Why Should You Have A Trust For You & Your Loved Ones?

Bloomfield Township estate planning lawyer

Many Americans completely misunderstand trusts. However, in the right circumstances, they can offer significant benefits to those that use them, especially when it comes to protecting the assets of the trust from the beneficiaries’ creditors.

Trusts can be incredibly complex, but their implications are always in the headlines. Read on to learn about the subject in a simplified manner and explain how trusts protect the creator as well as their beneficiaries.

Trusts are many different types, so the only ones discussed here are the two most common varieties. It is important to find an estate planning lawyer if you have questions about specific types of trusts or how you can apply the concepts to your situation.

Irrevocable Versus Revocable Trusts

Trusts are two basic types: irrevocable trusts and revocable trusts. Revocable trusts are the most common and are fully revocable at the request of the creator. The creator retains control over the assets transferred to a revocable trust and can revoke the trust and have the assets returned. Irrevocable trusts are not revocable by the creator. Revocable trusts, however, don’t offer the trust maker or creator asset protection.

Asset Protection for the Creator

Asset protection planning is designed to protect assets that are otherwise subject to creditors’ claims. A creditor can reach assets that a debtor owns but cannot reach assets that the debtor does not own. This is where a trust comes in.

If a trust creator makes an irrevocable trust of which he or she is a beneficiary, any assets transferred to that trust are not protected from the creditors of the creator. The rule applies regardless of whether the transfer was done to defraud existing creditors or not.

Until recently, a trust creator was required to establish the trust outside the U.S. to remain a beneficiary of the trust while still retaining protection against creditors for the assets of the trust. However, several states now allow domestic asset protection trusts.

In Utah, South Dakota, Rhode Island, Delaware, and Alaska, a trust creator can transfer assets to an irrevocable trust and still be a beneficiary of the trust. However, this does not work if the transfer was done to defraud creditors.

Asset Protection for Beneficiaries of the Trust

Revocable trusts don’t offer any asset protection for the trust creator during his or her life. However, upon the death of the creator, the trust becomes irrevocable as to the deceased trust creator’s property and can offer asset protection for beneficiaries with two key caveats.

–    The trust must retain ownership of the assets to continue offering asset protection. If assets are distributed to the beneficiary, they are no longer protected.

–    The more the rights a beneficiary has with regards to compelling trust distributions, the less the protection the trust offers since creditors can compel a distribution from the trust.

If asset protection is a significant concern, the trust creator should not give the beneficiary the right to automatic distributions. A better approach would be discretionary distributions by an independent trustee.

Final Thoughts

It is possible to protect assets from creditors by putting them in a properly drafted trust. You can protect beneficiaries from the claims of creditors by keeping the assets in a trust over the lifetime of the beneficiary. Working with wealth planning professionals ensures that your planning is in line with your objectives and goals.

Schedule Your Free Consultation with Our Michigan Experienced Estate Planning Attorney

Einheuser Legal, P.C. is an estate planning law firm in Bingham Farms, Michigan. We help families set up wills and living trusts. Attorney Michael Einheuser is an experienced estate planning lawyer serving residents in Bingham Farms, Troy, Farmington Hills, Rochester Hills, Southfield, West Bloomfield Township and Bloomfield Township.

Schedule your free consultation today by calling 248-398-4665.

Leave a Reply

Your email address will not be published. Required fields are marked *