Do you have plans to start a new business, have multiple business ventures, or simply wish to establish a solid financial foundation for yourself and your family? If so, you might have already considered setting up a trust to protect yourself from future liability.
Trusts have historically been used as a means for asset protection. Tailoring a trust agreement for your specific needs, however, can ensure you a lifetime of reduced stress and afford you more time to do what you love most. Some common trusts used to protect assets include Spendthrift Trusts, Discretionary Trusts, Domestic Asset Protection Trusts (DAPTs), and Offshore Trusts.
Spendthrift Trusts and Discretionary Trusts:
A spendthrift trust is often created by one person to indirectly benefit another person. Moreover, a third-party trustee is given legal authority to oversee the distribution of trust assets. In this case, a spendthrift provision is included to prevent beneficiaries from transferring their ownership interest in the trust to creditors since they do not control trust assets. Regardless of this condition, the trustee is required to make payments to the beneficiary, even if distributions are to merely provide for their basic needs.
Similarly, a discretionary trust puts the duty of responsibility on the trustee to distribute trust assets according to the provisions set forth in the trust agreement. As with a spendthrift trust, the control of the assets belongs to the trustee and the beneficiary does not have a direct ownership interest in the trust. However, the trustee of a discretionary trust is given “discretion” over asset distributions. This means that, unless certain criteria are met, there is no legal expectation that the beneficiary will receive distributions.
Given the nature of both spendthrift trusts and discretionary trusts, an individual might create a trust with qualities of both varieties. In this case, there may be a provision that gives the trustee discretion in making asset distributions but also mandates that payments are made to beneficiaries at certain milestones.
Domestic Asset Protection Trusts (DAPTs):
With the basic knowledge of spendthrift and discretionary trusts, we can explore the domestic asset protection trust (DAPT). DAPTs are “self-settled” spendthrift trusts that are typically created with the main purpose of limiting a creditor’s access to an individual’s assets. “Self-settled” means that the grantor (the individual who establishes the trust) of the trust is also the beneficiary. While California is not one of 17 different states that allows individuals to set up a DAPT, California residents can still establish one in another state. However, the asset protection benefits of a DAPT may be weaker under California law.
Regardless, California residents who have business interests in other states can still benefit from the asset protection benefits of a DAPT in states where they are recognized by law. Consequently, the grantor may choose to place a significant percentage of their assets in the DAPT to protect themselves from creditors, future lawsuits, or other lurking liability.
Similar to DAPTs, offshore trusts often include spendthrift provisions and are fully discretionary. As an added bonus, an offshore trust may further deter creditors from pursuing claims to a greater extent than a DAPT. Because legal jurisdiction is outside of the United States, creditors may view it as less than ideal to pursue legally. Thus, the grantor may have more leverage to negotiate a favorable settlement if they are caught in a sticky situation.
Given the selection of great options, creating a trust can be a great way to protect your wealth. If you are considering whether a trust is right for you, feel free to contact your L&B professional at 858-558-9200.