Asset Protection Trust

Commonly utilized in estate planning and asset protection, trusts are designed to manage and distribute assets to beneficiaries per a trust agreement. They’re deployed to manage wealth, bypass probate, and insulate assets from excessive taxation. 

Asset protection trusts uniquely aim to limit control over assets and shield them from creditors and legal actions. A Texas Asset Protection Trust serves to safeguard various assets, including cash, real estate, business interests, personal property, and other valuables. Texas LLCs and Texas Series LLCs are often used in conjunction with Texas trusts to ensure a comprehensive strategy in meeting asset protection goals.

Like all trusts, asset protection trusts rely on three key role players, all of whom are named in the trust agreement:

• the Grantor: the individual who establishes the trust. A grantor is also known as the trustor or settlor.
• the Trustee: the party managing the trust’s assets. There can be one or more trustees.
• the Beneficiary: the individual or entity that ultimately benefit from the assets held in the trust.

Contrasted against outright property ownership, trust ownership is rooted in three functionalities:

• the creation by agreement of asset separation;
• the management of assets by a party other than the owner;
• the provision of assets to benefit a third party. Once assets are transferred by the grantor to a trust, they belong to the trust and are managed by the trustee for the beneficiary’s advantage.

Almost every type of asset protection trust is fundamentally an irrevocable trust – that is, a trust that cannot be easily changed or dissolved once they are created. This feature contributes to the reliability and foreseeability in the management and allocation of assets. 

An irrevocable spendthrift trust is a commonly used asset protection trust device in Texas. By law, a settlor can create an irrevocable spendthrift trust by incorporating statutory language in the trust agreement stating that “…the beneficiary’s interest in income and/or corpus is not subject to voluntary or involuntary transfer prior to payment or delivery of the interest to the beneficiary.”  These simple words – known as the “spendthrift provision” — bar most third-party creditors from attaching to the beneficiary’s interest in the spendthrift trust.

Spendthrift trusts effectively protect trust assets from claims of creditors. In practical terms, they operate by preventing a trust beneficiary from transferring their interest in trust assets to a third party by sale, assignment, or a pledge as collateral. They prevent creditors from forcing the Trustee of the trust to turn over assets to pay a creditor’s claim. Creditors’ claims may include future — not presently existing — court-ordered judgments, mortgages, business loans, and unpaid real estate taxes. Spendthrift trusts generally do not avoid IRS collection activities or devices. 

Many Texans look to these popular asset protection trusts as estate planning vehicles to address their life situations or meet their goals:

• Dynasty Trusts: trusts designed to exist for an extended period, often beyond the lifetime of the grantor, and cannot be easily altered or revoked. This is consistent with the aim of avoiding estate taxes and providing creditor protection over multiple generations.
• Income-Only Trust (Medicaid Trust): trusts created to protect assets while ensuring the grantor still receives income, often in the context of planning for Medicaid eligibility.
• Spousal Lifetime Access Trust (SLAT): trusts for the benefit of grantor’s spouse and often, additional beneficiaries such as children and grandchildren. Typically, the donee spouse – as a discretionary beneficiary — has access to the property, which in essence gives the donor spouse indirect access to trust property. 
• Supplemental Needs Trusts or Special Needs Trusts: trusts designed to provide for individuals with disabilities without jeopardizing eligibility for public benefits.

Asset protection is an indispensable component of financial planning, especially in Texas where laws offer unique and robust opportunities. An asset protection trust is the centerpiece of a Texas asset protection plan — focused primarily on shielding assets from future lawsuit judgments and creditor claims. By legally transferring ownership of your assets to an asset protection trust, you can build a strong layer of protection against financial threats.

If you believe an asset protection trust may be right for you, you should contact a seasoned Texas estate planning attorney. The attorneys at Reagan Moore can guide you in creating an asset protection trust that meets your objectives. But first and foremost, we’ll hear you out. Understanding your goals will shape our strategy for you. We’re here to discuss your options.