Asset Protection Trusts, or APTs, serve as effective legal mechanisms for the protection of assets from litigation, creditors, and other potential financial liability. By structuring APTs properly, individuals can secure economic stability and peace of mind with regard to protecting their assets over time. However, despite the benefits of an APT, there are many ways in which clients make costly mistakes when they create or manage their APTs. The errors made by clients often diminish the efficacy of the trust, create opportunities for legal challenges against the trust, and/or may expose the client to the liabilities the asset protection trust was designed to protect the assets from.
Waiting Too Long to Establish an Asset Protection Trust
A common error clients make is waiting until a lawsuit, creditor claim, or other financial liability is pending before establishing an APT. Asset protection is proactive and not reactive, and as such, it will generally be subjected to greater scrutiny by the courts where the creation of the trust occurred shortly after the creation of the lawsuit or creditor claim. In addition, the courts are likely to determine that a trust established during this timeframe constitutes a fraudulently created trust that has been established for the express purpose of avoiding creditor claims. Additionally, in this scenario, the courts may determine that it is invalid for any number of reasons, and clients should therefore establish asset protection strategies well in advance of any potential duty owed to a creditor.
Using a One-Size-Fits-All Trust Structure
Many clients will employ “one size fits all” generic templates or use an outdated template for their trust without modifying the template based on their personal situation, risk exposure, or laws applicable to the trust and assets. Each of the different types of assets (e.g., real estate, business ownership interests, investment portfolios) may require a different strategy for protection. In addition, there are variances from state to state and from country to country in the laws regarding trusts. Therefore, a trust structure that is appropriate for one jurisdiction may provide little or no protection in another.
Retaining Too Much Control Over Trust Assets
Unfortunately, many clients create a more vulnerable trust regarding asset protection as a result of retaining too much control over the assets they transfer into the trust. While it is understandable that a client would want to maintain access and exercise command over the transferred assets, having too much control may create a perception that the trust is simply an extension of the client and not a separate legal entity. As a result, if a court were to determine that the assets transferred into the trust continue to be owned by the client, the assets would continue to be subject to the client’s creditors. To avoid this mistake, the client should work with an experienced professional to determine an appropriate balance between asset access and independence.
Failing to Properly Fund the Trust
To a certain extent, an asset protection trust can be recognized as a true asset only when it is adequately funded. This is true for a large number of clients who open a trust but do not transfer any property or do not do the legal paperwork correctly. A trust that is not funded or is only partially funded will provide little or no protection at all, which will result in the vulnerability of the assets. Moreover, if the assets are not titled correctly, the trust may not work at all. To avoid this mistake, the clients must transfer all the assets they want to the trust, and during the transfer, they should also update the titles, deeds, and records of ownership accurately. It is also vital to do regular checks to confirm that new assets are being added at the right time.
Ignoring Tax and Compliance Implications
Depending on the trust type and jurisdiction, there may be various taxes, like income, estate, etc., that clients must bear, or there may be reporting requirements that clients have to comply with. Not taking proper care of these considerations might lead to unforeseen tax liabilities or fines. Some clients incorrectly presume that the asset protection trusts are created only to escape taxes, whereas tax avoidance is not the main reason behind making these trusts. If the planning is done well, the trust can be empowered through legal tax allowance while the protection is still secured. Tax and legal consultation are necessary to ensure that no mistakes are made, which might put the trust in jeopardy.
The Finale
Though asset protection trust lawyers in Frisco, TX, are powerful agents when proficiently crafted and maintained, their benefits can be considerably diminished through mistakes made by the clients. Among the top mistakes made by the clients are procrastination in the establishment of a trust, using standard structures, keeping too much control, not funding the trust, disregarding tax consequences, appointing an unsuitable trustee, and not doing regular updates of the trust. By comprehending these pitfalls and proactively engaging skilled professionals, folks can improve their asset protection schemes and stabilize their financial future.
