Definition of Asset Protection Trust
An Asset Protection Trust is an arrangement in which an independent person or financial institution (“the Trustee”) holds the property of your child or grandchild (“the Beneficiary”) for his or her benefit. The child or grandchild may also be one of the Trustees if he or she is an adult. The Trustees can distribute funds to the beneficiary as the Trustees deem necessary and advisable.
Who owns the Asset Protection Trust? The Trustee. The child can even be a Co-Trustee. If the child is going to serve as a Trustee, the child needs an independent Trustee. If the child is the sole Trustee, his or her creditors will claim that the child has control over the property and can legally turn it over to creditors.
Who is typically the other Trustee? A Trustee is usually a family member, a wise friend or a professional such as an attorney , accountant or a trust company. Siblings, however, are not recommended as Trustees because anything involved in the distribution of money can affect the relationship the child and his or her siblings.
Examples of How an Asset Protection Trust Works
1. A couple has a daughter who graduated from medical school. The couple wants to leave most of their estate to their daughter. If they leave the estate to their daughter outright, and then if the daughter is sued for medical malpractice, she’s going to lose her inheritance from her parents. The parents agreed that this type of Trust is the best plan for such a scenario.
How does an Asset Protection Trust save them in that situation? The Trustees own the property, not the child. Therefore, the property is protected and the creditor cannot go after the property in that Trust. It cannot be subject to the lawsuit.
2. Jennifer owned a lovely home in Mystic, Connecticut. She was divorced. She had a wonderful teenage daughter named Lisa. She wanted to leave the home to Lisa. Jennifer was concerned that if she died, her ex-husband (the daughter’s father) and her (Jennifer’s) meddling sister would take over the house and force Lisa to live elsewhere. Jennifer transferred her home to a revocable trust that contained an Asset Protection Trust. Jennifer designated the revocable trust as beneficiary of an account with enough money to cover one year of house expenses. She chose a good friend as Trustee. Then, unfortunately, Jennifer passed away. The ex-husband made a claim against her estate for the house repairs he paid during Jennifer’s life. But, because the house in the revocable trust was not part of Jennifer’s probate estate, he could not involve the house in a legal dispute. Lisa has a good job now, pays the house expenses, and continues to live in her mother’s lovely Mystic home.
When An Asset Protection Trust Is Not a Good Idea
An Asset Protection Trust requires a yearly fiduciary income tax return. Therefore, the Trust might incur tax return preparation fees. If a professional is appointed as Trustee, the Trust will owe Trustees fees. Because of the annual cost involved, an Asset Protection Trust is usually not recommended if a child or grandchild is an adult and, the value of property transferred to the trust will be less than $100,000.
