A question often asked by our clients is whether the revocable living trust we are preparing for them protects their assets from lawsuits and creditors.
Unfortunately, it’s not that easy to protect assets. A revocable living trust can be designed to provide asset protection for your beneficiaries. But that doesn’t protect you during your lifetime, only after you’re gone.
Thankfully, revocable living trusts aren’t the end of the story when it comes to asset protection.
One of the advantages of living in the United States is that we have easy legal access to 50 different jurisdictions. Each state has its own laws regarding asset protection. So a trust or business entity created in Nevada or Alaska (for example) will work under a different set of rules than one created in Illinois. We can use that to our advantage by finding the best state for a particular purpose.
- Family Limited Partnerships. A limited partnership is a business entity that is often used for asset protection. A family limited partnership (FLP) is a limited partnership that is intended to hold a family business or investments. In many states, creditors have fewer, less desirable options when attempting to enforce a judgment against limited partner interests.
- Domestic Asset Protection Trusts. In most states, a trust created by a person for their own benefit is exposed to their creditors. However, a few states allow what are officially known as self-settled spendthrift trusts. These trusts can be created and used by people living in all 50 states, including Illinois.
- Offshore Asset Protection Trusts. Sometimes you want protection that you just can’t get in the United States. Even the best state laws are still constrained by the fact that you’re dealing with US courts and US-based assets. In those cases, going offshore might be the answer.
Who is asset protection for? Asset protection makes particular sense for business owners and those at high risk of frivolous lawsuits, such as doctors and dentists. But anyone who is concerned about lawsuits or creditors can benefit.
One important note: asset protection isn’t something you put in place when a lawsuit is imminent. So plan ahead. These strategies are often recommended as part of a comprehensive plan to achieve your wealth transfer, asset protection, and privacy goals.
