If you have invested in creating an Asset Protection Trust for the protection of your assets then it is critical that you understand an important change that occurred in 2005 regarding the inclusion of the Trust assets in a Bankruptcy Estate.
First of all, understand that your Asset Protection Trust is what is called a “Self-Settled Spendthrift Trust”. This means that you have Settled (or created) the Trust for yourself and have included “spendthrift” (or asset protection) provisions in the Trust.
This type of Trust is extremely unique and has proven to be very effective in protecting assets. So much so that in 2005 congress addressed the issue of when such a trust would be includable in a Bankruptcy Estate. This was done through a revision to the Bankruptcy code and is as follows:
11 U.S. Code § 548 – Fraudulent transfers and obligations (e) (1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if— (A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
This section of the Code very specifically targets Self-Settled Trusts, which is what you have. What this means to you is very significant because IF your trust is LESS THAN 10 years old, then a Bankruptcy court may argue that your Trust should be included, if they can establish that the transfer was made with an actual intent to hinder, delay or defraud a creditor.
However, IF your Trust is MORE THAN 10 years old, guess what? It is excluded by the terms of Section 548 on its face as being more than 10 years old.
The significance of this cannot be overstated:
“IF YOU HAVE A TRUST WHICH IS 10 YEARS OLD, (OR WILL BE) THEN YOU HAVE THE MOST POWERFUL ASSET PROTECTION TOOL ON THE PLANET!”
From time to time clients ask me if they should dissolve their planning when they retire or when their perception of risk falls. My answer is inevitably DEFINITELY NOT! If for nothing else, an old plan provides an incredible amount of security for whatever may come up, even an unexpected Bankruptcy.
This level of security is unheard of and cannot be purchased at any price. If it were possible to create shelf trusts to meet the 10-year mark, these trusts would have a huge value on the market. But the fact is that you cannot. Only time can give you that privilege.
So if you have a Trust that is 10 years old already, please keep it in place!
If your trust is not yet 10 years old, then keep going until you get there! Even your 1 or 2 year old trust has incredible value in the Asset Protection context, and before you know it you will find yourself in the exclusive club of being Bankruptcy protected as well!
And if you haven’t yet started your Trust, do it now! Time passes quickly and every day in which your trust has been active is working in your favor. Everyday you delay is working against you. Just Begin it!
Does a Revocable living trust protect my assets from law suits ?
No a Revocable Living Trust does not protect your money from a lawsuit in any way.