December 2, 2019
By Joseph Price Jr.
What if you were able to set up a trust, contribute assets to it, maintain some control over the assets and thumb your nose at any creditor who tried to seize them to satisfy a debt that you owed?
You can certainly try to do that now, but no attorney with any scruples would guarantee that your self-settled Asset Protection Trust (Trust) would successfully prevent the creditor from seizing those assets. To understand the attorney’s caution on guaranteeing success, you need to be aware that 17 states – including Missouri, but not Kansas – have laws that allow a person to create such a Trust, but all of those state laws tightly prescribe the conditions under which such a Trust will actually “work” (that is, will actually prevent the creditor from seizing the assets).
The conditions these states impose include:
- The identity of the trustee of the Trust (generally, it must be a state resident or a bank chartered in the state).
- The timing of your contributions to the Trust (generally, at least 2–4 years before the judgment).
- At most, indirect (and definitely not direct) control over the Trust assets after the contribution.
- A purpose for creating the Trust (avoiding, delaying or hindering an existing creditor is not allowed).
With all of the above handled, your protection of the assets is still at risk if you are sued in the courts of one of the 33 states that does not recognize these Trusts or if the type of obligation you are trying to avoid (e.g., child support or alimony) is not allowed in the state where you are sued. It’s no surprise that often, when we spell out for clients all the reasons their Trust may not “work,” they decide that the likelihood of needing the protection provided by the Trust is not worth the cost of creating and maintaining it.
The story is, however, completely different if you are establishing a Trust for someone other than yourself – say, for example, your spouse, your children or your grandchildren (third party). None of the restrictive conditions described above will apply to deny the third party protection to the same degree that they would apply to you if you established a Trust. In other words, a Trust created by you for a third party has an excellent chance of “working” in almost every instance, regardless of where the Trust beneficiary is sued for any reason.
So what should your takeaway be from this article?
It is difficult to create and maintain a Trust that protects your own assets. There are a lot of hoops to jump through and even if you jump through them all, your Trust still may not protect your assets. On the other hand, that objective that is so difficult for you to achieve personally is fairly easy for a third party to achieve if you are willing to create and fund the Trust for them.