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living trust

Ryan is right. There is NO asset protection whatever in a revocable trust (I’m assuming that you put together a “living trust” for the avoidance of probate, no?) The fact that it is revocable means that any creditor can have a judge force you to revoke it.

As to the irrevocable trust, there might be some asset protection, but we’d need to know what you’ve got there, why it’s irrevocable, whether you continue to have control over the assets (and, if so, how), who the trustee and beneficiaries are, and how the beneficiaries are to benefit in the end. I DO NOT suggest that you post those details on a public bulletin board, however, but that you discuss them with your financial planner or attorney within the context of a confidential consultation.

I must admit that I have something of a bias when it comes to trusts as an asset protection vehicle, since I believe that while trusts are an excellent estate planning tool, there might be far better and easier tools to use, especially when it comes to ongoing businesses. In my view, (and I’m talking GENERALLY here), a well-structured LLC gives you as much asset protection as you can hope for in a domestic structure, and is a good way to go for protecting business assets.

The fact that you mention equipment from a practice leads me to believe that you are a health care professional (I’m extrapolating here from pretty thin evidence, I know). If that’s the case, a professional LLC might provide some tax advantages, but may not provide as much in the way of asset protection as it might in another, non-professional, context, depending on whether it is a one-person PLLC (professional limited liability company) or whether you practice in a group of professionals (most states will not allow non-doctors to be members in a medical practice PLLC, for example), and where you practice. For example, California is notorious for piercing the “corporate veil” of one-member LLCs, while some other states are more respectful of it (although one-member LLCs are always a little scary, since the public policy reasons for having LLC protections are certainly subject to challenge if a case can be made that the person standing behind the corporate veil is really just the alter ego of the LLC — a pretty easy case to make if that person is the sole LLC member).

My advice for any health care professional for a “first wall” of protection is to carry adequate malpractice insurance for the professional practice, and adequate liability insurance for the other aspects of your life (cars, home, equipment, office, etc.), including a sizable umbrella policy. There really is no substitute for insurance, regardless of what some of the asset protection hustlers out there may push. Once you’ve put that into place, you can start putting together some other structures to protect yourself if for some reason that first wall is breached. For example, for the house you’ve got in the revocable trust, you might want to consider some equity stripping strategies that you’ll find discussed on various bulletin board postings (or on the websites of the pros who post here, Ryan Fowler and Jay Adkisson, both of whom have very good and detailed strategies on their respective sites). You can do those while still maintaining the property in the revocable trust, if that’s what you want to do.

As mentioned above, though, before trying to figure out what you want to do, you’ll want to figure out what the options are, and there’s no substitute for sitting down with a professional for an asset protection diagnosis and plan of treatment (how’s that for using a medical metaphor?).

Back to the original point, though. Your “living trust,” while it will avoid probate and will provide an orderly distribution of your estate upon your death,(and that’s nothing to sneeze at), won’t help a bit if you’re sued.
Posts: 23 | From: Salt Lake City, Utah | Registered: Mar 2006 | IP: Logged

Member # 690

Member Rated:
posted 04-21-2006 03:15 AM
Revocable living trusts provide no asset protection because they are “revocable.” Revocable trusts allow the client to take assets in and out of them and have control of the assets. If a client has control of the assets, a court can direct the client to hand over those assets to a creditor.

As for irrevocable trusts, Randall makes some good points (Randall when are you going to finish your tests). The main problems with irrevocable trusts are two fold. 1) the client doesn’t understand that they are irrevocable and should not be controlling the trust or assets and that the assets no longer belong to the client. 2) the irrevocable trust has to pay taxes on the income (usually in a higher tax bracket than an LLC if the children were owners of the LLC (like they are the beneficiaries of the irrevocable trust)).

If you want to get the assets out of the irrevocable trust and into an LLC, you can buy the assets out by swapping a paid up 2nd to die life policy which is very inexpensive (sort of like a for value transfer).

Posts: 37 | From: St. Joseph, Michigan | Registered: Nov 2005 | IP: Logged

Jay Adkisson
Member # 391

Member Rated:
posted 04-21-2006 06:46 AM
Actually, it is incorrect to say that living trusts provide *no* asset protection. To the contrary, living trusts do provide *some* asset protection as follows:

1) After the death of the settlor, a properly structured living trust with spendthrift provisions can provide asset protection to beneficiaries from the beneficiaries’ creditors.

2) In some states, living trusts can actually provide asset protection to the trust assets from creditors of the decedent’s estate.

As others have noted, where living trusts do not provide asset protection to the trust assets is against the settlor’s creditors while he or she is still alive.

Hate to be nitpicky — and I’ve often made the same overbroad statement myself that “living trusts provide no asset protection” but did want to offer the technical clarification to the board.
Posts: 184 | From: Dallas, TX | Registered: Jun 2004 | IP: Logged

Randall K. Edwards
Junior Member
Member # 792

posted 04-21-2006 07:58 AM
Jay, I hate it when you’re right, but … you’re right. I stand corrected.

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