When making your estate plans, don't forget to account for the possibility that creditors may cart away your assets and leave your heirs with peanuts. However, that won't be the case if you craft a solid asset protection trust and transfer your assets to it. Here are a few things you should know about such a trust.
You Can't Use It to Avoid Current Creditors
You can't create a self-settled trust to shield your assets from existing creditors. In fact, the need to protect your assets from creditors should not even come up during the creation of the trust; it should just be a byproduct of the trust. To prevent people from running to lawyers to create self-settled trusts whenever they have a debt issue, many jurisdictions have a waiting period before creditors can be barred from accessing the trust. However, it is an excellent way of shielding potential creditors from taking your assets in the future.
Choose Your State Wisely
You don't have to create the self-settled trust in your home state; you can create one in any state. However, you need to be careful with your chosen state because of the following.
Trust Laws Vary By State
You need to research self-settled trust laws in your target state so that you aren't disadvantaged by one of them after creating the trust. Don't forget that a self-settled trust is irrevocable—once you create it, you won't be able to undo the creation.
The Trustee Needs to Be in the Same State
The trustee, the person who manages the trust on your behalf, should be in the same state as the one in which the trust is created. Therefore, you should not pick a state before picking a trustee; pick a few potential trustees and states and see which ones are compatible.
Your Assets Need to Be in the Same State
This is another reason you need to be careful when choosing the state; you may be able to move some assets such as stocks and bonds. However, real estate property or established businesses are harder to move. In such cases, you may have no option but to create the trust where the assets are located.
Don't Ignore Your Liquidity Needs
Lastly, you should not rush to protect all your assets and ignore your liquidity needs. In some cases, the trust may be created in such a way that you can only receive proceeds from it if the trustee agrees. What if you want your family members such as your spouse and grandchildren to benefit from the trust? Factor in such considerations when creating the self-settled trust because you may not be able to change them later on.
To learn more, reach out to an estate planning attorney.