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Refresher on Trust Protections

By: Atty. Sam Collins

Just because something is called a “trust” does not mean it will protect assets.  In fact, the most common trust in the world (which all of you have) offers zero asset protection for the trust’s creator:  the revocable living trust.  But the revocable living trust is foundational to every meaningful estate plan.  In your trust, you’ve planned for an orderly transfer of control if you become disabled, and have provided the blueprint for who will benefit, and how, at your death.   

At a death, a revocable trust living trust creates “school bus trusts” for the beneficiaries.  At this point, the trust becomes an asset protection trust, and offers potential protection from lawsuits, divorce, catastrophic illnesses, and in many cases even future estate taxes.  The most common examples of these trusts are the Family Trust (and sometimes a Marital Trust) for the benefit of the surviving spouse (created at first death of a married couple) and inherited trusts for the benefit of the children or other loved ones (commonly created at the death a single person). 

Often, these trusts are referred to as “irrevocable” – but that term implies the trust gives the beneficiary no control, limited flexibility, and is unchangeable.  Irrevocable trusts get that reputation because so many are drafted that way “out there” in the world at large.  In most cases, our clients plan to maximize the beneficiaries’ control over the trust.  Frequently, the beneficiary is trustee of the trust, makes all investment and administration decisions, and plans where and how the school bus trust assets pass someday at their own death.   

So, asset protection is all about planning for someone else with the assets you plan to pass on to them.  This is a common mantra around here: “You can do something for them that they can’t do themselves!”  If you think about it, it makes perfect sense: if it were easy to protect assets from a person’s own creditors, the entire world would be judgement proof!

But isn’t there a way for me to use a trust to protect assets from my own creditors?  Yes, and it would involve giving assets away to an irrevocable trust that (1) you cannot legally control, (2) you cannot take the assets back from, and (3) all of this would have to be created and implemented before there was even the potential for a creditor.  Most of the time when our clients undertake this type of planning it is with an eye toward removing assets from the threat of nursing home costs the client may one day incur.  You’ll recognize this concept as the Strategic Gift Trust, and this strategy needs to be implemented at least 5 years in advance of a nursing home stay.  As we said at this year’s Client Update Program, School Bus Trusts are a special breed in that they allow a future beneficiary to have significant control and asset protection.


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