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Setting Up a Trust

setting up a trust handshake

A trust is a contract between a grantor and a trustee, whereby the grantor turns over assets to the trustee who will manage them for the benefit of a third party. The trust grantor is sometimes referred to as a settlor. There are several reasons why people set up trusts. Below are just a few of them.

Contrary to a commonly-held belief, setting up a trust is not just for the wealthy. This is especially true if the main purpose of creating the trust is asset protection. It’s not just the ultra-rich folks who have valuable assets to secure from predatory claimants. If you have a business or practice a profession with a high risk for litigation, you have assets to protect.

A trust can also be useful for estate planning. It can counter forced heirship laws and help your beneficiaries avoid a probate. Some people prefer setting up a trust to leaving a will because of privacy issues.

You worked hard for your assets and wish to leave them for your family and loved ones when you’re gone. However, your assets may prevent you from qualifying for long-term care from Medicaid, should you need it later on. Setting up a trust can help you preserve your assets and protect it from a Medicaid spend-down.

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Setting Up a Trust for Asset Protection

There are more than 15 million civil lawsuits filed in the U.S. each year. Sadly, several of them are frivolous lawsuits, lodged against individuals perceived as having ‘deep pockets.’ These types of cases are filed by claimants who are only after quick money. They usually don’t even have a legitimate grievance against the defendant. It is simply a matter of, “You have money and I want it.” This litigious environment is the reason you have to be proactive in protecting your hard-earned assets.

When you set up a trust, you turn over your assets to a trustee. This could be a trusted individual, a professional or institutional trustee or even a company or organization. In essence, you no longer own the assets; the trust does. However, the trustee does not derive any direct benefit from the assets themselves.

Of course, if the trustee acts in a professional capacity, he or she receives payment for their services. The assets are managed for the grantor’s beneficiaries, who are the ones who directly benefit from the trust assets. The trust deed contains instructions for administering the trust. This includes items such as the trust’s purpose, when to distribute discretionary interests and other similar issues.

How it Works

The moment you turn the assets over to the trustee, you are no longer the legal owner of those assets. Therefore, it is a way to keep assets away from those who sue you. Keep in mind, however, that for this potent asset protection feature to kick in, you must create an irrevocable trust. This means, you cannot directly change the terms of the trust deed once the trust has been set up. If a court determines that you still exercise considerable control over the trust assets, it can order you to turn those assets over to a creditor or a plaintiff.

You can get around this by using verbiage allowing for a certain amount of discretion on the part of the trustee. For instance, you can stipulate that an interest is to be distributed to a beneficiary only after having reached a certain age. Or, you can state that any income from the assets is to be used only for the beneficiary’s educational needs. A carefully-worded trust deed allows you to retain a measure of control over the use and enjoyment of your assets. At the same time, you’re not placing your assets in the crosshairs of a predatory lawsuit.

offshore trust

Domestic or Go Offshore?

The first state that allowed the establishment of asset protection trusts was Alaska in 1997. Delaware and Rhode Island quickly followed suit in 1997 and in 1999, respectively. To date, there are only 16 states that have asset protection legislation. The scope of the regulations vary greatly from one state to another. So, if you’re thinking of setting up a domestic asset protection trust, choose a state with the most beneficial laws.

You can shop around since you’re not required to live or work in the state where you decide to set up your trust. Of course, what’s ‘beneficial’ for you may not be the case for another person. An asset protection trust has to be customized to meet the specific needs and goals of each individual. An asset planner who says otherwise is giving you bad advice. Keep your checkbook in your pocket and head for the door.

Domestic Assets at Risk

A major drawback of a domestic asset protection trust is that it’s under the body of laws of the U.S. government. While powerful on many levels, these laws tend to be creditor-friendly. You might think your assets are safe and secure under friendly Delaware legislation. But they might be placed in jeopardy if a lawsuit is mounted against you in another state. It’s not always simple to predict which side will ultimately win in a battle between two equal but separate jurisdictions. And there you are caught in the middle, trying to hold onto your assets any way you can.

