Asset Protection Using an Irrevocable Trust?
Do Irrevocable Trusts Really Protect You?
This is now officially QUESTION #1 coming in from visitors to my website! Apparently the new word on the street is that if you are in trouble and want to protect your assets, just give them all away! And better yet, give them away in this incredible vehicle called an Irrevocable Trust, which allows you to still have some control over what gets done with those assets and how.
And I must admit that this sounds like a great plan. I mean why not, especially if the objects of my generosity are my very own children or other close family members. On top of that, this type of protection can cost as little as FREE if you just transfer the assets outright. Even if you do want to have some control and use an Irrevocable Trust, since it is a simple domestic trust the cost can run anywhere from $2,500 – $7,500 (pretty reasonable when you are talking about asset protection).
This does sound pretty good, so is there a catch? The answer is YES, there is a big catch. Consider the following:
- Giving all of your assets away out of the blue to your children, spouse or family is simply not a normal thing to do.
- When a judge sees that happen (outright or in an irrevocable trust) he/she will make a presumption that the gift was made to delay, hinder or defraud a creditor.
- This exposes the entire gift to a clawback by a judge.
- If the gift was outright, then the judge may simply bring it back (i.e. take it away from whomever you gave it to).
- If the gift was through an Irrevocable Trust, then the judge may invalidate the trust completely and remand the funds to the court, leaving you in a worse position then prior to the gift. (Worse because the job of finding and collecting all the assets has already been done for the court and the court doesn’t even need to take the assets away from you).
You can create an Irrevocable Trust, fund that trust, complete the gift, and leave all the assets right here in the good old USA. And if you follow the logic, and do not understand how the law really works, you may think that taking the time and effort to use an Irrevocable Trust somehow protects them in front of a judge. The irony is that often this just makes the job of the court and a creditor EASIER. You might as well just put a bow on that basket.
The Difference with a Full Asset Protection Plan
The most important difference is that in a true and well-structured asset protection plan, there is not a blatant gift made in the face of a creditor. In fact, this is a case where less is more. By taking legitimate steps to structure your estate and asset plan, you may move certain assets to legal tools such as a Limited Partnership or a Limited Liability Company without these transfers either being, or possibly even more important, appearing, to be a clear violation of the fraudulent conveyance laws.
While giving everything you have away is not a normal action at all, moving assets into legitimate business and estate planning tools IS a normal action for someone to do, even when faced with a crisis. This is the key difference between the two strategies and makes all the difference when it comes to how a court will view your actions.
These tools in turn may be connected further to a special type of Irrevocable Trust called an Asset Protection Trust. While an APT is irrevocable, it is one in which you haven’t actually given your assets away. You remain the beneficiary of this trust and retain direct control until the assets are truly threatened. And if this trust is ever challenged you have the additional security of moving your assets away from the U.S. court, judge and jury (not available if you do a normal irrevocable trust).
It may help to think about it this way; A sophisticated Asset Protection Plan vs. a simple Irrevocable Trust is like the difference between driving down the highway at 85 mph in a new car with front, back and side airbags while wearing your seat belt and driving a motorcycle while wearing a helmet. While the helmet may give the illusion of security, which position would you really rather be in if you were heading for an accident?
And if you are even close to having a serious threat to your assets, then you are driving more like 130 mph with ice on the road.
Take Your Asset Protection Planning Seriously
The bottom line is that if you are serious about protecting your wealth, do your research online, and then when you think you understand the basics, or when you have reached the point where you are really confused by all of the conflicting information, pick up the phone and call a real live expert in this area (1-800-231-7112). It need not be me or my firm, but I strongly encourage you to call someone who can walk you through this. Remember, you are dealing with an incredibly important personal planning decision which affects your whole family, and going it alone is not a good option.
I recommend that you ask yourself what your goals truly are. If your answer is that you really want to protect your wealth, then I suggest you take a pass on any option which offers only the illusion of security and choose the one which will provide you with true protection.