What’s the law when it comes to having an Asset Protection Trust?
Asset protection trusts enable people to protect specific assets and ensure they are used or maintained according to their wishes. Although the person creating the trust gives up legal ownership of the asset(s) once the trust is created, they are able to set out guidelines for trustees to manage the trust on its creation, thus ensuring that their intentions are carried out and the trust is managed as they would like.
Trusts can be created for any number of reasons; many people create a trust because they want to protect the asset(s), either for themselves in future years or for other beneficiaries. In addition to protecting the asset from unwanted or unexpected claims, trusts help ensure that the asset is managed appropriately on behalf of beneficiaries who are unable to manage the asset independently, such as children and minors. As they are unable to control the asset without assistance, a trust ensures they benefit from the asset in accordance with the donorís wishes and that it is managed effectively. In many instances, the trust will be dissolved once the individual reaches an age specified by the original donor, at which point the beneficiary becomes the legal owner of the asset.
Asset protection trusts can also be created when the donor wishes to ensure it is managed on their behalf should they become unable to manage the asset effectively themselves. People often use this form of trust to safeguard their future and ensure funds will be available to them in upcoming years. Of course, many simply require a trust to protect the asset from claims or creditors. This is not always successful though as courts will often ignore a trust if it has been created with the sole intention of avoiding a creditor.
When creating a trust, the donor will appoint a trustee or team of trustees ñ family, friends, professionals or even specialist corporations – who will be responsible for maintaining it. The complexity of creating a trust means it is advisable for anyone considering one to seek financial and legal advice. Donors often have very specific wishes and instructions that trustees must follow, which therefore need to be thoroughly documented and understood by the trustees in order to avoid future uncertainty and potential mismanagement.
Asset protection trusts can be split into two broad categories; those that are subject to reversal or change and those that are irrevocable. If the trust is revocable the donor could regain legal ownership of the asset at some point. However, if the trust is irrevocable they are severing their legal ownership of the asset permanently.
Due to the potential impact on the donor, trustee(s), beneficiaries and the asset itself, it is generally recommended that advice is sought before creating an asset protection trust. Trust creation and maintenance experts can ensure the donor’s wishes are documented appropriately and that the trust is created and maintained in a tax efficient manner whilst providing advice regarding tax and/or accounting liabilities for those involved. Although they may appear complex, when created and maintained effectively, trusts do provide a viable option for people wishing to protect and control their assets, and allow people to leave a lasting legacy that benefits future generations.