Can a Living Trust Help with Asset Protection?

Most likely, one of the  major reasons you decided to sit down and  create an estate plan is to ensure that loved ones are financially secure should something happen to you. You want to make sure that you assets are passed down and/or available to continue to provide for loved ones in your absence. Of course, that presumes you have assets left to pass down when you die. One way to increase the likelihood that you will still have substantial assets left to pass down is to also include asset protection as one of your estate planning objectives.

Recognizing Threats to Your Assets

Like most people, you may  not have considered assets protection as an important estate planning component because you may never have considered the fact that your assets are at risk. In truth, however, no one is completely immune from threats to their hard-earned assets. For example, consider the following common threats that could jeopardize your hard-earned assets:

• Major illness or injury — if the illness/injury is serious enough you may suffer a considerable loss of income and incur substantial medical bills that could force you to liquidate assets to pay those bills.
• Creditors — An  economic downturn, a business failure, or your own incapacity could all put your assets at risk. Your assets could be at risk if you are a co-signer and the primary borrower defaults on the loan.
• Your Divorce – North Dakota is an “equitable distribution” state for assets and debts in a divorce. Non-marital assets should be safe in a divorce, people frequently co-mingle non-marital assets without even realizing it which can put those assets at risk in a divorce.
• Divorce of a Beneficiary – if you gift assets to a married adult child and then that child goes through a divorce, those assets could end up in your (now ex) son-in-law’s or daughter-in-law’s hands which is unlikely your plan.
• Long-term Care Costs – the longer you live, the better the odds of needing long-term care at an average yearly cost of  over $80,000. Unless you can qualify for Medicaid benefits you may have to use your assets to cover the cost of care; however, Medicaid may require you to use those assets first if they are available.   A specialized type of asset protection planning known as “Medicaid planning” can help protect your assets while still ensuring that you qualify for help from the Medicaid program.
• Spendthrift Beneficiaries – maybe it’s because of an addiction problem, marital problems, loss of a job,  or just being horrible at managing money, but a beneficiary could easily squander your hard-earned assets if you don’t protect them.  Gifting assets outright to a spendthrift beneficiary puts your assets directly at risk.

Testamentary vs. Living Trusts

All trusts are first divided into two broad categories — testamentary and inter vivos (living) trusts. A testamentary trust is one that only activates a the time of your death, usually triggered by your Last Will and Testament. A living trust, as the name implies, is one that becomes active as soon as all the formalities of creation are met.

Revocable vs. Irrevocable Living Trusts

Living trusts are then further divided into revocable and irrevocable living trusts. A revocable trust is one that can be modified or changed at any time and for any reason by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor for any reason once the trust takes effect.  Testamentary trusts are always revocable up to the time of your death because a testamentary trust hasn’t actually become active yet and you have the right to change or revoke it before it activates.

Which Type of Trust Provides Asset Protection?

Revocable trusts do not offer asset protection benefits because the key to asset protection is legally removing the assets from your estate. The assets you transfer into a revocable living trust can remain accessible to you because of your ability to modify or revoke the trust whereas assets transferred into an irrevocable living trust become the legal property of the trust. This, in turn, provides the asset protection benefits you want. Because the assets are out of your reach, they are also protected from the reach of creditors or other threats. When structured correctly, however, an irrevocable living trust may still be able to provide you with financial benefits.

Contact Us

For more information, please join us for one of our upcoming free seminars. If you have additional questions about asset protection planning in the State of North Dakota please contact the experienced estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.