What is a Trust?
Trusts can be used for so many different things including estate planning, tax benefits, income in the case of disability or illness, passing on a family business, and asset protection. If you own a business, it’s time to consider the possible advantages a trust can provide.
The Settlor – the person who puts the assets in the trust. This person also usually writes up the rules for how those assets should be distributed and to whom in a Deed of Trust.
The Trustee – usually a financial institution of some sort but it can be a designated person or even the settlor. The trustee’s job is to protect, invest, and distribute assets in accordance with the terms outlined in the Deed of Trust and in the best interests of the beneficiaries.
The Beneficiaries – the people or organizations designated to receive the assets or cash distributions from the trust. These are usually the heirs of the settlor but they can be almost anyone, and in some cases, they can even be the settlor themself.
What is a Trust?
A trust is a fiduciary agreement where a person or persons (the settlor/s) place their assets in the hands of a trustee for future use by the people or organizations they name as beneficiaries.
It’s a way to pass on your wealth on to generations as well as a way to control how that wealth is distributed. You can also use a trust to protect your assets from creditors in future lawsuits as well as gain tax benefits in terms of your real estate investments. There are many different types of trusts and they all have their own advantages and disadvantages.
Common Types of Trusts
A revocable trust, also called a living trust, is the most popular form of trust. It’s often used for estate planning purposes as the assets placed in a revocable trust are transferred to the beneficiaries upon the passing of the settlor. However, while still alive, the settlor retains the ability to control the assets and can even change or cancel the trust at any time. This is why it’s called ‘revocable’ or ‘living,’ because everything from the assets to the beneficiaries can be changed or revoked.
An irrevocable trust differs from a revocable trust in that it cannot be changed once it is in place. This means that the people or organizations listed as beneficiaries will stay beneficiaries and the assets placed in the trust cannot be changed nor controlled by the settlor. There are a few exceptions to these rules, but in general, once the trust is finalized, it cannot be altered.
Obviously, a revocable trust sounds more appealing due to the ability to continue controlling your assets, but an irrevocable trust offers one major advantage: asset protection. Because the settlor gives up ownership over their assets, creditors generally cannot reach those assets because the settlor themself cannot access those assets. This is a strong way to protect your property from future lawsuits against you or your business.
A discretionary trust also provides asset protection benefits because the beneficiaries have no property rights with regard to the assets held within the trust. This makes it difficult for creditors of the beneficiaries to pursue those assets. The downside of this is that the trustee has discretion over the identity of the beneficiaries and the timing and amount of distribution of the assets. In a discretionary trust, the settlor essentially hands over their assets to the trustee and trusts them to make the right decisions.
Offshore trusts are usually irrevocable so as to further protect your assets from U.S. legal interference. However, they can also be self-settled — meaning that you are both the settlor and the beneficiary. Offshore jurisdictions add a layer of protection over an individual or business’s assets because your property is no longer tied to U.S. soil or the U.S. court system. This means a judge in the U.S. cannot compel a foreign trustee to release your assets in the case of a lawsuit. If a plaintiff wants to come after your assets in an offshore trust, they’ll have to litigate in that country.
Choosing the right type of trust is key in your asset protection strategy. If you’re looking to avoid the possibility of your assets being seized in a lawsuit, you ought to hire a professional asset protection lawyer to advise you on the best path forward for your business. When done correctly, your trust can protect you, your beneficiaries, and your assets in future legal battles. However, trusts can be extremely complex, especially offshore trusts, so you’ll want to hire an experienced attorney to help guide you through the process.