Offshore Offers Stronger Protection

On the other hand, a foreign asset protection trust puts your assets squarely under the guardianship of a sovereign country. These jurisdictions often have settlor-friendly laws, precisely because they want to attract offshore investors and trust settlors. The U.S. will not automatically enforce a judgement from another country and neither will these offshore jurisdictions. Many will require a new trial under their laws even for creditors who have already won in a U.S. court. A new trial on foreign soil can be costly, time-consuming and tedious. A predatory plaintiff will often look for an easier mark than go through the trouble and expense of another trial. Sometimes you need to go offshore to combat the threats to your assets onshore.

estate planner

Setting Up a Trust for Estate Planning

A trust can be quite useful in estate planning. Set up properly, a trust cannot be contested as easily as a will. It can help your beneficiaries avoid a probate, which can be expensive and lengthy. A probate can also tie up the assets so your beneficiaries are unable to derive any interests from them. It can also happen that some people may be entitled to receive a copy of your will upon your passing. You can avoid this by setting up a trust instead. A trust agreement is a private document. Only the parties that you authorize can readily find out about the terms of the trust. Your information – and assets – remain private, even when you are no longer around to defend your wishes.

A trust can also help you avoid the issue of forced heirship or compulsory succession. Some states and countries have laws that confer an automatic allotment of a portion of an estate for protected heirs. These are typically the surviving spouse, children and other relatives of the deceased. Forced heirship rules are applied irrespective of the wishes of the deceased. A trust that has been properly set up helps you circumvent forced heirship rules – even from beyond the grave. As ghoulish as that may sound, it echoes the argument of individuals who are against forced heirship laws. Why should the state be able to impose restrictions on the distribution of a person’s assets in death, when it could not do so legally when the person was still alive?

medicaid trust

Protect Assets from Nursing Home Costs

No one likes to talk about it, but growing old is simply part of life. And sometimes, needing long-term care is part of growing old. If you’re an aging American with assets, you have a dilemma. You want to preserve and pass your assets down to your loved ones after you die. That’s perfectly understandable. But if you need nursing home or long-term care, you can’t qualify for Medicaid until you spend down your assets. This means you will have nothing left to leave behind for your loved ones.

An irrevocable Medicaid protection trust prevents your assets from going to pay for nursing home costs. The assets you fund this trust with will not be considered in determining your qualification for long-term care from Medicaid. This type of trust usually works best for protecting real estate, but it can secure other types of assets too. A Medicaid asset protection trust also shields your assets from estate recovery. This is the process whereby Medicaid seeks to be reimbursed for the cost of care from the deceased person’s estate. Keep in mind however, that Medicaid has a five-year look back period. This means any assets you place in a trust will be subject to a spend-down or estate recovery if you transferred them within five years of needing or applying for long-term care.

preparation is the key

Conclusion

Setting up a trust can help you meet a number of major financial goals. It’s an excellent asset protection vehicle, especially when you set one up offshore. However, if the thought of having your assets thousands of miles away makes you uncomfortable, a domestic asset protection trust can offer ample protection under typical circumstances.

A trust is also an effective estate planning tool. You can use it to get around forced heirship laws in your jurisdiction and help your beneficiaries avoid a probate. Additionally, because a trust deed is a private document, your assets and plans for them remain hidden from public scrutiny. A trust can also aid in preserving your assets for your beneficiaries without disqualifying you for long-term care from Medicaid.

The key to harnessing the legal power of a trust is to set one up as early as possible. Set up an asset protection trust before someone mounts a lawsuit against you. Have your estate planning trust in place as early as possible because, let’s face it, you simply don’t know when your number’s up. Establish a Medicaid trust before you actually need long-term care. A trust can only protect you and your assets if you have one in place before you need it.