Certainly! Can a Trust Safeguard Assets from Legal Action? In short, yes. Specific types of trusts have the ability to shield assets from lawsuits. For instance, an asset protection trust can provide protection in the event of a lawsuit, but this is not typically the case with most living trusts. It’s crucial to emphasize that the trust must be drafted correctly and linked to the appropriate legal jurisdiction. Additionally, it generally requires a trustee who is not a spouse, close relative, controlled employee, or agent.
To draw a parallel, consider this question: Can vehicles achieve high speeds? Indeed, certain types can. Race cars, when properly constructed, tuned, and fueled, can outpace most other vehicles. On the contrary, while farm tractors excel in their designated tasks, they are not known for their speed. In essence, if speed is your objective, selecting the right vehicle is essential. Similarly, if asset protection is your goal, choosing the appropriate type of trust is crucial.
The Menace of Lawsuits
It’s widely known that the United States stands out as the most litigious country globally, boasting the highest number of lawyers, approximately one attorney for every 240 residents. Countless television commercials feature lawyers promoting their expertise in filing lawsuits and securing “compensation” for minor injuries. No one is exempt from the threat. When directed at you, frivolous litigation has the potential to strip away everything you’ve diligently accumulated throughout your life, a truly daunting prospect.
Many individuals turn to offshore trusts for various reasons, and safeguarding assets from lawsuits often tops the list. While trusts can indeed provide protection against lawsuits, it’s crucial to recognize that not all types of trusts offer this safeguard. A revocable trust, such as a living trust, falls short in this regard, as creditors can step into the grantor’s shoes and utilize the power of revocation. In contrast, a properly crafted irrevocable trust does not allow such intrusion.
Unveiled An irrevocable trust is characterized by its resistance to easy modifications. This doesn’t imply that changes are entirely off the table, as it greatly hinges on the stipulations outlined in the trust and its drafting. For the specific objective of asset protection, the individual funding the trust, known as the settlor, and the beneficiaries lack the authority to make alterations without involving the trustee. The trustee assumes responsibilities such as overseeing the trust and managing its accounts. Unlike a revocable trust, where the settlor often serves as the trustee, this is not the case in most irrevocable trusts designed for asset protection.
It’s essential to recognize that, according to legal standards, creditors possess the same abilities as a debtor. For instance, in a revocable trust, the settlor has the freedom to change beneficiaries at their discretion. Legally, a creditor can sue the settlor, and if successful, a judge may declare the creditor as the beneficiary, enabling them to access trust assets to settle debts. While an irrevocable trust curtails the settlor’s powers compared to a revocable trust, it also limits the rights of creditors and the judiciary.
The key lies in setting up the trust according to your preferences from the outset. Fortunately, if circumstances change, the trustee can make necessary and legally acceptable adjustments. While many of us appreciate having control, it’s crucial to realize that full control granted to the settlor also means that a judge and creditors could attain the same level of control. Hence, for those seeking genuine control, establishing an irrevocable trust is the recommended approach.
Who Requires Lawsuit Protection?
If you inquire about the necessity of lawsuit protection, the common response might highlight physicians concerned about malpractice claims, real estate developers cautious about potential legal entanglements, or other high-net-worth individuals in careers susceptible to litigation. However, the reality is that anyone could find themselves facing a lawsuit at any given time. This holds true especially for those who have amassed significant assets, as the legal concept of the “deep pockets” theory often targets individuals or entities with the greatest ability to pay, even if their involvement in the lawsuit is minimal. It’s worth noting that lawsuit protection may be essential even for individuals without substantial assets but who face the risk of losing their home or grappling with mounting debts.
It’s crucial to understand that, in the eyes of a contingent fee attorney, sympathy may be as scarce as it is for a baby gazelle among a pack of lions—seeing you as the next meal. Circumstances like a contentious divorce, a car accident, a business dispute, or various other events leading to litigation can befall anyone. Few, if any, are entirely immune from such possibilities.
Legal Matters Postmortem
While death is an inevitability, the absence of the living does not guarantee immunity for your estate against potential lawsuits. An asset protection trust offers a means to allocate your assets to chosen beneficiaries, simultaneously serving as a deterrent against bequeathing assets to undesired individuals. Consider a scenario where there’s a strained relationship with a close relative; naturally, you wouldn’t want them to be a beneficiary of your trust. In cases where forced heirship laws are in effect, or if you reside in Louisiana, disinheritance of kin through a will or trust may not be possible. However, by siting your trust in a foreign jurisdiction that does not acknowledge forced heirship, a discontented relative would be unable to succeed in a lawsuit against the trust to claim beneficiary status.
Insurance Falls Short
Many individuals hold the belief that acquiring ample insurance coverage eliminates the necessity for an asset protection trust. However, in certain situations, such as during a divorce, this assumption may prove inaccurate. Furthermore, defining what qualifies as “sufficient” insurance can be elusive. In typical circumstances, a couple of million dollars in insurance might offer protection. Yet, in extraordinary situations, like an unexpected accusation of sexual harassment from a former employee, the insurance policy intended to safeguard assets could provide a false sense of security. It’s important to recognize that insurance companies design policies primarily to protect themselves, not necessarily the policyholder. Consequently, many insured individuals who presumed they were adequately protected found themselves confronted with disheartening statements like, “your policy doesn’t cover that.” An alternative and more robust approach to safeguarding assets is through the utilization of an asset protection trust.
Understanding Asset Protection Trusts
An asset protection trust is administered by one or more trustees and is characterized by its irrevocable nature, often featuring spendthrift clauses. The inclusion of spendthrift clauses means that creditors are barred from seizing the assets of the trust’s beneficiary until those assets—ranging from real estate and securities to cash—are officially distributed to the beneficiary.
Another notable advantage of an asset protection trust lies in its flexibility, allowing for the inclusion of a wide array of valuable assets. This encompasses not only bank accounts but also items like art, antiques, jewelry, precious metals, and a myriad of other valuable possessions. The scope of assets that can be safeguarded within such trusts is virtually limitless.