There are many asset protection techniques that involve the use of irrevocable trusts, but they must be carefully drafted and implemented. There are a few reasons why transferring assets to an irrevocable trust may not protect the assets.
First, the drafting attorney must include special language regarding the nature and use of the assets. Not all irrevocable trusts are asset protection trusts or the irrevocable trust may only provide protection in limited circumstances.
Second, you cannot enter into asset protection planning in contemplation of a lawsuit or defrauding your creditors. If you already know you will be used or that there is a likelihood of being sued, then your attempts at asset protection will probably not work. Similarly, if you have already incurred a debt, it’s likely that your attempts at asset protection will not protect your assets from your creditor or in a bankruptcy proceeding.
This, of course, is a very simplified analysis and there are a whole range of possibilities. For example, if you transfer the assets when there is no pending or even threatened claims on the horizon and no reason to believe that legal problems will develop in the future, but you simply want to plan for your family’s future well-being, then that is not a fraudulent conveyance. On the opposite end of the spectrum, if you make the transfer just before filing for bankruptcy or divorce or immediately after having a lawsuit filed against you, then that clearly is a fraudulent conveyance. Other situations may lie somewhere in the ‘gray’ area in between these two ends of the spectrum and it will not be clear whether an irrevocable trust will hold up in court or not.
In determining whether a conveyance should be deemed fraudulent, a court is also likely to examine other factors, such as whether the transfer essentially made the person insolvent. For example, if you transferred such a large portion of your assets to the irrevocable trust that you no longer retained sufficient assets to satisfy your current debts and obligations, this would be considered “insolvency” and the transfer would likely be deemed fraudulent. In such instances, the creditor will likely be able to have the conveyance set aside so that the asset can be seized and sold by the creditor.
Finally, in addition to requiring special language, there are certain rules about how such an irrevocable asset protection trust be set up. For example, you cannot name yourself as the beneficiary and trustee of the trust. The courts and the IRS will also look at the level of control you retain over the assets in determining whether or not they should be considered “yours.”
There are exceptions to the above, such as charitable trusts, children’s trusts (you are not the beneficiary), and qualified personal residence trusts, but all must still be drafted with the appropriate language to qualify for protection.
Want to learn more about asset protection planning? Register for an upcoming seminar or call office at 919-443-3035 to schedule a Vision Meeting to discuss your estate planning and asset protection goals.