An asset protection trust is a legal arrangement that protects trust assets from taxes, debtors, lawsuits, and bankruptcy. The trustee manages the assets for the benefit of the beneficiaries, and a spendthrift clause can limit their access. The trust can also protect assets from bad business, accidents, and divorce.
An asset protection trust is a legal arrangement set up to protect the contents of the trust from taxes, debtors, lawsuits, divorce and even bankruptcy. A person who creates this type of trust seeks to safeguard the trust assets for the benefit of the trust beneficiaries. A trust can be created for asset protection if it is a discretionary trust, meaning that its beneficiary’s benefit from the trust is not fixed. Instead, the person managing the trust has the discretion to decide how much to pay each of the beneficiaries and when to distribute it.
Learning what a trust is can prove helpful in understanding how an asset protection trust works. Basically, a trust is a legal arrangement that a grantor, a person creating a trust, forms. Chooses a trustee, a person who takes control and management of the assets placed in the trust. The trustee manages the assets on behalf of the person or persons who will benefit from the trust, not for the benefit of the grantor. A person who benefits from the trust is referred to as its beneficiary.
Typically, an asset protection trust includes a savings clause. This clause helps protect the trust not only from people and creditors who might try to seize its assets, but also from the irresponsibility of the beneficiary. The reason an asset protection trust can work so well is because neither the grantor nor the beneficiary own the assets. The trust becomes a legal entity and technically owns the assets.
A spendthrift clause allows a trustee to decide when and how much of a trust’s assets a beneficiary can use. For example, a grantor may be known to gamble compulsively, so a grantor may have a spendthrift clause included in his trust. This means that the beneficiary cannot simply use the trust assets to support his gambling habits. Instead, he was supposed to use whatever income the trustee provided him. Had he spent this amount irresponsibly, he would not have been able to receive additional income from the trust without the trustee’s permission.
A grantor setting up an asset protection trust can also protect the trust assets in the event of bad business, accidents and even bad marriages. If a beneficiary starts a business and fails to pay his business debts, for example, his creditors cannot seize any of the trust assets to recover their money. Likewise, the assets of such a trust are often invulnerable to divorce. The beneficiary of an asset protection trust cannot lose any of the trust assets in divorce proceedings. Any asset that has been distributed to a beneficiary does not receive that protection, however, as it is no longer part of the trust.
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