Missouri’s Asset Protection Trust
An asset protection trust is not just for the rich. Generally, trusts provide an easy way to direct who will inherit your money and assets. A will does the same thing, but it has to be administered by a probate court. That can take up to a year and be expensive and contentious. Trusts are not administered by a probate court. The trust instrument simply tells the trustee what to do with trust assets when you die. The trustee usually does not need to involve a court in that process. Additionally, you can protect trust assets with a Missouri asset protection trust.
Trust Terms
First let’s define some terms related to trusts. The settlor, or grantor, creates a trust by signing a trust instrument along with the trustee. The settlor can then transfer his or her personal property to the trustee . This property then becomes trust principal, and any income earned from the principal is trust income.
The trustee is the person who manages the income and principal according to the rules set forth in the trust instrument. The settlor, a person trusted by the settlor, or a company that provides professional trust services is typically a trustee. The settlor can appoint more than one trustee. The trust instrument also typically identifies one or more successor trustees, who replace an initial trustee who becomes incapacitated or dies. The beneficiaries are the people who benefit from the income and/or principal of the trust.
There are generally two types of trusts: a revocable trust and an irrevocable trust. A settlor may at any time change the terms of a revocable trust, or even terminate the trust. A settlor may neither change the terms of an irrevocable trust or terminate the trust. Except for a power of appointment, the settlor effectively loses all control of the assets transferred to an irrevocable trust.
The trust instrument instructs the trustee on how to distribute trust income and principal to the beneficiaries. Distributions may be mandatory or discretionary. A distribution of income or principal which the trustee is required to make to a beneficiary is a mandatory distribution. Generally, a distribution is mandatory if the trust instrument says that the trustee “shall” make the specified distribution. The distribution is discretionary if the trust instrument says that the trustee “may” make the specified distribution. The distinction is important.
Asset Protection Trust
What is a Missouri asset protection trust? Let’s say you set up a trust for your children. You are the settlor, and they are the beneficiaries. You’ve transferred a vacation house, two cars and a partnership interest to the trust. One of your children unfortunately winds up with a judgment against him. Can the judgment creditor attach distributions from the trust to your son? Yes. The judgment creditor might also be able to seize trust income and principal to the extent your son has an interest in it as a beneficiary. You can prevent this from happening by making the distributions discretionary. This protection exists even if the beneficiary is also a trustee. You can further protect your son’s interest by including a spendthrift provision in the trust instrument.
A “spendthrift” provision restrains a beneficiary from voluntarily or involuntarily transferring any of their interests in the trust. As a consequence, a judgment creditor of the beneficiary may not reach such interest or distribution. This provision is the basis of an asset protection trust.
Protecting the Settlor’s Interests
Let’s again say that you’re the settlor of your trust. You’ve transferred the vacation home, two of your cars and a partnership interest to the trust. If someone gets a judgment against you, can they seize the assets that you transferred to the trust in order to satisfy the judgement? If the trust is revocable, then yes. If the trust is irrevocable without a spendthrift provision, then the judgment creditor can reach the maximum amount that can be distributed for the settlor’s benefit. If the trust is irrevocable with a spendthrift provision, then, except for the following circumstances, the judgment creditor cannot seize any trust income or principal in order to satisfy the judgment.
If a transfer to a trustee is fraudulent, then the settlor is not protected by a spendthrift provision. Likewise, the spendthrift protection disappears if the settlor is the only beneficiary, retains a power to amend the trust instrument, or retains a right to receive a specific portion of income or principal.
Settlor as Trustee
As stated, a beneficiary of a discretionary trust can also serve as trustee and maintain his or her creditor protections. Such protection will not apply to a settlor of a revocable discretionary trust. Likewise, a spendthrift provision might not protect a settlor who is a trustee of an irrevocable trust. Because of this uncertainty, it’s best to appoint someone other than the settlor as trustee of a spendthrift irrevocable trust. Appointing a spouse or adult child as trustee is also problematic, but potentially less problematic than the settlor serving as trustee.
The uncertainty might also be somewhat mitigated if the settlor is a co-trustee. Worse case, the settlor might have to chance being the sole trustee of a Missouri asset protection trust, if the settlor cannot otherwise protect his or her assets and cannot appoint someone else as trustee.
The information provided in this article is for educational and informational purposes only. It is not intended as legal advice. You should consult an attorney experienced in this area of law about how the information in this article might apply to your specific circumstances.
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© 2016 Michael Sewell
Contact Michael Sewell at (314) 942-3232 or at michael@SewellLaw.net.
