Asset Protection Q & A

Q: What exactly is “asset protection?”

A: The term “asset protection” is often used to describe one of the key benefits obtained by holding valuable assets in a trust – namely, that such assets cannot be reached by creditors, predators, or even ourselves if we are unfortunate enough to lose mental capacity.

Q: Can asset protection be achieved by having a revocable living trust?

A: It’s a common misconception that as soon as you transfer assets to your revocable living trust, they’re protected from your creditors. This is simply not the case.

To make it simple, assume that a trust creator’s only asset is a large bank account, which she holds in her revocable living trust. If someone sues the trust creator and gets a judgment against her, they could obtain recovery from the trust bank account. But when the trust creator dies, the trust becomes irrevocable. The terms of the trust will direct that the bank account either (a) continues to be held in trust for the named beneficiaries or (b) is distributed to them outright.

Now assume, for the sake of example only, that the trust directs the Trustee to continue holding half of the bank account in trust for Daughter, and to distribute the other half of the account to Son outright. As long as the bank account proceeds continue to be held in trust, they are there when Daughter needs them but protected from Daughter’s creditors. As soon as Son’s half of the money is distributed to him, it loses protection from Son’s creditors. If Son is married, his inheritance could even be exposed to his spouse’s creditors or possibly taken by the spouse if they divorce.

Thus, the answer to this question is yes, but only with respect to protection from a beneficiary’s creditors (and not with respect to the trust creator’s creditors).

Q: Can asset protection be achieved by any other methods?

A: Yes. Creating a limited liability company (LLC) or limited partnership to hold assets can provide an asset protection solution in certain circumstances. Creating certain types of irrevocable trust, such as a domestic asset protection trust (DAPT) or a retirement plan trust, to hold and protect assets may be appropriate in others. We would be happy to discuss your particular asset protection concerns and explain what the best options are for resolving them.