By: Matthew M. Shafae, Attorney
Litherland, Kennedy & Associates, APC, Attorneys at Law
The living trust is the bedrock foundation upon which our estate plans are built. It’s right there in the word: trust. It sounds safe and secure; it’s warm peace of mind. If you’ve been to one of our seminars or workshops, you’ve probably heard us tout the benefits of an asset-protection trust, and how our clients typically take advantage of this estate planning enhancement to leave property to loved ones without having the property exposed to creditors and predators. But don’t all trusts provide asset protection? As Roy would say, the answer is a “definite ‘yes, no, and maybe’”.
A trust is simply a way to hold title to an asset, ownership. When you transfer title of an asset into a trust, the asset being held remains unchanged; it’s simply the arrangement of ownership that differs. There are as many types of trusts as we have flavors of ice cream. But before we get lost in the weeds that are various trusts, let’s take a step back and review what a trust actually is. This applies to all trusts.
Remember that a trust is a method by which you own property, how you describe your ownership, or title. If I gave you a car, and registered title in your individual name, I have given you full ownership of it. This is not a novel legal concept. You own the car, and you own every part of the car, including what you may do with the car. You can drive it, you can sit in the back seat, you can modify the stereo, you can change the paint job, and you can even sell or give it to someone else. It’s yours. But what if I told you that there is a way for you to specify who can drive the car and who can ride in the car? And what if I told you that you can even specify where the car is driven, how fast it can go, and even which radio stations it can carry?
Let’s imagine that you still own that car I gave you in the last paragraph. You take that car and you place it in a special garage. Let’s call this garage the Trust. You’re now the Trustor. You supplied property that you own into this special garage, or Trust. In that garage, you have a list of people who are appointed to drive the car. Let’s call these people Trustees. They can drive the car however they please, but only according to the instructions you provided in the garage. Or, you can let them drive however they want, because you believe that their ability to drive shouldn’t be limited by your instructions. But they don’t own the car. You’re the owner. They simply drive it and take care of it, wash the car, change the oil, etc.
Now imagine that you’ve also provided a list of people who may ride in the car. They get to enjoy the benefits of the car; they are driven around in the car by the Trustee. Let’s call these people Beneficiaries. They, too, don’t own the car. They also can’t drive the car, unless you allow them to. Because, remember, you are the Trustor, and you are still the owner of the car. The Beneficiaries can ride in the front seat, the back seat, they can ask the driver to take them to school, to bring them lunch, or whatever they want. The driver’s job is to make sure that no matter what the passenger asks for, that it is allowed under your instructions for the car.
So what does this all have to do with asset protection??
I’m glad you asked. When you establish a living trust, it is a revocable trust. That means you can…well, revoke it. It can be changed, it can be amended, and it can be terminated. It’s like the car is parked in a garage, and the list of drivers, passengers, and even the shape of the garage can be changed. While you’re alive, you are the car owner, the car driver, and even the passenger. You’re all three of those people at once. This provides no protection to the car from outsiders. So, no asset protection so long as you have all of those abilities to drive, ride, and get rid of the garage. However, if you relinquished the ability to drive and ride in the car, and gave up your ability to change the dimensions of the garage, you now have an increasing level of protection for the car. This is similar to the trusts our clients leave for their children or grandchildren. When the Trustor has passed away, by leaving the inheritance in an asset-protected trust, the now-deceased Trustor has relinquished her/his ability to drive or ride in the car, and s/he can’t change the garage or the list of instructions anymore. The assets in the garage can now be protected from the beneficiary’s creditors and predators.
It makes sense, right? If we retain the ability to drive the car, ride the car, and change the garage and list of instructions, and have asset protection… well, everyone would place all of their assets into the garage and stop paying their credit card bills! It sounds nice until you’re the one trying to get back your money from someone you lent it to.
As a general rule of thumb, and car metaphors aside, the more power and control you retain over an asset, the less protection you are afforded from creditors and predators. The more power and control you relinquish over an asset, the more it is protected from your creditors and predators. That is why you can protect assets from creditors and predators when you establish trusts for other people, but not always when you create a trust for yourself.
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