For many people, one of the primary reasons for creating an estate plan is to ensure that the assets they spend a lifetime accumulating are distributed according to their wishes at the time of death. If that applies to you then there is something else you need to also consider in your estate plan – asset protection. Unless you protect the assets you own, there won’t be anything left to pass down to your intended beneficiaries at the end of your life. A trust can be an excellent asset protection tool if it’s the right type of trust. The asset protection attorneys at Hedeker Law, Ltd. explain why the type of trust you create is extremely important.
All trusts start out the same. A trust is created by a Settlor, also referred to as a “Maker,” a “Trustor,” or a “Grantor.” The Settlor transfers title to some or all of his or her property to a Trustee, who then holds title to that property in trust for the benefit of the beneficiaries. The beneficiaries of a trust may be anyone you wish, including family members, charities that are important to you, or even the family pet. You can also mix charitable and non-charitable beneficiaries in the same trust or include current and future beneficiaries. Almost any type of assets can be used to fund a trust, including real and personal property, securities, cash, and even the proceeds of a life insurance policy. As you can see, trusts are extremely flexible which is the primary reason why it is so common to see at least one trust agreement in the average estate plan.
All trusts fall into one of two general categories. The first is a testamentary trust which does not activate until a provision in the Settlor’s Will causes it to activate upon the death of the Settlor. A living trust, as the name implies, is a trust that activates while the Settlor is alive and as soon as all formalities of creation are in place. Living trusts can also be divided yet again into two categories – revocable and irrevocable living trusts. If you create a revocable living trust you retain the ability to modify or revoke the trust at any time and for any reason, or without providing a reason. On the other hand, if you establish an irrevocable living trust you can never modify nor revoke the trust for any reason. This distinction between revocable and irrevocable living trusts is crucial when discussing the use of a trust as an asset protection tool.
What Type of Trust Can Be Used to Protect Your Assets?
If you hope to be able to pass down assets to your loved ones upon your death, accumulating sufficient assets is certainly necessary; however, you must also protect those assets from a wide variety of threats over the course of your life as well if you hope to still have them at the end of your life. An irrevocable living trust can help you do just that.
Assets transferred into an irrevocable living trust become the property of the trust from a legal perspective. In contrast, assets transferred into a revocable living trust may still be considered to be your property in the eyes of the law. The rationale behind this is simple. If you retain the ability to transfer the asset back to you, as is the case in a revocable living trust, then you retain an ownership interest in the asset. Because you cannot access an asset that has been transferred into an irrevocable living trust, you do not retain any ownership interest in the asset.
Because you retain no ownership interest in the asset, it is no longer considered part of your estate. Consequently, the asset cannot be part of a division of assets in a divorce, cannot be attached by a creditor, nor lost to the Medicaid “spend-down” requirement.
If asset protection is an important estate planning goal for you, speak to your estate planning attorney about using a trust to help achieve that goal to ensure that the right type of trust is used and that the right language is used within the trust agreement.
Contact Asset Protection Attorneys
Please download our FREE estate planning worksheet. If you have questions or concerns regarding asset planning and how it interacts with your overall estate plan, contact the experienced asset planning lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.