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Trust and Asset Protection

Asset Protection Trust

An asset protection trust is a financial term that covers a wide range of different legal concepts. Basically, asset protection trust is another term for a discretionary trust. In a discretionary trust, property is held in trust by a trustee, to be transferred to the recipient (the beneficiary). It is called a discretionary trust because the property is released to the beneficiary at the "discretion" of the trustee—that is, according to their own judgment rather than according to a fixed condition.

Most asset protection or discretionary trusts do however contain certain guidelines that the trustee is to follow regarding the property distribution. This will help provide protection for the property owner, as well as for the property itself.

Asset Protection And Asset Protection Planning

Asset protection refers to the specific methods that a person may use in order to secure their property from creditors, government seizures, and private lawsuits. Asset protection is a broad field, and involves many different areas of law, including:

Protecting assets requires a considerable amount of planning, as well as a working knowledge of all areas of law that are involved with property ownership.

Asset protection planning is the process of applying those lawful methods. This has the effect of making it difficult or even impossible for future creditors to seize your assets, or collect judgments against you. An example of this would be how bank accounts are generally more easily seized by creditors than a home that is shared with a spouse. Because of this, asset protection planning largely considers the difference between exempt and nonexempt property.

Some of the most common examples of assets that are generally exempt from attack by future creditors include:

  • Public and private retirement benefits;
  • Household furniture and furnishings;
  • Personal items, such as clothing and jewelry;
  • Disability and health benefits;
  • Life insurance and annuity policies;
  • Social security benefits; and
  • Tools of a trade or business. This is because seizing such property would render the debtor unable to work, and as such unable to pay back their debt.

When significant sums of money are involved, asset protection planning involves setting up a series of trusts or partnerships in order to hold legal title to your assets. A future creditor may be aware of how difficult it would be to collect on any judgment that they may win against you and could decide that the effort would not be worth the outcome. Asset protection is generally only an issue when the asset's owner is in debt, as a creditor may seek to claim the debtor's property in order to compensate themselves for the debt or missed payments.

Common Asset Protection And Planning Techniques

Asset protection can quickly become a complicated undertaking due to how many different areas of law are involved in the process. Additionally, the process involves several steps. Whenever property is either purchased or obtained, there are some steps that the owner can take in order to increase security, as well as ensure their ownership of the asset in the years to come.

Some of these steps include, but may not be limited to:

  • Purchasing Insurance: Some property can be backed by insurance, such as vehicles and houses. Insurance assists the property's owner in replacing the property, or recovering some of the property's cost in the event that the property is ever lost, damaged, or stolen. Property insurance and title insurance are two of the most common examples of asset protection insurance to take into consideration;
  • Utilize a Written Contract: Disputes associated with who actually owns a piece of property can generally be avoided by utilizing a written contract for all significant sales transactions. Doing so provides a record of the sales and exchange terms for future reference. Additionally, a written contract could prove to be invaluable evidence should any legal disputes arise later on; or
  • Avoid Going Into Debt: While this may sound obvious, one of the best ways to avoid having your assets seized in order to repay a debt is to avoid going into debt in the first place. An example of this would be to avoid missing payments on homes, mortgages, cars, and other major purchases so that you may avoid having a lien placed on the property. If you find that you are becoming unable to make your regular payments, you should contact your creditor as soon as possible, as they may be willing to work with you.

There are many traditional forms of estate planning that can be effectively utilized to protect assets. Some other asset protection planning techniques include:

  • Gifts of Property: Gifts of property remove the assets from your estate, and as such lessen the risk of attack from creditors. An example of this would be how if you give your farm to your child, your creditors will likely not be able to seize the property because it no longer belongs to the debtor. However, this tactic does put the recipient at risk of having the property seized by their own creditors; or
  • Business Options: By conducting your business as a corporation, limited liability company, or limited partnership, you are afforded a degree of liability protection. This could also provide various tax advantages.

It is imperative to note that there are some basic tax reporting laws that you should be aware of, especially those that involve exempt and nonexempt property. Categorizing property as exempt as opposed to nonexempt may have different asset protection results, but there are some circumstances in which that would not actually be legal. Consulting with an attorney can ensure that you adhere to your state's specific laws regarding the matter. 

Benefits of Asset Protection Trusts

Thus, asset protection trusts can be beneficial and are associated with a number of different advantages, such as:

  • Provide the trustee with a greater amount of control and decision-making regarding property distributions
  • Protect against waste by the beneficiary
  • Protect against unwise spending or investing by the beneficiary
  • Help the property owner to maintain records of their property distributions
  • In most instances, the property is no longer considered taxed under the person's estate once it is transferred to a trust

For instance, if the beneficiary is younger, the asset protection trust might contain instructions for the trustee to make the distributions at a later period in time. This will help avoid common pitfalls such as overspending, which is common amongst younger beneficiaries. Also, some asset protection trusts offer various tax incentives and benefits.

Dispute Over an Asset Protection Trust

Some common asset protection dispute trusts may involve:

  • Persons claiming that they are beneficiaries to the same property
  • Violations of trustee duties 
  • Illegal or unauthorized transfers of trust property

These types of disputes are often resolved through the filing of a lawsuit. In most cases, the court will order a damages award to help the plaintiff party recover losses. In some instance, the court may order the property to be transferred to a specific person or party. This all depends on the facts in each dispute. 

How Can A  Lawyer Help Me With An Asset Protection Trust?

There are many different types of asset protection trusts, each with their own distinct characteristics and features. You may need to hire a trust lawyer if you need assistance creating or revising a trust arrangement. Also, you may consult an experienced attorney near you if you need to file a lawsuit due to a trust dispute. Your attorney can represent you in court so that you can recover damages or obtain other similar legal remedies.