An asset protection trust is a financial term covering a wide range of legal concepts. Asset protection trust is another term for a discretionary trust. Property is held in trust by a trustee to be transferred to the recipient (the beneficiary). It is called a discretionary trust because the property is discharged to the beneficiary at the “discretion” of the trustee—that is, according to their judgment rather than a fixed condition.
However, most asset protection or discretionary trusts contain specific guidelines that the trustee must follow regarding property distribution. This will help protect the property owner and the property itself.
A properly structured asset protection plan that combines asset protection planning with an IEP results in a better outcome in most situations. However, this result depends upon several variables. These variables vary from the client’s net worth, the client’s objectives, the nature of the assets assigned, the skill with which the asset protection plan was prepared and defended, and the asset protection vehicles selected to enforce the asset protection plan.
Asset Protection Planning
Technically, asset protection planning is the procedure of managing one’s assets and affairs in advance to protect against threats to which the assets would otherwise be subject. The phrase “in advance” warrants substantial power. One planning to protect assets must be cautious and avoid the negative implications that may follow if there are creditors entitled to remedies under applicable fraudulent transfer and similar laws. Asset protection planning may be used to shield every kind of asset, including an operating company or a professional practice.
What Is the Definition of Asset Protection Planning?
Safeguarding assets from the many dangers involved is not a new idea or planning goal. Asset protection is more at the forefront of planning because of developing theories of liability. New liability theories sometimes correlate with results-oriented judges and juries determining things based on a perceived desired outcome rather than the law. An ever-present problem includes increased dollar amounts of jury awards that we hear about today.
Asset security must be managed in the new legal arena because of concerns about the sufficiency of traditional forms of security. Although there are debates for and against the contingency fee system, it is unquestionable that our current legal system, coupled with contingency fees, has helped contribute to the litigation explosion. For this cause, asset protection planning is increasingly necessary.
What Are the Goals of Asset Protection Planning?
Asset protection objectives are varied, but all must be managed to make a high-quality plan. The plans must be user-friendly or doomed from the beginning due to the client’s discomfort with an unfriendly plan. Since being a party to a lawsuit is often a loss in the client’s mind, procedures must be prepared to prevent litigation. The plan must supply an incentive for an early and affordable settlement if it fails to prevent the litigation in the first place.
The net effect of the deterrence or an early settlement is to level the litigation playing field between the plaintiff and the defendant. This leveling improves the client’s bargaining circumstances. Any plan must be relaxed enough to deliver options as the game is played because litigation may not come from the initially considered source. The overall objective of any plan is for the client to win the game ultimately. Once objectives are discussed with the client, the planner should incorporate them into both the asset protection and estate planning plan.
What Asset Protection Planning Is Not?
As important as it is to know what an asset protection planning component is, it is equally important to know what it is not. Asset protection planning will not aid a client in evading the payment of taxes.
Asset protection planning does not use the concept of hiding assets but generally works to protect those assets. A hidden asset may be found, but a protected asset is a more secure one. Professional and ethical advisors do not use asset protection as a means of defrauding creditors.
Does Asset Protection Planning Work?
First, the standard used in deciding whether the asset protection component of the integrated estate plan (IEP) “worked” must be determined by reference to where a client would have been, financially, had they not engaged in an IEP. The ultimate purpose of integrated estate planning is recognized if the client weathers a legal storm at least moderately better than they otherwise would have in the absence of any planning.
Second, the many variables that exist under any given IEP control, in all fairness, the use of blanket statements such as a “particular asset plan works, or it does not work.”
The following variables are typical of critical significance in resolving how extensive an asset protection plan needs to be to protect against a future creditor:
- The client’s net worth: There is a cost/benefit relationship concerning the asset protection planning component of the IEP.
Generally, clients with a net worth of less than $1 million should use the more straightforward, less protective asset protection conveyances. On the other hand, due to the incrementally more diminutive cost, most clients with a net worth greater than $1 million should use the more sophisticated forms of asset protection planning, such as a foreign integrated estate planning trust (IEPT).
Liquid assets are typically more effortless to protect when compared to assets such as real estate and business interests. On the other hand, certain asset protection vehicles, such as the family limited partnership combined with the foreign IEPT, are much more useful in covering real estate and business interests than other asset protection vehicles.
What Are Some Benefits of Asset Protection Trusts?
Thus, asset protection trusts can be beneficial and are associated with several different advantages, such as:
- Provide the trustee with a greater amount of control and decision-making regarding property distributions
- Protect against waste by the beneficiary
- Protect against unwise spending or investing by the beneficiary
- Help the property owner to maintain records of their property distributions
- In most instances, the property is no longer considered taxed under the person’s estate once it is transferred to a trust
For example, if the beneficiary is younger, the asset protection trust might contain instructions for the trustee to make the distributions at a later period in time. This will help sidestep common pitfalls such as overspending, common among younger beneficiaries. Also, some asset protection trusts offer diverse tax incentives and benefits.
What If I Have a Dispute Over an Asset Protection Trust?
Some common asset protection dispute trusts may involve:
- Persons claiming that they are beneficiaries to the same property
- Violations of trustee duties
- Illegal or unauthorized transfers of trust property
These types of disputes are often resolved through the filing of a lawsuit. The court will order a damages award to help the plaintiff party recover losses in most cases. In some instances, the court may order the property to be transferred to a specific person or party. This all depends on the facts in each dispute.
Should I Hire a Lawyer for Help with an Asset Protection Trust?
There are many different asset protection trusts, each with distinct characteristics and features. You may need to employ a trust lawyer if you need help developing or revising a trust arrangement. Also, you may consult an experienced attorney near you if you need to file a lawsuit due to a trust dispute. Your lawyer can represent you in court so that you can recover damages or obtain other similar legal remedies.
