Using Trusts To Protect Your Money and Assets
In the wake of recent string of celebrity deaths, particularly Jeffrey Epstein and Kobe Bryant, everyone seems to want a trust. With the term circulated on TMZ and news sources, most are starting to understand that trusts symbolize privacy and orderly estate administration. Although the use of trusts to pass on wealth after death has become a widely known concept, the idea of protecting wealth during life, remains classified information. Asset protection planning goes farther than the O.J. Simpson days, to the 19th century. With the variations of available trusts, asset protection is no longer only for the multimillionaires, but can very effectively protect small business owners and homeowners alike.
Asset protection planning should not be criminal; its purpose should not be to evade taxes or conceal assets. Instead, its been designed to lawfully insulate assets from past, present, future and hypothetical creditors. The foundation of asset protection planning is based on two principles: (1) a creditor can attach a judgment on any assets owed by a debtor; and (2) a judgment cannot attach to assets that are not owned by a debtor. In other words, if you don’t own the asset, its not at risk of a seizure by a judgment creditor.
Accomplishing Asset Protection: Revocable or Irrevocable?
Optimizing Revocable Trusts
Revocable trusts are great in that they can avoid the need to probate a will. Probate can be burdensome (or easy) depending on individual circumstances. Avoiding the probate process can be a very big deal and may be only reason someone may need to opt for a trust. If there is concern of a will contest by a disinherited child, spouse or another entitled heir, invest in a trust. Of course, revocable trusts can be challenged in Surrogate’s Court, but the process requires a savvy estate lawyer and a substantial retainer fee.
Other things to consider, is that Surrogate’s Court in most New York counties are backlogged. Oftentimes, there is only one judge for hundreds of cases. Some counties are better to die in than others. In Queens County, it can take several months for a will to be admitted to probate (if all documents are submitted properly). Legal fees and costs can quickly add up. All heirs must be notified and receive a copy of the will. If an heir cannot be found, the nominated executor may have to hire a private investigator and publish in a local newspaper. A will contest can take several years and drain the estate. In sum, dying with a trust is the most respectable way to go.
Revocable inter-vivos trusts (aka living trust) are the most popular, in that they are low risk because the person creating the trust (ie the grantor) is typically named the trustee in the trust and retains control of his or her assets. No longer feel like having a trust or want to change beneficiaries? Revocable trusts are equipped with liberal revocation and amendment powers. Not much changes for a grantor, except that, assets are re-titled to the trust name. Although I have seen grantors die with empty trusts, under proper legal advice, assets should be re-titled to the name of the trust. At death, whichever asset is held in the name of the trust goes directly to the named beneficiary, no questions asked. A revocable trust without any assets is useless for estate planning, unless, its part of a pour-over-will.
Aside from the benefits of probate avoidance and possibly privacy, a revocable trust does not provide the debtor with any considerable degree of asset protection during life. In some form, we can argue that revocable trusts can protect a decedent’s assets after his death, due to the troublesome and complex means of challenging a trust, as opposed to a will, in Surrogate’s Court. However, any trust created to protect assets during life must be irrevocable.
Key Points
- An empty trust is useless; assets should be transferred to the trust during one’s life.
- Any assets not held by the trust, have to wait probate approval (unless a beneficiary is designated).
- For privacy considerations, be more creative with naming the trust rather using a generic name ie The Smith Family Trust.
- For additional anonymity, the trustee should be a third party, not the grantor.
Irrevocable Trust Protection
Within the American system, everyone has a right to file a lawsuit against an individual or entity for an alleged wrong. With that said, we can never make something lawsuit proof, but we can make a creditor’s attempt to reach the debtor’s assets very expensive and difficult. Precisely,
the process should be so cumbersome that the creditor may forego it altogether or give up soon after. With expert irrevocable trust planning, estate lawyers can help dispel the common concern of losing control, and clients can walk away with confidence and protection.
As trust lawyers, the following are some of the irrevocable trusts we frequently use for estate planning and asset protection:
Qualified Personal Residence Trust (“QPRT”)
QPRT’s are used to transfer a residence out of the name of the grantor and into the name of an irrevocable trust. The intended purpose is to remove this asset and any appreciation over the course of years from the grantor’s estate. In essence, the grantor no longer owns the property or its capital gains. QPRT’s benefits are two fold. During the grantor’s life, they can protect the residence from judgment creditors. At death, the home value is excluded from the decedent’s estate for estate tax purposes.
Spendthrift Trust
Nowadays, almost every trust includes a spendthrift clause. A spendthrift trust limits or prohibits a beneficiary from transferring or assigning his interest in the income or principal of the trust to a creditor, or to anyone really.
Example: Ben is worried that his daughter will waste her entire inheritance on shopping sprees and trying to live large in the moment. Rather than giving her an outright distribution to the trust estate at Ben’s death, he instructs the trustee to make periodic distributions to his daughter for living expenses, as necessary. The daughter has no power to compel distributions or assign her interest her someone else (friend, Prada store, landlord etc).
Medicaid Asset Protection Trust
The Medicaid Asset Protection Trust also known as MAPT, is designed to shield assets while on Medicaid or when trying to qualify for the government program. With Medicaid’s very strict income and asset limitations, many are not eligible for government paid health coverage, or have to spend down assets to practically nothing before they can qualify. Rather than sell off your home and dissipate bank accounts and stocks, the alternative is placing assets into an irrevocable trust – MAPT. In a MAPT, and most other irrevocable trusts, the grantor retains the right to live in the residence rent-free, with the home passing to their designated beneficiaries at death.
Foreign Trusts
All trusts contain a jurisdiction clause that lets the trustee or the court know under which state law the trust is to be interpreted. Trusts prepared in New York typically have a jurisdiction clause that states the trust is to be interpreted under the laws of New York State. A foreign trust, on the other hand, provides that the subject trust is to be interpreted under the laws of a foreign jurisdiction. There are many reasons why a foreign trust is deemed superior to a domestic trust in the realm of asset protection. Mainly, foreign jurisdictions can provide for a shorter statue of limitations, greater privacy and confidentiality, higher burden of proof, and extensive legal costs imposed on a creditor to fight the trust.
Contact Us
There are many advantages to using irrevocable trusts for asset protection objectives. Unlike most of revocable trusts, asset protection planning is a relatively difficult topic for most legal practitioners. We know what we are talking about when it comes to trusts and estate planning. Contact us for a consultation before it may be too late: 646-233-0826.