A very important concern of most clients is how to protect their assets so their estate will remain intact for the future of their families. There are many different asset protection strategies, including trusts. However, not every type of trust can provide the asset protection you need. Trusts that are irrevocable are the only types that protect assets because they move your assets out of reach of creditors and others how may make a claim against them. This article will explain why irrevocable trusts make one of the best asset protection strategies.
What does “irrevocable” mean?
In order for certain trusts to be really effective asset protection strategies, it needs to be an irrevocable type of trust. The term “irrevocable” means the trust can no longer be modified once it has been created. The reason it can successfully protect assets is that you no longer control the property. Since you cannot change or revoke the terms of the trust that means you cannot get the property back. Consequently, the property is no longer subject to any legal claims that may be brought against you.
How is an irrevocable trust is different from a revocable living trust?
The basic difference between these two types of trusts is that a revocable trust can be changed and an irrevocable trust cannot. A revocable living trust is a special type of trust that is meant to be effective during your lifetime and allows you to manage both the terms of the trust and the trust property during your lifetime. Once you pass away, the trust property is then transferred to the beneficiaries you have chosen. A living trust is usually created in combination with a will as part of a comprehensive estate plan.
The first step in establishing the proper asset protection strategies is to carefully analyze your property. After you have established the nature and extent of your assets you will be better capable of organizing those assets in a way that will provide the best protection against loss. A common problem for most is that they do not begin working on asset protection strategies because they are afraid doing so would constitute fraud. Asset protect does not require “hiding” assets. Instead, it is an entirely legal way to be prepared for unexpected situations that may place your property at risk. This can easily be done without committing fraud or engaging in any form of tax evasion.
The reason a revocable living trust does not provide appropriate asset protection is that you still own the property that is in the trust during your lifetime. Essentially, you are the named trustee while you are alive so that means you still maintain control over the trust property. That makes your property still subject to the claims of your creditors.
In addition to allowing you to retain control of your property, a revocable living trust also allows you to make modifications to the terms of the trust at any time before your death. Whenever you revoke or cancel a trust, the trust property once again belongs to you. Finally, income that is generated by your trust property belongs to you. For all of these reasons, a revocable living trust is not one of the best asset protection strategies.
In order for your asset protection plan to be the most effective you need to establish which asset protection strategies you intend to use now. If you wait until there is an issue and your property is at risk, then your attempts to transfer or reorganize your assets may have the appearance of being fraudulent. Put another way, if you try to move your assets after a creditor has made a legal claim or after you receive notice of a lawsuit against you, then a court may consider that move to be a fraudulent transfer.
Another example of asset protection strategies that are meant more for the protection of your beneficiaries than for yourself is spendthrift trusts. The purpose of these types of trusts is to provide more restrictions for beneficiaries who need help with managing their own assets and would, therefore, need help with an inheritance.
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