A revocable living trust can be a good choice as an asset transfer vehicle for a wide range of people, but it does not satisfy every single objective. We will examine the value of these trusts in this blog post, but first, we will look at the matter of matter of asset protection planning.
Asset Protection Planning
It is said that we live in a litigious society. Indeed, there are people out there who like to file lawsuits, especially if they feel as though the person they are targeting has a great deal to take. Plus, there are certain business endeavors and professions that create vulnerabilities. This would include doctors who could face malpractice suits, and it also extends to landlords. Clearly, people who rent out property are open to legal actions brought by individuals who get injured on the property.
Many people think that you are creating a legal degree of separation when you convey assets into any type of trust. The idea is that any trust would be effective from an asset protection planning perspective.
In fact, this is not true with a revocable living trust while the grantor of the trust is living. The first thing that you should notice is the revocable designation. You can in fact dissolve or revoke this type of trust if you ever choose to do so.
Plus, the grantor of the trust can act as the trustee while he or she is alive and well, and most people who create living trusts do assume this role. If you were to act as the trustee of your living trust, you would control the actions of the trust every step of the way.
Since you would be able to take assets out of the trust, and you could even dissolve the trust entirely if you ever chose to do so, you would be retaining incidents of ownership in a legal sense. Because you do not surrender control of the assets in the trust, they would not be protected if you were to be targeted by a litigant seeking redress.
There are however other types of trusts that do in fact protect assets. These would be irrevocable trusts that you cannot rescind. You surrender incidents of ownership when you convey assets into this type of trust.
Now that we have made that distinction, we can move on to the postmortem asset protection planning benefits. After you die, the trust would no longer be revocable; it would become irrevocable. The successor trustee that you name in the trust agreement would be empowered to administer the trust. Successor beneficiaries could receive distributions from the trust in accordance with your wishes.
A spendthrift provision could be added when you create the trust. After your death, there is a concept called “stepping into the shoes” of the beneficiary. Anyone who had a judgment against the beneficiary would have the same power as the beneficiary. The beneficiary of the trust would not have the power to handle assets in the trust and take distributions on his or her own. The trustee would be required to follow the instructions that were set forth the trust agreement. Since the beneficiary would not be able to take assets from the trust at will, the judgment holder would not be able to do so either. As a result, there would be asset protection for the beneficiary after you are gone.
The protections for the beneficiary do not stop there. If you were to retain direct personal possession of your property and arrange for its transfer through the terms of a last will, you would be leaving lump sum inheritances to people named in the will. This can be disconcerting if you have people in the family who may not be very good at managing money.
When you create a living trust, you do not have to allow for lump sum distributions all at once. If you have concerns about a spendthrift, you could instruct the trustee to distribute limited assets on a monthly basis to stretch the viability of the trust. You may want to convey income producing assets into a living trust. The trustee could be instructed to distribute only the earnings from the trust, and this is an approach that is taken by many people.
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