Individuals should consider implementing trust-based strategies to protect their assets from creditors, ex-spouses, and other litigants. Although people who have substantial wealth are prime targets for lawsuits, everyone is at risk. There are a number of situations in which a person’s assets can become attached or garnished. Bankruptcy, divorce, and even civil lawsuits for personal injuries can put property in jeopardy. Transferring assets to trusts makes them inaccessible to most creditors and can help protect a person’s own property as well as property gifted to, or inherited by loved ones.
Choosing the Right Type of Trust
There are essentially two types of trusts- revocable and irrevocable. For a trust to be effective at shielding assets while a person is still living, it must be irrevocable. With an irrevocable trust, the person gives up a portion of his or her ownership rights to the property while still maintaining some control. Unlike revocable trusts, the terms of an irrevocable trust are nearly impossible to change. Since the ownership rights to the property are permanently transferred to another entity in an irrevocable living trust, the assets are off limits to most creditors, bankruptcy courts, and even the IRS.
An irrevocable living trust can help protect assets from a variety of risks. Common threats to assets include:
- Divorce: An irrevocable living trust can protect assets from a person’s spouse in a divorce, and it offers additional protection against divorcing spouses of adult children as well.
- Creditors: Even when people are responsible with their finances, unexpected life events can wreak havoc on personal assets.
- Business Debts and Liabilities: An irrevocable trust protects personal assets from business debts and liabilities.
- Spendthrift beneficiaries: When assets are passed down, they can be gone in a flash because of financially irresponsible beneficiaries.
- Taxes: Since the IRS is a priority creditor, it can come after most personal assets when back taxes are owed. An irrevocable trust may be able to protect property from the IRS.
- Long-Term Care: People who move into nursing homes are especially at risk of having their assets drained. An irrevocable trust can make assets inaccessible and can even help people qualify for medicaid in some cases.
Since trusts can hold virtually any type of property including real estate, personal collections, motor vehicles, investments, businesses, and even cash, they are often an excellent way for people to protect their property from the unexpected, ensuring that it is preserved and passed to intended beneficiaries.