Asset Protection

What is Asset Protection?

It’s no secret that today’s society is more litigious than ever.

The Asset Protection Attorneys at Ainer & Fraker, LLP are constantly asked: How can we leave money to our children in a way that is protected from Creditors, Predators or Divorce?

The Most Cost-Effective Asset Protection that Money can Buy

A Living Trust can provide your family with the most cost-effective asset protection available.

If you leave money to a child, or other beneficiary, in trust (as opposed to an outright distribution), it is possible to ensure that it not fall into the hands of creditors, ex-spouses or others.

Self-Settled Trust vs. Third Party Trust

Current State of California, and even Federal Law, draw a distinction between the protection of a Self-Settled Trust, and that provided by a Third Party Trust.

Self-Settled Trust Explained

A Self-Settled Trust is often referred to as a First-Party Trust.  The Settlor (person who created the Trust) is the same as the Beneficiary (person who enjoys its benefits).

A Self-Settled Trust ordinarily offers no Asset Protection under California or Federal Law.

A Living Trust is a common example of a Self-Settled Trust while the Settlors are still alive.

Example 1:  Husband and Wife set up a Revocable Living Trust, which offers them no Asset Protection.

Third-Party Trusts Offer Asset Protection

By contrast, a Third Party Trust is a Trust that someone else (a Third Party) sets up for the Beneficiary.

A Third-Party Trust can offer substantial Asset Protection under both State of California and Federal Law, if properly designed and administered.

Example 2:  The same Living Trust which Husband and Wife set up in Example 1, after their death, is now a Third-Party Trust to their children, and can offer Asset Protection for their children’s inheritance.

Asset Protection is a Sliding Scale, not an On-Off Switch

Asset Protection can best be thought of as a Sliding Scale between Beneficiary Control over their Inheritance, and the Asset Protection desired.

Generally, the greater the Beneficiary control over their Inheritance, the weaker the Asset Protection.  The weaker the Beneficiary control over the money, the stronger the Asset Protection.

Use vs. Control

However, it is possible to design a Trust that gives Beneficiaries the maximum enjoyment of their Inheritance, without sacrificing Asset Protection.

If a Living Trust leaves an inheritance to a child in Trust, it is possible for the Child to have the use of the assets, even if they don’t have control.

Example 1:  A Trustee can be directed to make Trust Assets available for the Health, Education, Maintenance and Support of a Beneficiary.

Example 2:  An Independent Trustee can also be given the Discretion as to any distributions of Income or Principal.

Generally, Example 2 offers greater Asset Protection that Example 1, but may not be right for every family.

The key to leaving your assets to your children in a protected manner comes from both the design and the administration of the Trust.

We encourage you to discuss your family’s needs with an Asset Protection Attorney at Ainer & Fraker, LLP.