A few weeks back, I had a heart-to-heart with a financial planner who’s been sending clients my way for quite some time. In our recent chat, he mentioned the need for asset protections within a trust for a potential client he was planning to refer to me. He brought up the idea of using a revocable trust. These discussions are quite common between us because we have a solid understanding of how to collaborate effectively. However, this particular conversation delved into the depths of estate planning, much like how this blog post goes beyond the basics to explore a more specialized topic. As we talked, I turned to my friend and asked, “What do you mean by asset protection in a revocable trust?”
His response was, “I thought when you place assets in a trust, they’re shielded from creditors and anyone attempting to collect a judgment because the trust has a different name than the individual.” We briefly discussed how merely having a different name wouldn’t offer substantial protection and that creditors could easily discover assets in a revocable trust. I explained that under Texas law, a revocable trust didn’t provide that kind of asset protection. It turns out, the notion that all types of trusts create asset protection is a common misunderstanding.
Throughout all our conversations over the years, my financial planner friend and I had never delved into the specifics of asset protection offered by a revocable trust. I informed him that a revocable trust doesn’t grant immediate asset protection for the person creating the trust. Curious, he inquired, “What’s the point of asset protection in a revocable trust, then?” I clarified that a revocable trust could offer asset protection for the heirs’ future interest in the trust assets, but for current asset protection for the trust creator, an irrevocable trust would be the way to go. It seemed like a vital concept to share with more people, so I decided to put together this blog post.
Everyone’s goals and objectives are unique. The structure of a trust is tailored to what you want to achieve. Asset protection essentially involves creating a legal separation between a person and their assets, thus providing a layer of protection. Irrevocable trusts are ideal for those with a current need, while revocable trusts can offer future beneficiaries this protection. Each approach has its pros and cons, just like any other decision, and we’ll delve into those options in this blog post.
Irrevocable Trusts: Current Asset Protection with Trade-offs
If your aim is to safeguard assets from potential future creditors, you’ll need to establish an irrevocable trust. These trusts can’t be altered or amended without court permission and create a legal barrier between you and your assets. As the trust becomes a separate legal entity, you no longer own the assets, making them inaccessible to your creditors. However, the downside is that you lose control and the ability to enjoy those assets.
This loss of control can be a significant drawback. Most people want to maintain control over their assets and use them as they please. Typically, my clients who opt for this arrangement are older individuals seeking to protect assets from Medicaid, nursing home costs, or other long-term care expenses. There are specific time frames and waiting periods to consider when applying for these programs, as discussed in another blog post about advance Medicaid planning. This scenario may not apply to most younger individuals, so it’s wise to explore other alternatives.
Additionally, if you’re currently facing creditors or foresee potential creditors on the horizon, such as being in the midst of a lawsuit, transferring assets to an irrevocable trust won’t help. Such transfers are considered fraudulent and can easily be undone by someone seeking to collect on a judgment.
Revocable Trusts: What You Can (and Can’t) Achieve
Transferring assets into a revocable trust isn’t considered fraudulent, but it also doesn’t provide immediate asset protection for the trust creator. If you create the trust, serve as its trustee, and are the primary beneficiary, the assets within the trust are essentially still yours. Although the assets may bear the trust’s name, everything flows back to you, leaving your assets vulnerable to current and future creditors. For debt collection purposes, you’re still regarded as the owner of trust assets.
Nonetheless, a revocable trust can provide asset protection for future heirs and beneficiaries. This is often done to safeguard assets for minor children, beneficiaries with special needs, or in cases where a lump-sum payment may not be advisable. The trust can hold onto assets and disburse them for a beneficiary’s well-being under specific circumstances. For instance, if a person has special needs and can’t manage their finances, the trust can retain assets and allocate them for the person’s care. These assets may not count against them if they’re receiving government assistance subject to asset limits.
A revocable trust eventually turns irrevocable when it’s protecting assets for final beneficiaries in the future. This transition occurs after the trust creator has passed away, turning the trust into a separate legal entity and securing the assets.
In simpler terms: a revocable trust becomes irrevocable when the trust creator passes away, thus providing asset protection.
Texas Residents: Which Trust Suits You Best?
The question now is, which trust aligns with your specific needs?
Your requirements for a trust may differ from those of others. If you want to discuss your trust and determine what’s best for you, feel free to schedule an appointment with us. We’re here to help you navigate this important decision.