Trusts, Asset Protection, and Estate Taxation

Estate Planning Tools

When it comes to estate planning, the two primary options are to have a will or a trust. Most people will choose to use both of these options together, but you should understand how they work before you make your decision. Additionally, it is important to understand the different types of trusts, as there are several options. This guide will go over what a trust is, as well as the in-depth details about one specific type of trust — the asset protection trust.

How Trusts Work

The formation and execution of a trust has three main parts. The person who creates the trust takes on the role of benefactor, the person who maintains the trust for the benefactor takes on the role of trustee, and the person who eventually receives the possessions takes on the role of beneficiary. This is how the process works:

  1. The benefactor works out the details with the trustee, eventually transferring a set of possessions or money to the trustee for safekeeping and setting a condition on the trust.
  2. The trustee cares for the contents of the trust, handling any required administrative or tax requirements.
  3. When the condition that was set at the formation of the trust is met, the contents of the trust are transferred to whoever the benefactor originally designated as the beneficiary.

If you use a trust for estate planning purposes, the beneficiaries will be anyone who you wish to inherit your belongings, and the condition will be your death. That way, you will transfer your belongings to whoever you wish at the time of your death.

Asset Protection Trusts

An asset protection trust is a special kind of trust designed specifically to protect belongings, rather than to pass them along to someone. For example, if someone was in debt and worried about debt collectors coming to claim his or her belongings, the items could be transferred into an asset protection trust. As long as the items belong in the trust, they are protected from taxation, lawsuits settlements, and debt collectors. Asset protection trusts are only legal in certain states, so the first step is to ensure your state actually allows them to exist.

The idea of avoiding estate taxation is appealing to many people. Sometimes it may be beneficial, but the trust fee is usually higher than what an estate is typically taxed. However, there are rare cases where the taxes are unusually high. You can speak with an estate planning attorney to learn if an asset protection trust could actually benefit you.