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Can You Really Protect your Assets from Creditors?

Posted by Fred Simon | Jul 16, 2022 | 0 Comments

These days lawsuits seem to be filed all the time (maybe even when there doesn't appear to be any reason for it), the question often asked is what can be done to protect my assets from creditors? While people don't typically go around worrying about losing their home, savings or investments, there is concern, especially among licensed professionals, that they could be the target of unscrupulous scammers out to take everything. So how do you ease these tensions and what estate planning tools can be used to confront this threat?

What is an Asset Protection Trust?

Enter the asset protection trust, which is created to hold and thereby protect the security of a person's assets from creditors, judgments, and lawsuits. Like a corporation or LLC (limited liability company) a trust is a legal entity, distinct from the creator (sometimes referred to as the grantor or settlor). When assets are irrevocably placed into the trust, they are considered to be trust property, separate from the property retained by the original owner. As a result, when the settlor is sued and an order is signed compelling him to pay, the creditor/plaintiff shouldn't be able to collect from the trust.

If an Asset Protection Trust is Irrevocable, Can the Settlor Use the Assets?

Although the trust laws differ among states, in some instances the original owner of the assets transferred can still benefit from them. For example, there are laws that will permit the settlor to be a beneficiary who may control the distribution of assets through use of a private trust company (managed by the settlor) that is designated as trustee.

Are Asset Protection Trusts Available in All States?

Unfortunately, no. As of this writing only 18 states have passed asset protection trust laws to help shield assets. Kentucky, California, Texas, Florida, and New York are not among them and have not adopted these statutes. However, there are provisions that allow a resident of one state to establish an asset protection trust in one of the 18 states that do allow them.

Do Out-of-State Asset Protection Trusts Effectively Shield the Settlor?

The laws of the 18 states that do allow Asset Protection Trusts were enacted to protect the assets of the individual creating it. But that protection is not bulletproof. There are numerous examples where a local judge will refuse to recognize or enforce the asset protection trust laws of a “foreign” jurisdiction, requiring the person seeking protection to surrender assets notwithstanding. Another important factor to consider is that the state where the trust is established will have a statutory look-back period between two and four years where assets transferred to trust might be considered fraudulent (with intent to defraud creditors) if a claim is made before the statute of limitation expires.

Who Should Decide if an Asset Protection Trust can be Effective?

As with any estate planning, it is best to seek the advice of an attorney who is familiar with the laws and regulations concerning the creation and use of Asset Protection Trusts. These strategies can be extremely beneficial if approached with caution and following a full understanding of how an Asset Protection Trust might fit an individual's situation and purpose.

About the Author

Fred Simon

Experienced Attorney Working Directly With You When working with some law firms, you may think that you are working with an experienced lawyer. In truth, your case may have been given to an associate attorney. This can result in receiving legal advice from an individual who has practiced law wit...


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