Many people who create living trusts are under a misconception that the trust protects the assets that are included in the trust (we say “funded into” the trust). But a living trust, also called a revocable trust, does not afford any more protection during the life of the trust creator (called the grantor) than the protection that exists under the law without the trust.
There are however circumstances in which the trust that you create can be used as an effective asset protection tool – sometimes for you, as the grantor, and sometimes for your beneficiaries.
If the trust that you create limits the distributions to be made to you, as the beneficiary, and if you put control of the trust into the hands of an independent trustee, then the trust assets will have greater protection from your creditors. To accomplish this purpose, you need to work with your Estate Planning Attorney to properly create the language of the trust.
Two elements are particularly important here: First, your trust must either limit distributions by an ascertainable standard or by reference to the trustee’s exclusive discretion.
Second, and equally important, the trustee must be an independent trustee. This means that the trustee cannot be a person who is ‘interested’ in you (as transferor or beneficiary) because they are related or subordinate to you, and the trustee cannot be able to be removed and replaced by you as an alternate trustee or replaced with another person who is related to you or is subordinate to you.
If one of your goals is to protect the trust assets for those like your children who will be beneficiaries after you pass away, then separate protections can be included in the trust declaration document to further that goal as well.
Your Attorney can help you by reviewing the reasons for your interest in focusing on protection of your assets from your creditors (for example, risky business ventures or a job with heightened risks). Then the Attorney can review existing laws that protect your assets, and then help you to determine whether your estate planning trust should have special provisions.
If you are unsure if your current trust takes into consideration asset protection considerations, or if you are interested in exploring and creating a trust, reach out to the Attorneys at Marc D Sherman & Colleagues, PC.
