You may think of trusts as estate planning tools. While trusts can certainly fill that role, they are also useful for protecting assets, both now and later. Creditors, former business partners, ex-spouses, "spendthrift" children and taxes can all pose risks. Here is how trusts defend against asset protection challenges.

To protect assets, your trust must own them and be irrevocable. This means that you, as the settlor, generally cannot modify or terminate the trust after it has been established. Once you transfer assets into an irrevocable trust, you have effectively removed your rights of ownership to the assets. Because the property is no longer yours, it is unavailable to satisfy claims against you.

It is important to note that placing assets in a trust will not allow you to sidestep responsibility for debts or claims that are outstanding at the time you fund the trust. There may also be a substantial "look-back" period that could eliminate the protection your trust would otherwise provide.

By including a spendthrift clause in the trust document the trust becomes a "spendthrift trust." Despite the name, a spendthrift trust does more than protect the trust beneficiaries from themselves. It can protect your family's assets against dishonest business partners and unscrupulous creditors. It also can protect loved ones in the event of relationship changes.

The spendthrift clause restricts a trust beneficiary's ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets. However, despite the general validity of the spendthrift trust, there are exceptions that exist with respect thereto. For example, the interest of the beneficiary can often be reached to satisfy an enforceable claim against the beneficiary by the beneficiary's spouse or child for support, or by the spouse for alimony and by government agencies to collect on tax obligations.

It is also important to note that in order for the trust to act as an asset protection vehicle you, as the settlor of the trust, cannot be a beneficiary of the trust unless the trust is established in a state or a foreign country that has enacted legislation that allows for self-settled asset protection trusts. Not all states recognize self-settled asset protection trusts, and there is an issue as to whether states that do not recognize assets protection trusts can enforce judgments against trusts established in states that recognize self-settled asset protection trusts.

Trustees play a role in keeping your trust safe. If a trustee is required to make distributions for a beneficiary's support, a court may rule that a creditor can reach trust assets to satisfy support-related debts. So, for increased protection, consider giving your trustee, who is not a beneficiary of the trust, full discretion over whether and when to make distributions. You will need to balance the potentially competing objectives of having the access you want and preventing creditors and others from having access.

Make Asset Protection A Priority

If securing your assets is a priority — and it should be — talk to your financial advisor about whether a trust can provide the protection you need. There may also be other ways to shelter wealth — for example, maximizing your use of qualified retirement plans, titling your personal residence in tenancy by the entirety with your spouse, transferring rental real estate to a limited liability company, contributing to a 529 plan for your children's education. Another option to protect against creditors is to buy an umbrella insurance policy, which provides liability coverage beyond what your auto or homeowners' policies cover.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.