Asset ProtectionThe concept of and strategies for guarding ones' wealth is what we call Asset Protection. It is a type of planning intended to protect one's assets from creditor claims. Asset Protection helps insulate assets in a legal manner-without engaging in the illegal practices of concealment, contempt, fraudulent transfers, tax evasion or bankruptcy fraud. Some common methods for asset protection include asset protection trusts (not the common revocable trust), family limited partnerships, Limited Liability Company's and Corporations.
A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker's property and can provide asset protection for the beneficiaries, with two important caveats. First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary's creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse's creditor(s), or they may be available to the former spouse upon divorce.
Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor 'steps into the shoes' of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.
Irrevocable Trusts may be used to protect assets, as the assets that are transferred to the Irrevocable trust may be considered unavailable to the Trustor and therefore not reachable by creditors. In Medi-Cal planning we use a Medicaid Asset Protection Trust (MAPT) to help protect assets from government claims.