How Trusts Help with Asset Protection

As the population aged 65 and older continues to grow, more seniors recognize the need to address long-term healthcare costs, which can quickly deplete assets meant for retirement or inheritances. Asset protection trusts have become a popular solution for those who can plan. This article explores the benefits and features of asset protection trusts, focusing on Intentionally Defective Grantor Trusts (IDGTs) and how they can help safeguard your assets.

Irrevocable Trusts vs. Revocable Living Trusts:

Asset protection trusts are irrevocable, meaning the person who created the trust (the grantor) cannot access the principal within the trust. This contrasts with Revocable Living Trusts, where grantors maintain complete control over their property and can use it for their benefit, providing no asset protection during their lifetime.

Intentionally Defective Grantor Trusts (IDGTs):

IDGTs are a common irrevocable trust used to protect the grantor's assets. Grantors have no right to the principal and may not serve as trustees, further restricting access to the trust's property. However, they can receive income from trust-owned assets, such as rental properties or investment accounts. During the grantor's lifetime, trust income is taxed at the grantor's tax bracket instead of the higher trust tax bracket. Upon the grantor's death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding significant capital gains taxes.

Flexibility and Protections for Grantors:

Although "irrevocable" might seem daunting, most IDGTs include built-in flexibility and protections for grantors. Common provisions are the Testamentary Power of Appointment, which allows grantors to change beneficiary designations, and clauses granting exclusive rights for grantors to reside in their primary residence. If a grantor needs to change residences, the trustee can buy and sell the property within the trust as required.

Lifetime and After-Death Beneficiaries:

IDGTs provide for two types of beneficiaries: lifetime and after-death beneficiaries. Lifetime beneficiaries receive shares of the total estate upon the grantor's death. These provisions are crucial, as they allow the grantor to make gifts from the trust principal, ensuring that at least one person can receive the trust principal if necessary.

The Role of Estate Planning Attorneys:

Asset protection trusts are complex and require the expertise of an experienced estate planning attorney. When set up correctly, these trusts can offer protection from unforeseen creditors, long-term care expenses, and even unexpected tax liabilities. Consult an estate planning attorney to determine if an asset protection trust suits your unique situation.

Conclusion:

Asset protection trusts, particularly IDGTs, offer valuable safeguards for preserving your wealth and ensuring your assets are used according to your wishes. By working with an experienced Austin estate planning attorney, you can establish a trust that provides security for you and your beneficiaries while offering flexibility and protection against various financial risks.

Reference: The News Enterprise (March 4, 2023) "Asset protection is major concern of aging population."(March 4, 2023) “Asset protection is major concern of aging population”