Trust Protector Can Provide Added Flexibility For An Irrevocable Trust

A recent article in the New York Times by John F. Wasik provides an excellent discussion of trust protectors.  Many states now allow for trust protectors - - someone other than the trustee who essentially provides some checks and balances in a trust arrangement.

A trust protector is a bit like a watchdog.  He or she is not the trustee, but rather someone who keeps an eye on the trust (and the trustee) to be sure it is operating the way it was intended to.

A trust protector also might be able to make certain changes in an irrevocable trust arrangement in response to changes in the law.  Since asset protection statutes, tax laws, and trust laws are changing so rapidly these days, it is advisable to build as much flexibility as possible into an irrevocable trust.

A trust protector may be given the power to replace the trustee under certain circumstances, which obviously provides a very significant check on the power of the trustee. 

The role of a trust protector should be discussed with your asset protection attorney and/or your estate planning attorney whenever you set up an irrevocable trust.

Trusts Require Flexibility

Asset protection planning (and estate planning) frequently involves the use of one or more trusts. Possibilities include an offshore trust, Domestic Asset Protection Trust, irrevocable life insurance trust and various other kinds of trusts. 

Most of these trusts are designed to last for many years. It is therefore important to give the trustee the flexibility to adjust to changing circumstances. Many things can change during the life of a trust. Among the many changes that a trustee may be faced with are:

·         Beneficiary’s creditor problems

·         Changes in family circumstances (including divorce)

·         Cost of living

·         Legal changes

A person setting up a trust is often inclined to impose very specific requirements on the trustee (for example, making specific distributions to beneficiaries each year). But one or more of the changes mentioned above could make a particular distribution problematic. Giving your trustee flexibility and discretion often makes the most sense. This is why I frequently remind my clients that who you choose as trustee of a trust can be just as important as the trust documentation.

In any event, it is important to keep in mind that no matter what kind of trust you establish, you are going to have to give your trustee a certain amount of flexibility to react to future changes.

Surrendering Some Control of Your Assets Required for Asset Protection Trust

Any trust that can help protect your assets from creditors requires that you surrender at least some control over those assets. This goes for an offshore trust; a so-called "domestic asset protection trust"; an irrevocable life insurance trust; and any other trust that gives you creditor protection. If you think about it, this is just common sense. If you retain full control over the assets in a trust, than a judge could order you to hand those assets over to a creditor who has a judgment against you. This is why a revocable grantor trust (frequently used for probate avoidance) provides no creditor protection. Such a trust may be useful to avoid probate, provide asset management, and for other purposes. But it is not going to protect your assets from a judgment creditor.

Surrendering some control of your assets is not necessarily bad, as long as you are willing to do so. But each situation has to be analyzed separately. And, you must be very careful about who you are giving some control to. While this is a broad generalization, it should come as no surprise that the more control you give up, the better creditor protection you get. But surrendering control has its own risks, which should be considered very carefully.

Legitimate asset protection includes a balancing of risks and possible rewards. Always keep in mind that if a particular arrangement looks too good to be true, it probably is. 

Irrevocable Life Insurance Trusts Provide Excellent Asset Protection

Irrevocable life insurance trusts (ILITs) can be a great estate planning tool under the right circumstances. ILITs have the added benefit of providing significant asset protection. 

Life insurance owned by an ILIT is not generally part of the insured’s estate (for both federal and Ohio estate tax purposes).  An ILIT will be most effective if it is formed prior to acquisition of the life insurance policy.   The ILIT directly purchases the insurance policy or policies. If the ILIT is formed properly creditors of both the settlor (the person establishing the trust) and the beneficiaries should have no rights in either the cash value or the death benefits of the insurance.

Assets of an ILIT should also generally be immune from claims in a divorce or dissolution of marriage. An ILIT (unlike certain other trusts such as so-called marital deduction trusts, credit shelter trusts and/or QTIP trusts) may also provide for termination of a spouse’s interest in the event of remarriage.

Whether or not an ILIT is suitable depends on the particular facts and circumstances. Moreover, the insured has to effectively give up control of the assets held in this type of trust; and the fees and expenses to set up such a trust also have to be considered. In some circumstances, however, an ILIT can be a valuable estate planning tool, and also provide significant asset protection opportunities.

An ILIT is definitely not going to constitute a complete asset protection plan.  But it may be very useful as one of the components of such a plan.