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By: W. Scott Simonton, Vice President and Managing Director
Are you concerned about protecting your assets from potential creditors and frivolous lawsuits? If you're not, you should be. Until recently, creditor-friendly laws have limited your ability to protect you and your beneficiaries from losing what you have accumulated.
You may have established a revocable living trust for estate and tax planning purposes, but this does not offer a defense from a creditor who sues you. And the same holds true for an irrevocable trust if you have the right to receive distributions of income or principal. In both cases, all of the trust's assets may generally be used to satisfy a judgment against you.
The law in many states will only provide protection as long as you cannot revoke the trust or receive any benefits from the trust. This means that, to protect those assets against a potential unknown incident, you would have to irrevocably give them away - an unpopular choice for many people.
In the past, the only solution for such a dilemma was to set up an offshore trust. Unfortunately, these can be expensive, complex instruments that often make it just as hard for you to get at your money as it would be for your creditors. Fortunately, now there is an alternative.
In 1997, Delaware amended its trust law to allow asset protection trusts. These trusts can provide you with protection from creditors and lawsuits, and you can still name yourself as a beneficiary. This could be especially attractive if you are a doctor, lawyer, business owner, or anyone else who has large potential liabilities because of your profession.
As the settlor, you can:
The trust's assets may also be considered a completed gift for Federal gift tax purposes and excludable from your taxable estate. In addition, no limit is placed on the amount that can be sheltered from creditors' claims.
You don't have to be a resident of Delaware to set up a Delaware Asset Protection Trust. But you do have to make a disposition to a qualified trustee and place a portion of the trust's assets with a Delaware financial institution.
A qualified trustee is defined as an entity that:
You can appoint non-Delaware individuals or corporations as co-trustees. However, that may increase the chance that Delaware law could be found not to govern the trust and thus jeopardize your beneficiaries' and creditors' rights.
Delaware's laws provide maximum protection that extends to other accounts as well. Unlike qualified retirement plans, IRAs are not protected from creditors' claims by any Federal law. However, Delaware has expanded its spendthrift provision to exclude IRAs, rollover IRAs, and Roth IRAs from attachment. Combined, these provisions provide much more creditor protection than is available under the laws of many other states.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.