Asset protection methods available include the use of qualified retirement plans, variable annuities and life insurance. By law, such assets are exempt from the claims of creditors. Exposure of your assets to creditors and lawsuits can also be lessened by operating a business in the form of a corporation or limited liability company. If the company is properly set up and maintained, the exposure of your personal assets for company debt is generally limited to the amount you have contributed to the company.
Although a revocable trust provides no asset protection for the trust maker during his or her life, the trust can provide important asset protection for other benificiaries of the trust. Upon the death of the trust maker, 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 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.