Asset Protection for an Irrevocable Trust
An asset protection trust, sometimes called a spendthrift trust, insulates trust assets from seizure by creditors. Irrevocable trusts are those in which the trust's creator doesn't have the power to revoke the trust himself. Those with questions about a specific irrevocable trust should consult an estate lawyer or estate planning professional.
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Irrevocable Trusts
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A trust is a legal arrangement that transfers assets from one person into a trust managed by a trustee on behalf of a "beneficiary." In an irrevocable trust, the original owner, known as the settlor, transfers the assets into the trust, then cannot revoke the transfer himself. Depending on the terms of the irrevocable trust, the settlor typically requires consent from all beneficiaries to the trust before he can revoke it.
Asset Protection Trusts
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When he creates the trust, the settlor has the right to stipulate how and when the beneficiary can transfer his interest. In a typical trust, the beneficiary can choose to transfer his interest to another party, and the beneficiary's creditors can seize his trust assets to satisfy judgments against him. An asset protection trust is one in which settlor's terms specifically prohibit the beneficiary from transferring his interest, either voluntarily or involuntarily. The majority of U.S. jurisdictions allow asset protection trusts, but in most such jurisdictions, creation of an asset protection trust demands an explicit clause in the trust document that protects the assets from transfer.
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Limits on Protection
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Even in a valid spendthrift trust, many states have laws to allow certain parties to reach assets even in an asset protection trust. Under the Uniform Trust Code, anyone legally entitled to child support from the beneficiary can typically reach the assets to satisfy that support. The Code allows spouses and former spouses of the beneficiary to reach trust assets for money owed. Judgment creditors, who are owed money for providing some sort of service, are also excepted under the Code. The Code also prohibits enforcement of an asset protection provision against states or the federal government.
Self-settled Trust
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Several states' statutes allow a settlor to transfer assets into a trust with himself as a beneficiary. This type of arrangement is known as a self-settled asset protection trust, because it protects the assets from creditors while allowing the settlor to receive the benefit of the assets as a beneficiary. Many non-U.S. jurisdictions allow this type of arrangement as well. Even in jurisdictions that allow self-settled trusts, however, the Uniform Fraudulent Transfer Act typically prohibits the settlor from transferring assets into a trust if in so doing he intends to delay or defraud his creditors.
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References
- Photo Credit signing a contract image by William Berry from Fotolia.com
