5 Ways To Protect Your Assets With Trusts

What is the best approach for protecting the legacies you will pass on to your heirs? Outright inheritances may be inappropriate for those with poor financial judgment, who might face divorce in the future, or who may have a history of addiction or inappropriate behavior. Then, too, professionals such as doctors and attorneys, who face the threat of financially crushing malpractice suits, may be looking for ways to protect themselves.

There are pros and cons to these 5 strategies for protecting your assets, read more to see which might be best for your situation. We also recommend seeking advice from a trust professional and other advisors before taking any irrevocable steps.

A spendthrift trust includes a provision that prevents a beneficiary from demanding distributions either of income or principal or from transferring any interest they may have in the trust. The trustee may be given wide latitude in refusing distributions that are reachable by creditors or when there is concern that the distributions might be used unwisely. (State laws recognize the rights of some creditors to reach trust assets.)

A discretionary trust permits the trustee to make (or not make) distributions to a beneficiary. When there is more than one beneficiary, the trustee can be given the authority to make unequal distributions from the trust. A discretionary trust often is established for disabled beneficiaries as a means to preserve benefits from government entitlement programs by limiting the trust’s distributions to supplemental rather than support needs.

A support trust is designed to provide a beneficiary with sufficient income from the trust to meet their basic needs and to live comfortably. The standards for making the distributions are predetermined in a written trust agreement. Commonly, distributions are permitted for living expenses, education, medical expenses, and other similar requirements.

A domestic or foreign asset protection trust (also called a self-settled or offshore trust) is created for the sole benefit of the individual establishing the trust, chiefly to prevent creditors from reaching the assets in the trust. Although these trusts have gained in popularity in recent years, changes to the Bankruptcy Code and successful attacks in the courts may have removed much of the shield created by these trusts.

A tax-qualified retirement plan or IRA is not usually considered an asset protection trust. However, to some extent, they operate in that manner. Generally, assets held in a retirement plan account or an IRA may not be attached by creditors while they remain in the plan or IRA.

Finally, it’s worth mentioning that other mechanisms may afford specific asset protection. For example, some states’ homestead laws protect a family home from creditors. Spouses may be able to protect their home (or, in some states, other assets) through joint tenancy. Limited partnerships and limited liability companies may protect the entity’s assets from the creditors of a partner or member.

Legacy’s trust advisors have extensive experience with trust and planning matters that impact successful individuals and families, family-owned businesses, non-profit organizations, family offices, and foundations and endowments. Our focus is on developing long-lasting client relationships that grow with your changing needs. These solid relationships are especially reassuring when unpredicted circumstances occur or when situations that require delicate handling arise.

If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com. 

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Any developments occurring after July 1, 2022, are not reflected in this article.

This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.