By Linda Cammuso
In a previous blog, we discussed erroneous preconceived notions that people might have about asset protection planning. We also mentioned that legal vehicles such as trusts and business entities can be effective ways to shelter your exposed assets. Take, for example, Joe and Jennifer’s situation.
Joe, a small business owner, and Jennifer, a pediatrician, are a married couple approaching their fifties and enjoying a fruitful and successful life. They want to ensure that they and their children and (eventually) grandchildren reap the benefits of their years of hard work. Joe and Jennifer have already established an estate plan for estate taxes, probate avoidance, and to manage the children’s inheritances and they feel confident that their family will be provided for when they’re gone. However, they still wonder if there is something else they could do to preserve their assets while they are alive.
The answer for them may be to augment their current estate plan with a special type of trust designed for lifetime asset protection.
Trusts play an important role in every day in estate planning for a variety of reasons ranging from probate avoidance, gift tax and estate tax planning – to protecting beneficiaries including minors, spendthrifts and individuals with special needs, and to sheltering assets from long-term care/nursing home expenses.
A trust is a legal agreement where one party (the “trustee”) holds assets for the benefit of another (the “beneficiary”). The terms of the agreement are set forth in a legal document. In a typical trust arrangement, the person who creates and funds the trust with his/her assets (the “grantor”) is both the trustee and beneficiary; upon the grantor’s death, the assets are passed on to whomever the grantor designates in the trust document – spouse, children, extended family, charities, etc.
Revocable and Irrevocable Trusts: The roles and differences they play in protecting your assets
Many people mistakenly believe that assets in a trust are automatically protected from their creditors. Trusts used for everyday estate planning are usually “revocable”, meaning that the grantor can change or undo (revoke) the trust at any time during his/her life. While a great tool for estate planning, revocable trusts do not offer any asset protection for the grantor. Even if a trust is “irrevocable” (not capable of being revoked or amended), under Massachusetts law it will still have exposure to the grantor’s creditors to the extent the grantor is able to benefit from it.
The key to protecting assets in an irrevocable trust from the grantor’s creditors is to limit the beneficial rights that the grantor has in the trust. Such a trust can still provide for the grantor’s family, as well as accomplish tax planning, probate avoidance and inheritance management for the grantor’s heirs. These trusts can be ideal ways to protect and pass on assets that the grantor may not need or want to directly spend/use, but over which he/she would still like to exercise a certain degree of control during his/her life.
To summarize, legal vehicles such as trusts can be effective tools to shelter your exposed assets. The decision as to which type of trust best suits your situation should be reviewed carefully and in consultation with a knowledgeable estate planning attorney.