Making end-of-life plans can be challenging for you and your family. But, it can be the only way to protect your loved ones and their financial future if you become incapacitated or pass away unexpectedly. With all the things you’ve done to build your wealth over time, including your business, you need to safeguard them against risks to ensure all your assets will be given intact to your family members. This is where an asset protection trust enters the picture.
Essentially, an asset protection trust is one of the protective mechanisms used in estate planning for business owners and entrepreneurs. It’s a trust vehicle allowing a grantor to designate an asset pool account held by a trustee for the benefit and use of particular beneficiaries.
However, if you want to determine whether an asset protection trust can work best for your situation, below are the pros and cons you should remember from the get-go:
Pros
When it comes to estate planning, trust is one of the popular methods of asset protection. As such, below are the advantages of getting an asset protection trust for your estate:
Protection Against Creditors And Lawsuits
This is the most significant advantage of setting up an asset protection trust. Having this mechanism can help keep your assets from the reach of creditors and lawsuits. When you end up facing a cased due to a business or personal transaction, the assets placed on your trust account will not be used to pay your liabilities. Consequently, you can preserve and pass them to your loved ones after becoming incapacitated or passing.
However, if you want to learn more about an asset protection trust and how it can protect your estate against creditors and lawsuits, consider browsing through reliable online sources like https://blakeharrislaw.com/blog/self-settled-spendthrift-trusts and other similar sites.
Opportunity To Skip The Probate Process
When you die and leave a considerable amount of assets, your estate needs to undergo a probate proceeding. The goal is for the executor to collect all the assets, pay the debts and taxes, and distribute the remainder to the designated beneficiaries. However, it’s essential to note that probate can be a costly and lengthy process. You may need to wait for a long time before your loved ones can enjoy your business assets and similar properties.
But, if you have an asset protection trust, you can avoid some costs and delays because it doesn’t have to undergo the probate process. When you die, your beneficiaries can access the assets right away.
Safeguard Against Bankruptcy
In most cases, declaring bankruptcy for your small or large business means you still need to pay the company’s outstanding liabilities. When the business has no assets anymore to settle the obligations, the creditors or judgment holders will run after your personal assets to pay the company’s debts.
Hence, if you want to avoid this unfortunate situation, setting an asset protection trust can be an excellent decision to make. It can be considered a safeguard against bankruptcy because the assets held within the trust can’t be taken away from you throughout the process. They can’t be used to pay your business’ debts and other liabilities. As a result, you can leave your estate to your family to ensure their future.
Reduced Taxes
Having an asset protection trust also comes with a tax benefit. Depending on how it’s structured and how the funds are managed, your beneficiaries may be able to reduce the taxes they owe to the government.
For example, suppose the trust is created to generate long-term income. In that case, your beneficiaries may only pay taxes on the income received and not on the total assets within a certain period. Also, depending on the tax laws of your state, your beneficiaries may not need to pay inheritance taxes on the assets placed in the trust unless they receive them in full.
Cons
Aside from the advantages, an asset protection trust has some drawbacks you need to familiarize to make sound estate planning decisions. These can include:
Complicated To Set Up
Unlike a last will and testament, an asset protection trust can be complicated to set up. Since most of these self-settled trusts are irrevocable, you can no longer take your business and personal assets back once you transfer them to the trust account. What you have included in the trust will remain there until the beneficiaries receive them.
Unfortunately, this situation isn’t beneficial if you change your mind about the assets you want to place in an asset protection trust. This only adds to the complication associated with estate planning. Hence, to avoid this problem, it’s best to find an estate planning lawyer to guide you through the process. They can assess your estate and provide valuable advice on which asset types should be included in the trust, whether they’re business or personal assets.
Costly And Time-Consuming
These are other disadvantages of an asset protection trust. Although it may seem simple to establish, this estate planning tool can cost you hundreds to thousands of money to establish. Unless you’re an estate planning expert, you need the assistance of a legal professional to set up the trust for you. But, in consideration of the legal services rendered, you have to pay a considerable amount of attorney’s fees. Also, you have to include in your expenses all the money you should pay to the trustee in managing your trust for your beneficiaries.
On the other hand, establishing an asset protection trust can also take some time due to the procedures. Although the processes may vary from one state to another, they can be time-consuming to set up, especially while creating the trust deed.
At this stage, the grantor will turn over the business and personal assets to the trustee, including the necessary documentation. After that, the lawyer will create a trust deed specifying the trust administration instructions of the grantor. These procedures may be lengthy, depending on the actual circumstances.
Bottom Line
Estate planning can be stressful if you have no idea which tool to use to shield your business and personal assets against any risks while maintaining a level of control over them. This is one reason why an asset protection trust is sought-after during these situations.
However, you must understand that this protection vehicle may not be suitable for everyone. In such a case, consider the pros and cons mentioned above to help you determine whether an asset protection trust can work best to protect and keep your wealth intact for your loved ones.
