At the heart of any well thought out estate plan should be a roadmap for the distribution of estate assets to loved ones upon the death of the individual creating the plan. Your plan, for example, likely includes a Last Will and Testament as the foundation from which additional estate planning tools and strategies have grown over the years. As your estate has grown and increased in value, you have probably updated and revised your estate plan to account for that growth. At some point in time, your estate planning attorney may have suggested, or may yet suggest, the addition of an asset protection trust to your estate plan. Only your estate planning attorney can help you decide if you need an assets protection trust; however, understanding how an asset protection trust works and why one might be a good addition to your plan is a good place for you to start.
Your Growing Estate
People are often confused with regard to when they should start estate planning because they are often under the common misconception that it is necessary to have a large and/or valuable estate before an estate plan is required. The truth, however, is that every adult should have at least a basic estate plan in place. As the estate grows, both in value and complexity, and as the planner’s needs change, the plan should be updated accordingly. While a basic estate plan will direct the distribution of your estate assets after you are gone, a comprehensive estate plan can help grow those assets while you are alive, protect you and your loved ones from things such as your incapacity, and continue to provide for your loved ones after your death. For your growing assets to accomplish all of this, they must be protected from threats, both known and unknown. This is where an asset protection trust can help.
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Trustor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiary of a trust can be an individual, a charitable organization, or even the family pet. Beneficiaries can also be current beneficiaries or future beneficiaries.
Trusts are broadly divided first into two categories, testamentary and inter vivos, or “living”, trusts. A testamentary trust is one that does not activate until the death of the Settlor and is usually triggered by the Settlor’s Last Will and Testament while a living trust is a trust that takes effect as soon as all formalities of creation are in place and the trust is funded.
Living trusts are then further sub-divided into revocable and irrevocable living trusts. A revocable living trust is one that can be changed, amended, revoked or modified by the Trustor of the trust at any time, for any reason, or for no reason at all while an irrevocable living trust, cannot be changed, amended, modified or revoked for any reason by the Trustor, except as specifically provided, for example, to change the manner of distribution to beneficiaries. Because a testamentary trust is triggered by a Will, which can always be revoked or modified up to the point of the Testator’s death, a testamentary trust is a revocable trust.
How Does an Asset Protection Trust Fit into an Estate Plan?
An asset protection trust is an irrevocable living trust that is used to protect estate assets, as the name implies. People are often unaware of the various legal threats to their hard-earned assets, such as divorce, bankruptcy, or excessive medical bills during retirement years. Because an asset protection trust is an irrevocable trust, the assets you transfer into the trust become trust assets. The trust is a separate legal entity that takes over control of the assets once transferred into the trust. Consequently, those assets remain out of reach of creditors, ex-spouses, or anyone else trying to get to them. Assets held in an asset protection trust are also not included when calculating the value of your “countable resources” for the purpose of determining eligibility for Medicaid, something you may find yourself doing if you (or a spouse) need long-term care down the road. As the of the trust, however, you can continue to benefit from the assets through the creation of trust terms that provide continued benefits to you and any other named beneficiaries. In short, an asset protection trust does exactly that – protects your assets.
For more information, please join us for an upcoming FREE seminar. If you have additional questions about an asset protection trust, contact the experienced estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.