Covering Your Assets
We live and work in an exceptionally litigious culture. From car accidents to dog bites, to unfruitful business deals, potential liabilities swirl around us like a cyclone. Such fears can often keep individuals up at night. Consumers and Homeowners maintain insurance on their homes and personal property as asset protection used to ward off a potential loss. Most professionals maintain some form of error and omission insurance should liability rear its ugly head through professional endeavors. Setting aside proper business entity selection and the protection that affords, how can we best protect our assets from the liabilities surrounding us?
One answer comes to us via the Asset Protection Trust statute in the Utah Code
How do you know if an asset protection trust is right for you? If you are already contemplating bankruptcy or have already found yourself embroiled in litigation, it is likely too late to take advantage of the protection offered by this statute. Likewise, if you are seeking to avoid child support or protect assets derived from unlawful activities, an asset protection trust won’t be of much help. However, if you are looking to protect a portion of your hard-earned assets from potential future creditors then an asset protection trust is likely the perfect tool for you.
One of the first questions individuals ask about these trusts is: “what kind of protection will I have and from whom?” The Statute defines the term creditor as a “creditor or other claimants of the settlor existing when the trust is created, or a person who subsequently becomes a creditor… one holding or seeking to enforce a judgment… or one with a right to payment.” This definition is quite broad, yet, quite beneficial to those employing the statute’s protection.
Providing that the trust is correctly established and complies with the statute, the creator, or settlor, of the trust will enjoy the almost blanket-like protection of a portion of his or her assets going forward. To illustrate, the trust could benefit a doctor by protecting his or her assets from a malpractice lawsuit, a business owner by protecting his or her assets from bankruptcy, or a homeowner by protecting his or her property from litigation resultant of a car accident.
Many people ask: “isn’t this the reason we buy insurance?” The answer is yes and no. Insurance is essential, but is it enough? Most insurances will protect us from some creditors, but it will not be of much use in the event of bankruptcy or other insolvency issues. In other words, I like to say that insurance helps us protect our assets much as an umbrella protects us from a rainstorm. An asset protection trust takes this protection a step further by removing access to some assets completely, thusly removing them from the rainstorm entirely.
Real life application of an asset protection trust usually centers around protecting most people’s largest asset: their home. A home with considerable equity is the perfect asset to place in an asset protection trust. Consider the difference between a business owner who declares bankruptcy and loses all of his assets, as opposed to the business owner who walks away after bankruptcy with his home, and all its equity, still intact. With a bit of foresight and some strategic planning, individuals can use the asset protection trust to save themselves from a tremendous loss.
When considering whether an asset protection trust may be of value to you, consult your estate planning attorney and be forthright regarding your current financial situation. For an asset protection trust to be of value, certain requirements must be met. For example, placing your assets in an asset protection trust cannot render you insolvent, nor can you transfer assets with the intention to hinder, delay, or defraud a known creditor. However, the statute sanctions other transfers should individuals wish to protect assets from potential future creditors.
In life’s turbulent storms, an asset protection trust is more than just an umbrella, it can provide you the security and assurance you need to weather potential financial disaster. Consult with your estate planning attorney about whether an asset protection trust is the right precautionary measure for you. Like Benjamin Franklin said: “an ounce of prevention is worth a pound of cure.”
Andrew S. McCullough is an associate attorney with the firm of Brindley Sullivan, 50 E. 100 S. Ste. 302, St. George, UT 84770, (435) 673-9220.