Posted by Andrew Feldman
In their basic form, trusts protect your assets by removing them from your personal ownership. There are numerous types of trusts that can be set up for specific reasons, such as protecting your assets from creditors, lawsuits or even future beneficiaries.
Asset protection trusts and spendthrift trusts, in particular, are valuable additions to estate planning especially for business owners or individuals with large estates. It is important to note for all types of asset protection trusts, assets must be moved before any legal action or creditor claims occur, including cases of divorce. These are proactive, not reactive, protection vehicles for your assets.
Read “Trusts 101: Understanding the Basics” to learn more about revocable and irrevocable trusts.
There are two main types of asset protection trusts to be aware of: domestic and foreign.
A domestic asset protection trust (DAPT) is a type of trust established within the U.S. that allows individuals to protect assets from creditors while still retaining some control and access to the assets placed in the trust. It is important that the DAPT is established in the same state in which the assets are held, or the trust loses its ability to protect them from creditors and other individuals who may want to lay claim. The owner of the trust doesn’t have to live in a DAPT state, but the assets they wish to protect do.
Currently, only 19 states allow for domestic asset protection trusts (DAPTs):
A foreign asset protection trust (FAPT) is established outside of the U.S. and is perceived as offering more asset protection then a DAPT, since an FAPT is outside the reach of U.S. domestic courts. The trust is subject to the laws of the country where the trust is established.
However, if the assets remain in the U.S., they may not be as protected as those assets actually moved out of the U.S. and held in a foreign country. Another consideration is that an FAPT can cost significantly more to establish than a DAPT, so conducting a cost/benefit analysis is important.
Asset protection trusts are complex; consult with an attorney regarding your specific situation.
A spendthrift trust, or a trust with a spendthrift clause, can protect assets from a future beneficiary’s creditors or from the beneficiary themselves.
A spendthrift trust creates a restriction on the beneficiary as to how they are able to use any potential assets once they inherit them from the trust. That restriction is a key defense against any potential creditors, as they would not have any access to the assets. The grantor will have the ability to set the parameters for when the beneficiary can receive distributions. This gives the grantor more control over how the assets of the trusts are distributed to beneficiaries, which gives the power of asset distribution to the trustee.
All individuals and their estate planning needs are unique. Using a mix of trust types and planning techniques can build an estate plan that works best for you and your beneficiaries. Working with your attorney and tax advisers, it’s always important to check in with your estate plan as you move through business and personal milestones, or generally every three to five years, as needed.
Contact Andrew Feldman, Joe Falbo or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.