually loss of control over the gifted assets.

4. How is the Asset Protection Trust established?

Depending on whether the provisions for the Asset Protection Trust are contained in a will or living trust, the executor or trustee – as the case may be – will be responsible for creating the trust during the weeks or months following the original owner’s death.  The process involves (1) formally appointing a trustee, (2) preparing a Certification of Trust, (3) applying for the Taxpayer Identification Number, and (4) opening an account in the name of the trust.

5. Who should serve as Trustee?

In many cases the beneficiary will serve as trustee.  However, if creditor protection is a paramount concern or if the beneficiary is not mature and responsible, the beneficiary should not serve as trustee.  Rather an independent trustee should be appointed.  This enhances the level of creditor protection by eliminating the conflict of interest held by a beneficiary who also serves as trustee.  If an independent trustee is appointed, the beneficiary may retain a right to remove and replace the independent trustee.

A flexible option is to name the beneficiary as initial trustee and grant the beneficiary a power to and appoint an independent successor trustee.  This gives the beneficiary discretion to choose the level of creditor protection desired or needed.

This is a brief summary of some of the features of an Asset Protection Trust. Please feel free to discuss with us in greater detail.