Protecting Your Money from Lawsuits and Creditors

Although you are usually protected from liability arising from your job, there are some circumstances in which you may be sued. With more responsibility comes a potentially higher risk to your personal accounts and property. One way to protect your personal accounts and property is to make sure that you or your employer has acquired appropriate liability insurance. A second way is by using special irrevocable trusts.

Domestic Asset Protection Trust:

A domestic asset protection trust (DAPT) is one strategy you can use to protect your money and property. You give some of your property to this trust, which is irrevocable and thus cannot be changed. The trustee can potentially make distributions to you, thereby allowing you to continue enjoying some benefits of the trust property.

However, the trustee in most cases needs to be an independent trustee (someone who is not related or subordinate to you or any other beneficiary and who will not inherit anything). The goals of a DAPT are to allow you to fund the trust with your own money and property, maintain an interest in the trust as a beneficiary, and protect that money and property from your future creditors.

DAPTs work on the legal principle that someone cannot take away from you something you no longer own. When you transfer property into a DAPT, you are actually making a gift of it to the trustee (the person or entity you choose to manage, invest, and use the accounts and property) on behalf of the irrevocable trust.

Lifetime Qualified Terminable Interest Property Trust:

A lifetime qualified terminable interest property (QTIP) trust is an irrevocable trust created by a trustmaker spouse (who usually has more money and property) for the benefit of the beneficiary spouse. The trustmaker spouse can create and fund the trust without using any gift tax exemption by relying on the unlimited marital deduction, which allows spouses to gift money and property to each other without tax consequences. During the beneficiary spouse’s lifetime, they will receive all of the trust income and may be entitled to receive trust principal for limited purposes.

When the beneficiary spouse dies, the remaining accounts and property will be included in their estate, thereby making use of the beneficiary spouse’s otherwise unused federal estate tax exemption. If the beneficiary spouse dies first, the remaining trust property can continue in the asset protection lifetime trust for the trustmaker spouse’s benefitand the remainder will be excluded from the trustmaker spouse’s estate when they die.

Spousal Lifetime Access Trust:

A spousal lifetime access trust (SLAT) is an irrevocable trust created by the trustmaker spouse for the benefit of the beneficiary spouse. This trust is used to transfer money and property out of the trustmaker spouse’s estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts by having the trustmaker make a sizable permanent gift to the SLAT that decreases the value of their estate while maintaining some limited access to the money and property that is gifted for the beneficiary spouse’s benefit.

The trustmaker spouse gives money and property (of which they are the sole owner) to the SLAT for the benefit of the beneficiary spouse. If the couple resides in a community property state, they will likely need to convert community property into separate property through a partition agreement. The trustmaker spouse reports the gift on a gift tax return. The beneficiary spouse can receive distributions from the trust, from which the trustmaker spouse may also indirectly benefit. Upon the death of the beneficiary spouse, the trust assets are transferred to the remaining trust beneficiaries (usually children and grandchildren of the couple), either outright or in trust.

When considering these types of trusts, it is critical that you work with an experienced estate planning attorney. These trusts usually have very strict requirements that must be met in order to provide you with the protection you are looking for. It is also important that you understand how much control you will be giving up in order to protect your hard-earned money. For more information, call my office at (406) 727-2200.