Although a revocable living trust can eliminate the need for court involvement upon your incapacity or death, it does not provide protection from your creditors while you are alive. Until recently, creditor protection in a trust came at the expense of the right to use or benefit from the assets in the trust. For example, you could create an irrevocable trust for the benefit of your descendants and receive creditor protection on the assets funded to the trust, but you yourself would not be able to use the assets once in the trust. In light of this situation, Utah and a handful of other states have recently enacted laws providing for what is known as an “asset protection trust,” allowing people with excess assets to obtain creditor protection on those assets while still enjoying the assets themselves. (See Utah Code § 25-6-14). Among other things, Utah’s asset protection trust statute provides for the following:
- The person establishing the trust (the “settlor”) may receive discretionary distributions from the trust, no matter how large, at the sole discretion of the trustee.
- The settlor may receive mandatory distributions from the trust under limited circumstances, such as pursuant to an “ascertainable standard” (i.e., for health, education, maintenance and support).
- The settlor may use property in the trust, such as a personal residence.
- The settlor may remove and appoint persons known as “trust protectors,” provided they are not related or subordinate to the settlor; and the trust protectors can in turn remove and appoint trustees in charge of making distributions to the settlor.
- The settlor may veto any proposed distribution to a non-settlor beneficiary.
- A transfer to the trust cannot render the settlor insolvent.
- The settlor cannot intend to hinder, delay or defraud known creditors by transferring assets to the trust; but an expressed intent to protect assets from potential future creditors is specifically allowed by the statute.
- Persons with child support rights as against the settlor have special rights as to distributions from the trust.
- The settlor may not revoke or amend the trust or withdraw property from the trust except with the consent of a person whose interest in the trust would be adversely affected, such as a child whose remainder interest in the trust would be reduced by the settlor’s removal of assets from the trust. However, the statute puts no limitations on a trust protector’s power to revoke.
- A known creditor loses the right to file a fraudulent transfer claim as to property in the trust two years after the settlor transfers said property to the trust or one year after the creditor reasonably discovers or should have discovered the transfer. But if the settlor notifies the creditor of the transfer in writing, the creditor will have only 120 days to file a fraudulent transfer claim.
Although a revocable living trust is an integral part of every estate plan, it does not provide asset protection qualities. If your are solvent with any excess assets, even if relatively modest, an asset protection trust can be an invaluable piece of your estate plan. Whereas asset protection planning was historically geared toward people with large estates, Utah’s asset protection statute brings creditor protection within reach of everyday, hardworking families. Ask us about the asset protection trust and if it is right for you.
Trackback from your site.