You may already recognize the need to have a comprehensive estate plan in place. That plan, however, should accomplish more than just directing the distribution of your estate assets after you are gone. In order for you to have any assets left to distribute, for example, you must protect the assets you acquire over the course of your lifetime. You may have heard that trusts are frequently used to protect assets. What type of trust protects assets though?
Why Is Protecting Your Assets Necessary?
If you take a minute to stop and consider the issue, you will quickly realize that there are a number of potential threats to the assets you have spent a lifetime acquiring, including:
- Divorce – this one is fairly obvious and something people often to think to protect against in their estate plan. Even in states without community property laws, a divorce could seriously threaten your assets if you do not make a conscious effort to protect them.
- Business failure – like many small business owners, you may think that by incorporating you are protected from personal liability for the debts and liabilities of the business; however, it may still be possible to come after you personally for debts and/or liabilities of the business.
- Gift and estate taxes – federal gift and estate taxes can wreak havoc with your estate plan if you have a moderate to large estate and you fail to incorporate sufficient tax avoidance strategies into your estate plan.
- Incapacity — what might happen if you were seriously injured in a car accident tomorrow? If those injuries prevented you from managing your assets, who would do so for you? The wrong person could seriously deplete your assets in a short period of time.
- Nursing home/long-term care expenses – nursing home/LTC expenses averaged over $80,000 per year across the United States in 2017. Although Medicaid will help cover your LTC costs, you must first qualify. If your assets exceed the limit when you apply you may be forced to “spend-down” those assets in order to qualify for much-needed help paying your LTC bill.
What Is a Trust?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A Settlor (also referred to as a “Grantor” or “Trustor”) transfers assets into the trust that is then administered by a Trustee, appointed by the Settlor. All trusts must have at least one beneficiary but may have many. Trusts fall into one of two categories — testamentary or living trusts with the former not activating until the death of the Settlor and the latter activating during the lifetime of the Settlor. A living trust can also be either revocable or irrevocable.
How Can a Trust Protect Assets?
A trust is one of the most effective asset protection tools when used correctly. Neither a testamentary trust nor a revocable living trust will work as an asset protection tool because assets held in either trust remain accessible to the Settlor and, therefore, part of the Settlor’s estate in the eyes of the law. Consequently, the law considers those assets to be fair game for creditors or spouses. In addition, those assets are counted as part of your “countable resources” when considering your eligibility for Medicaid as a senior if you ever need help covering the high cost of long-term care. Only assets transferred into an irrevocable living trust are truly protected because those assets become the property of the trust once the transfer is complete. The Settlor, therefore, no longer has a legal interest in the assets held in the trust. Consequently, assets held an in irrevocable living trust are not accessible by creditors of the Settlor or a spouse in a divorce, nor are they counted when determining eligibility for programs such as Medicaid. The key to using a trust as an effective asset protection tool is to work closely with an experienced trust attorney to ensure that you create the right type of trust.
Contact Illinois Trust Attorneys
Please join us for a FREE upcoming seminar. If you have questions or concerns regarding trusts, contact the experienced trust attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.