How to Use a Trust for Asset Protection

By David Montoya

As with other testamentary instruments, such as a will, trusts give clear directions on how to distribute property upon the happening of a specified event, for example, death. Trusts can also protect assets from creditors, depending on the type of trust you use. This occurs because property held in a trust is considered property of the trust. In other words, once you place property in the trust it is no longer yours; it belongs to the trust. Some limitations exist, however. For example, few states allow trusts for the sole purpose of asset protection. A basic understanding of trusts can help you determine the best type of trust to use in order to protect your assets.

Step 1

Speak to a lawyer or consult an online legal document provider to help you construct your trust document. Trust laws vary by state. A lawyer licensed in your state can navigate through all pertinent laws and ensure you create a legally enforceable trust.

Step 2

Enter the assets that need protection into the trust. This may include assets such as cars, stocks and bank accounts. Any assets you enter into the trust become property of the trust and are no longer yours.

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Step 3

Name beneficiaries of the trust. These individuals will receive trust property upon the happening of a specific event. Common events include the death of the settlor, the person who creates the trust, or a beneficiary's arrival at a certain age. Only a few states allow a settlor to also be the beneficiary of a trust since this violates public policy because it is a strong indication that the trust was created for the sole purpose of evading creditors. These types of trusts are commonly referred to as domestic asset protection trusts, or "DAPT trusts." If you'd like to establish a DAPT, first consult with an online legal document provider or attorney to determine whether your state allows them.

Step 4

Name a trustee to control and manage the trust. These responsibilities includes such things as paying off debts and ensuring none of the trust property devalues. The settlor can outline any specific directions for the trustee to follow as well.

Step 5

Finalize the trust document to ensure it becomes legally operative. Once the trust is complete, the assets officially become part of the trust and are fully protected from creditors. Again, it's important to note that full protection only occurs if you follow all pertinent state laws. If not, the trust can fail; thereby, leaving assets susceptible to creditors.

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Are Living Trusts Exempt From Lawsuits?

References

Related articles

How to Set Up an Asset Protection Trust

If you want to shield investments and property from creditors, or anyone who might have a claim on them, an asset protection trust provides a viable option. A trust is a legal structure that owns assets under a separate name and is under the control of a trustee. Claimants to the assets will still have access unless the creator of the trust, known as the grantor, does some careful advance planning when establishing the trust.

Enforcing a Trust

A trust is a legal relationship in which a trustee holds property for beneficiaries, who are the individuals benefiting from the trust. The trustee must abide by the terms of the trust to manage property and distribute it to the beneficiaries. The person who creates a trust is known as the settlor, or grantor. The settlor can also serve as the trustee, naming a successor trustee who will take over for him following his death. Alternatively, the settlor can name someone else to serve as the trustee at the time he creates the trust. A trustee owes certain duties to the beneficiaries -- and the beneficiaries have a right to enforce the terms of the trust and hold the trustee in breach of his duties if he is performs any wrongful acts or omissions that affect their interests.

How to Break an Irrevocable Trust

Two types of trusts are possible: a revocable trust and an irrevocable trust. Although the grantor can unilaterally revoke a revocable trust, even a revocable trust becomes irrevocable when the grantor dies. The assets of an irrevocable trust belong to the trust beneficiaries, not the grantor. Even an irrevocable trust can be revoked under certain circumstances, although it is almost impossible for a creditor of the grantor or a beneficiary to revoke it. Although the trust laws of the various states differ on the grounds and procedures for revocation, they are all based on similar principles.

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