There are several goals that an estate plan can address, one that I think is pretty interesting is creditor protection and asset protection. For purposes of this article, when I say creditor protection I am referring to the ability to allow loved ones to inherit assets while protecting the asset from a potential future bankruptcy, divorce, failed business, or lawsuit. This strategy is effectively accomplished by creating a creditor protected sub-trust. Instead of creating a trust that distributes assets directly to loved ones, a person can distribute assets to a sub-trust where their loved one is the beneficiary of the trust.
From a legal standpoint the person who inherits this trust does not own the trust. Sounds bad right? Wrong. The beneficiary can still have control over the assets but since technically he or she does not own it, it is protected from creditors. For example, If I were to inherit one of these creditor protected sub-trusts I could serve as successor trustee (or manager) of the trust. The trustee controls what the trust invests in and how it distributes assets. In this example, let’s say that I want to purchase a condo in San Diego. If I have the trust distribute funds to me and I then purchase the condo, it is now in my name and subject to creditor claims. I don’t like that. Instead, as manager of the trust I would rather have the trust buy the condo as an investment and I could use and enjoy the property. That way if there was ever a lawsuit against me and someone wanted the condo, I could politely tell them that I do not own the condo. Instead, it would be owned by a trust that is separate from me. Pretty cool concept right? So what is the catch? Frankly, there is a catch. This trust can’t be created for oneself. It can only be set up for the benefit of another. That is why I mentioned that it is a good way to distribute assets to loved ones. This distribution can take place during lifetime or after death depending how the trust is set up.
Creditor protected sub-trusts are very common for individuals with substantial wealth. They provide an effective way to preserve family wealth for generations. Some people call these trusts “dynasty trusts”, “GST Trusts”, or “Generation Skip Trusts.” Aside from creditor protection, these trusts can provide benefits when it comes to the estate tax. If you are interested in learning more about a creditor protected revocable trust, please contact the estate planning attorneys at the Dana Law Firm.
Written by Arizona Estate Planning Attorney Zachary Dana