When you sit down to create your comprehensive estate plan you will want to include estate planning goals above and beyond simply deciding who will receive your assets when you are gone. Protecting your assets while you are here, for example, is a common estate planning goal. You may have heard that trusts are often used as asset protection tools in an estate plan; however, you may not know whether irrevocable or revocable trusts can provide you with asset protection. Consulting with an experienced New Hampshire estate planning attorney is the only way to know exactly what estate planning tools and strategies are best to provide your estate with asset protection; however, it may also be helpful to learn a bit more about asset protection as well as irrevocable and revocable trusts in the meantime.
Why Is Asset Protection Important?
Asset protection is an estate planning component that any estate plan can benefit from because no one is completely immune from threats to their hard-earned assets. Consider the various threats that might put your assets in jeopardy:
- Creditors — An economic downturn, a business failure, or your own incapacity could all put your assets at risk. In addition, if you co-sign a loan for a spouse, child, parent, or other loved one, your assets could be at risk if the primary borrower defaults on the loan.
- Your Divorce – New Hampshire is an “equitable division” state when it comes to the divisions of assets and debts in a divorce. Although non-marital assets should be safe in a divorce, people frequently co-mingle non-marital assets without even realizing it which can put those assets at risk in a divorce.
- Divorce of a Beneficiary – How can someone else’s divorce threaten your assets? Most often this occurs when you gift assets to a married adult child and then that child goes through a divorce. Those assets could end up in your (now ex) son-in-law’s or daughter-in-law’s hands.
- Long-term Care Costs – You and/or your spouse may need long-term care at some point in the future. The longer you live, the better the odds of needing long-term care. At an average yearly cost of over $120,000 in New Hampshire, your hard-earned assets could be at risk unless you can qualify for Medicaid benefits. Medicaid, however, may expect you to rely on your hard-earned assets first before helping you to cover those costs. A specialized type of asset protection planning known as “Medicaid planning” can help protect your assets while still ensuring that you qualify for help from the Medicaid program.
- Spendthrift Beneficiaries – Most families have one – that one family member who simply cannot be trusted with money. Maybe it’s because of an addiction problem. Maybe he/she is just horrible at managing money. Regardless of the reason why, gifting assets outright to a spendthrift beneficiary is a sure way to put those assets at risk
Revocable vs. Irrevocable Living Trusts
All trusts fall into one of two categories – testamentary or inter vivos, more commonly referred to as “living, trusts. A testamentary trust is a trust that does not activate until the death of the Settlor (the creator of the trust). A living trust, on the other hand, becomes active as soon as all formalities of creation are met. Living trusts are then further divided into revocable and irrevocable living trusts. A revocable trust is one that can be modified or changed at any time and for any reason by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor for any reason once the trust takes effect.
Which Type of Trust Provides Asset Protection?
While it is true that trusts often work well as an asset protection strategy, it must be the right type of trust. Revocable trusts will not accomplish the goal of asset protection because the key to asset protection is legally removing the assets from your estate. The assets you transfer into a revocable living trust can remain accessible to you because of your ability to modify or revoke the trust whereas assets transferred into an irrevocable living trust become the legal property of the trust. As such, assets transferred into an irrevocable living trust are no longer under your control. Because the assets are no longer owned by you, they are out of the reach of creditors. That does not mean that you can no longer reap any benefits from the assets though. On the contrary, a properly drafted asset protection trust can be set up to include you as a beneficiary of the interest earned on the trust assets.
If you have additional questions or concerns regarding asset protection or revocable trusts, contact the experienced New Hampshire estate planning attorneys at Debruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.