Legally, a trust and its beneficiaries are two distinct entities. When you create a trust and fund it by the book, the assets held in it belong to the trust, not to the individuals who will benefit from the trust’s proceeds.
As such, some trusts offer a form of asset protection from third parties who would otherwise have had a valid claim against such assets. Here is what you need to know about these important asset protection tools.
Trust assets are protected from lawsuits and creditors
Creditors cannot come after assets in a trust to settle an outstanding debt owed by a beneficiary because legal ownership is with the trust. Creditors can only go after a beneficiaries’ personal property under their name, not trust assets. Similarly, trust assets are safe from lawsuits if a beneficiary faces legal issues that could result in financial liability.
Important points to note
There are many forms of trusts to choose from, but not all offer asset protection. For instance, a living or a revocable trust cannot protect your assets since you are still considered the legal owner of these assets. Creditors and other third parties can claim assets held in such trusts.
Additionally, if the trust was funded without following the necessary procedures, it may not offer protection to the assets it holds since the legal entity may not be legally valid.
Do not take any chances
When establishing a trust, it is crucial to get everything right, from drafting to funding it. That way, you will be sure that the trust will stand the legal test and help you achieve your goals. Additionally, it is necessary to learn more about how trusts work and the other benefits besides asset protection. It will help you make the right decision depending on your objectives.