Asset Protection From the Trust Up

Asset protection against the causes of wealth depletion - lawsuits, judgments, creditors, ex-spouses, financial mismanagement, and the IRS - can be avoided or eliminated by the use of a Beneficiary Controlled Trust, created by someone else as Grantor and you as the Beneficiary/Investment Trustee. A spendthrift provision and a second Distribution Trustee shields your assets from predators.

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Asset protection works best when you start before you have a significant number of assets that need protection. You need to fix the roof before the rains pour in. The earlier a trust is created, the greater the benefits.

The time you usually worry about your assets - when facing a divorce, lawsuit, creditor demands, or a tax lien - is when you can kiss your stuff goodbye. If you have not protected it by then, it's not your property. It belongs to whoever the judge says it does.

Trusts used to be the last thing a middle-class taxpayer had to worry about. Estate taxes were the problem of the rich. A trust, along with appropriate use of corporations and limited liability companies, means never having to give your property to the ex-anyone again.

As it stands now, with modest homes in many parts of the U.S. fetching over $1 million, trusts are the most powerful asset preservation device available. In addition, all gifts and bequests should be made and kept in trust instead of being given outright.

What we call a BCT (Beneficiary Controlled Trust) goes by a more accurate description of "Crummey Defective Grantor Spendthrift Trust".

Crummey is the name of an individual who challenged the IRS and won, not a depiction of the quality of the trust. For that alone he deserves your respect and admiration.

In our Beneficiary Controlled Trust, the beneficiary also serves as trustee, hence the control. Crummey powers are handled by the second trustee, known as the Distribution Trustee, but all control and decisions remain with the beneficiary/trustee.

The BCT is designed to:

1. Give the beneficiary beneficial use and control of trust property without having ownership which can be reached by creditors or distributed by a judge in a divorce case. You can't lose property in a divorce settlement if you don't own it.

2. Have no negative gift or estate tax for the beneficiary or the person creating the trust (Grantor).

3. Own businesses in the form of corporations or LLCs to provide protection from personal liability from debts of or judgments against the business entities.

4. Pass income earned by the trust to the beneficiary to be taxed at lower individual tax rates.

5. Provide a way for parents to use their annual gift tax exemption to transfer wealth to children or grandchildren without estate tax issues for either the grantors or beneficiaries.

6. Restrict income and principal distributions only for HEMS (health, education, support, and maintenance). Distributions are discretionary, not mandated. HEMS conforms with IRS standards to make sure the assets are not included in your estate, and cannot be reached by creditors.

7. Gives you the right to replace the Distribution Trustee (2nd trustee) at any time. While this might not seem important at first, this is one of the few irrevocable trusts that can be "rewritten". The trust can continue for the beneficiary's lifetime and for successive generations. The only caveat is that the beneficiary/trustee may not rewrite in such a way as to increase his own benefits.

8. Our BCT has special testamentary powers of appointment which allows you to direct who receives the trust property upon your death. To prevent assets from becoming a part of your estate, the BCT will prohibit you from giving any property to creditors, your estate, or estate creditors. You can now pass the trust assets on to your family or charities or anyone you choose.

9. For parents who want to help their children start a new business, funds given outright to the individual child are exposed to claims of creditors or ex-spouses. Seed money contributions to the trust can be used to form a corporation or to organize a new limited liability company. An LLC owned 98% by the BCT, and 1% owned each by two natural persons such as the parents, is the structure we have found to provide superior asset protection. The LLC can then acquire assets 98% owned by the trust.

10. The beneficiary has no enforceable right to demand income or principal from the trust, so creditors cannot step into the shoes of the beneficiary and force a distribution. In bankruptcy, the beneficiary cannot voluntarily or involuntarily assign his interest in the trust for the benefit of creditors.

If you have full ownership of property, creditors, spouses, and the IRS can come gunning for you. Failure to exploit trusts to their maximum advantage puts a bull's-eye on your chest.

When distributions are subject to the absolute discretion of the independent Distribution Trustee, even though the beneficiary can replace that independent trustee, you now have unequalable divorce and creditor protection.

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Charles Lamm is a retired attorney and owner of Trustee and RA Services, Inc., in Coral Springs, Florida. His asset protection articles appear on his blog at: http://www.corp-llc-bct.com. To learn more about how to combine a corporation, LLC, and Beneficiary Controlled Trust for maximum asset protection and tax benefits, please email him at: asset-protection@corp-llc-bct.com.