A trust is a legal agreement that requires four basic elements — a grantor, a trustee, assets and a beneficiary. The grantor, sometimes referred to as a maker or trustor, is the person who creates the trust. The grantor must designate assets to fund a trust as well as appoint a trustee to oversee the trust and at least one beneficiary who will receive the benefits of the trust. A person can play more than one role within a trust. For example, the grantor may also be a beneficiary. Trusts come in many forms and are created for a wide variety of reasons. One category of trusts that has gained popularity over the last few decades is the asset trust.
An asset trust, as implied by the name, is a trust that has protection of assets as the main purpose of the trust. The grantor may be attempting to shield the trust assets from creditors or taxes, for example. An asset protection trust works by separating the benefits of the trust assets from legal ownership of the assets. In other words, the idea is to allow the trust beneficiary to enjoy the benefits of the trust assets without having actual legal ownership of the assets. With no legal rights of ownership to the trust assets, the beneficiary cannot be taxed on the assets and creditors of the beneficiary cannot attach a lien to the assets or garnish the assets.
State laws govern the availability and formation of an asset trust within the United States. In most cases, an asset protection trust must be irrevocable to qualify. In addition, most asset protection trusts include a spendthrift provision which prevents the beneficiary from alienating his or her benefits in favor of a creditor or a third party. Asset protection trusts are not impenetrable, however. Child support obligations, for example, can often penetrate the shield of an asset protection trust. Historically, a grantor who was also the beneficiary of the trust was not an allowable asset protection trust; however, many states have made changes which now allow for self-settled asset protection trusts under certain conditions.
Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.