Friday, September 04, 2009

In Trust: Asset Protection

For centuries, the common estate planning method was for assets to be distributed from one generation directly to the next.  In the context of living trusts, once the trust makers died, the trust would terminate either immediately or upon the beneficiary attaining a specified age and the assets would be titled directly to the beneficiary. 
 
At first glance, this method makes sense: you want your assets to pass to your beneficiaries.  However, the problem with beneficiaries directly inheriting assets "free of trust" is that such assets are vulnerable and unprotected: they may be co-mingled and lost in a divorce or they may be subject to your beneficiaries' creditors.  In this litigious era where the divorce rate is staggering, protecting beneficiaries' inheritance from divorce and lawsuits becomes a key concern.
 
By creating trusts that continue for the lives of your beneficiaries, you can protect your beneficiaries' inheritances from divorce and even lawsuits.  Instead of having the trust terminate and the assets be transferred directly to the beneficiary, your trust would create a "trust share" for each beneficiary.  If the beneficiary is mature and responsible, the beneficiary can even be the trustee of his/her "trust share" and be able to manage his/her inheritance.  This method of keeping the assets in trust will make it easier and more likely that your beneficiary will keep the inheritance separate and not co-mingle it with a spouse, thus greatly reducing the chances of it being lost in a divorce.  Depending on how the trust is drafted, if a beneficiary is sued, the beneficiary can resign as trustee and the inheritance will likely be protected from most creditors.
 
Rather than "letting the toothpaste out of the tube," and "dumping" your assets to your beneficiaries, careful Estate Planning can ensure that your hard-earned assets are protected for your beneficiaries, even in the event of divorce and lawsuits.

While many clients are interested in protecting their beneficiaries' inheritance, some clients inquire as to the feasibility of protecting their own assets from their own actual or potential creditors.

A typical Revocable Living Trust will not provide you with asset protection.  It is considered a "see-through" trust and creditors may seize trust assets just as easily as they can seize assets titled to your individual name.  However, there are Estate Planning steps you can take in order to provide you with a degree of asset protection.
 

If you run a business or own rental properties, you may form an entity such as a corporation or an LLC to own such assets.  By holding such assets through an entity, you can substantially limit your liability.  For example, if you own a vacation house that is titled to an entity and someone slips and falls in the house, your liability will generally be limited to the house and the potential plaintiffs will not be able to go after your personal property.  Corporations and LLCs will not, however, protect you from professional malpractice claims and you may not transfer your personal assets, such as your residence, into such entities.

A second method for protecting your own assets is to ask your potential benefactors (such as your parents) to amend their Estate Planning to create trust shares for your inheritance rather than "dumping" your inheritance to your individual name.  With "spendthrift" language and other provisions, your inheritance will be protected from most creditors.

 Protecting your residence and other "personal" assets that you acquired through your own hard work is more difficult.  California law does not allow you to create trusts where you protect your own assets from your own creditors while still being able to enjoy such assets.  Other states, however, such as Nevada and Delaware, do allow such trusts.  It is uncertain how a California court would rule concerning California property held in a Nevada trust, but it does create obstacles for potential plaintiffs and at least gives you a chance at protecting your hard-earned assets from creditors.
 

Purchasing general liability insurance is inexpensive and another form of asset protection.  Finally, always acting in a cautious, responsible, and thoughtful manner in everything you do is perhaps the best form of asset protection, though in this litigious era, it certainly isn't foolproof.