Most clients understand that living trusts are valuable components of an estate plan. But when asset protection is a primary goal of your estate plan, revocable trusts are not necessarily the way to go. The fact is, revocable trusts do not provide asset protection from legal claims or creditors. If you have the ability to take assets out of a revocable trust as a trustee, then your creditors have the same ability to enforce a judgment against you. But, there are other options available that you should discuss with your estate planning attorney.
Why revocable trusts cannot protect assets
When you create a revocable trust, and in particular living trust, you usually name yourself as the trustee so that you can retain control over your assets during your lifetime. That is the main reason revocable living trusts are so popular – the trust is revocable so you can make changes or revoke the trust at any point during your lifetime. This allows for flexibility to account for changes in your assets, financial status, and family. However, because you maintain the ability to use the trust property as you wish, to sell it or give it away without restriction, these assets essentially still belong to you. Therefore, those assets remain within reach of creditors.
Create your asset protection plan
Although revocable trusts are not effective for accomplishing asset protection, there are other ways to protect your wealth, through an appropriate asset protection plan. This plan must be created before claims and legal liabilities arise, though. If not, asset transactions may be seen as violations of the “fraudulent transfer” law, which could have serious consequences. Because most people cannot easily determine when a legal claim may arise, it is best to start your asset protection planning now. Once you have been served with a demand for payment or a lawsuit, it is likely too late to plan.
What you need for asset protection
A trust is still the most common estate planning tool for asset protection, but it must be an irrevocable trust – where assets are transferred to the trust under management by an independent trustee. “Irrevocable” means the terms of the trust cannot be changed later on. Because of this, the assets transferred to an irrevocable trust are considered to be removed from your estate putting them beyond the reach of creditors. Simply put, asset protection means analyzing your assets and arranging them in a way that provides the most protection possible. Done properly, you can protect all of your assets from the unexpected risk of loss, without fraud or tax evasion. So long as a legal claim or liability doesn’t arise for a statutory period of time, those assets can be kept out of the reach of creditors.
Proper asset protection planning is legal
A common misconception most people have is that asset protection requires surreptitious transactions for the purpose of evading and deceiving. However, that is not true at all. Everyone has the right to structure their assets in a way that is financially beneficial. This can easily be done within the limits of the law. Actually, the only time fraud becomes an issue is when it is clear the intent was to hinder, delay, or defraud creditors from collecting legal debts.
Determining who may be potential creditors
One of the most challenging components of asset protection is determining who may be a potential creditor. The better you are at determining where potential claims may arise, the easier it will be to create an effective asset protection plan. The key is to be able to create a strategy for protection against particular claims that will limit your exposure to liability.
There are still benefits to having revocable trusts
One of the primary goals of revocable trusts is to avoid probate and the time and expense it requires. Unlike assets that are passed on through a will, assets in a trust are inherited without the need for probate. This can be a great benefit when you consider the cost of the probate process and the time it takes to complete the process. Probate can cost between four and ten percent of the estate’s full value and can take anywhere from 6 months to a year, or longer. The actual cost will vary depending on your family situation and the complexity of your estate.
Other benefits of a revocable living trust
Living trusts are a type of revocable trust that become effective during your lifetime, allowing you to retain control of your trust assets while you are alive. Upon your death, your successor trustee takes over control of the trust and will manage the assets as you’ve directed in your trust agreement. The good thing about a revocable living trust is that your successor trustee can also take over if you become incapacitated. This type of provisions can be extremely beneficial in case of illness or an emergency situation making it difficult for you to continue to manage your own affairs, and will avoid the laborious and intrusive process of petitioning for a judicial guardianship or conservatorship.
If you have questions regarding revocable trusts or any other estate planning issues, please contact Anderson, Dorn & Rader, Ltd. for a consultation, either online or by calling us at (775) 823-9455. Attend a free seminar about revocable living trusts and their benefits!