If your irrevocable trust is created in a manner that is ethically and legally appropriate, it can protect your assets from creditors, bankruptcy, divorce, government agencies, estate taxes, and any other liabilities that you may experience. This will give you great security and peace of mind.
I am an asset protection attorney, a tax attorney, and a law school professor. I have designed hundreds of irrevocable trusts for clients throughout the country, including several NBA and NFL superstars and the owners of top companies such as Skull Candy, Omniture, Apex Alarm, VitalSmarts, and BlueHost. If you are interested in forming an irrevocable trust for asset protection or estate planning, give me a chance to show you some great ideas and give you amazing personalized service at a better price.
CLICK HERE to send me an email and tell me what you are
looking for and I will send you a free proposal designed just for you.
Irrevocable trusts have an infinite number of types, variations, and options
These are some of the issues to consider in creating an irrevocable trust:
- Grantor. The grantor is the creator of the trust and the person who is eligible to make gifts to the trust. You may serve as the grantor of your own trust, or you may ask a parent or another relative to establish the trust for your benefit.
- Trustees. The trustees control the trust and make decisions about investments and distributions. The trustees have a duty to follow the instructions in the trust or they can be held personally liable for breach of their duty to the beneficiaries. You may choose one or more trustees and you may give them equal powers or you may divide the powers and responsibilities of the trustee as you see fit. The grantor cannot serve as a trustee, but it is possible for a beneficiary to serve as a trustee. The trust document should name the successor trustees if the original trustees should cease or fail to serve, or it should include a formula for electing the successor trustees.
- Beneficiaries. The beneficiaries are the people who are eligible to receive benefits from the trust. You can name as many potential beneficiaries as you wish. You can define their rights in any manner, but it is usually best for asset protection purposes to limit the rights of the beneficiaries and give the trustees the discretion to determine how much or how little to give to the beneficiaries.
- Trust Protector. The trust protector is an independent person with special powers to watch over the trustees and ensure that the trust accomplishes its intended purposes. You may give the trust protector the power to remove and replace the trustees, to terminate the trust, to amend the trust to adapt to changes in the law, to divide the trust in the event of divorce, to eliminate a beneficiary from the trust, to add beneficiaries to the trust, and to exercise these powers with or without the consent of the grantor, the trustees, or the beneficiaries.
- Governing Law. You can generally choose the law that will govern your trust by designating the governing law in the trust instrument and by choosing a trustee located in the jurisdiction where you want the trust to be governed. Offshore trusts can provide excellent protection, but they tend to have a negative image that can do more harm than good. There is a vast difference in the laws of the different states and it is critically important to choose a jurisdiction whose laws are best suited to accomplish your purposes. For example, in many states, the ex-spouses of a beneficiary have a claim on the assets of the trust for alimony, support, and even property division in the event of a divorce. Other states specifically provide that a beneficial interest in a trust is not a property right and that distributions may be made in the “absolute” discretion of the trustee.
- Distributions During Life. I generally recommend that you leave the distribution schedule flexible during your life and allow the trustees discretion to make distributions among a large pool of potential beneficiaries at such times and in such amounts as they determine.
- Distributions After Your Death. Most clients leave specific instructions for the division and distribution of assets after their death. I generally suggest that you give the trustees discretion to continue the trust after your death, in order to protect your spouse and children from a remarriage, divorce, bankruptcy, or other unexpected liability. You can limit the rights of the beneficiaries in order to protect them from themselves, or you can give them the power to serve as their own trustee and distribute the assets to themselves as they wish.
- Powers of Appointment. A power of appointment is a power given to any person to change or “re-write” the requirements of the trust. You can give the beneficiaries or others broad powers to make changes, or you can give them limited powers to make changes within a certain group of beneficiaries. For example, you may give your spouse the power to make changes among your children after your death, but not the power to give all the assets to a new spouse.
- Income Tax Treatment. You may design your trust so that its income is taxable to you, to the beneficiaries, or to the trust itself. These are important decisions that should be made with the help of a qualified tax attorney. You may also design the trust with enough flexibility so that the income tax treatment can be changed from time to time. You may choose to have the trust income taxable to yourself for a time so the assets of the trust can grow tax free. This “tax burn” technique is a powerful tool for the elimination of estate taxes.
- Gift and Estate Tax Treatment. You can design an irrevocable trust so that its assets are included or excluded from your taxable estate. If you want to transfer unlimited amounts to an asset protection trust without any gift tax consequences, you will design your trust so it is included in your taxable estate. If your purpose is to avoid the estate tax, you will design your trust so that it is excluded from your taxable estate.
- Control. If you can find a parent or another person to serve as the grantor of your trust, you can serve as a trustee and retain significant control over your own trust. If you are the grantor, you may want to have the trust create a limited liability company with you as manager so you can retain control over the assets.
- Flexibility in an Irrevocable Trust. The word “irrevocable” can be frightening and misleading. A trust is irrevocable if the grantor retains no power to obtain possession of the assets of the trust or to amend the trust. However, there are many ways for a grantor to retain control, flexibility, and access to the benefits of an irrevocable trust. A good asset protection attorney should be able to give you the control and flexibility that you want without giving you so much legal control that you lose the asset protection and estate tax benefits of the trust.
Consider the following examples:
Asset Protection Trusts
You could create an asset protection trust for the benefit of your spouse and children. You could be the grantor (or creator) of the trust. You could appoint your spouse and an independent person as the trustees of the trust. You could name your spouse and children as the beneficiaries of the trust. You could retain a power to veto distributions that you don’t approve of. You could name your attorney as the trust protector, to be sure that the trustees operate the trust in accordance with your wishes.
You could design the trust as an “incomplete gift trust” which would allow you to transfer unlimited amounts to the trust without gift tax consequences. You would want to be sure to transfer assets to the trust at a time when you have no creditor issues in order to avoid the possibility of a fraudulent transfer. In the future, the assets of the trust would be protected in the event that you suffer financial problems, lawsuits, bankruptcy, IRS problems, or other unexpected liabilities. The trust assets and income could be completely removed from your personal financial statements and your personal tax returns. Potential future creditors would never know of the existence of the trust or its assets. Even if they did become aware of the trust or its assets, they would have no claim on them because they can’t take from you what you don’t own. You would have greater peace of mind, knowing that your family would be taken care of no matter what financial problems may come your way.
Irrevocable Life Insurance Trusts
If you own a life insurance policy on your own life, the proceeds of the policy will be included in your taxable estate at the time of your death and more than half of the proceeds could be paid in estate taxes. If you put the same policy into an irrevocable life insurance trust, all of the proceeds can be protected from estate taxes. Current laws provide that the estate tax rate could go as high as 60%!
Typically, you will name yourself as the grantor, your spouse and another person as the trustees, and your spouse and children as the beneficiaries. Second-to-die life insurance policies require a special kind of trust where the spouse is not included as a trustee or beneficiary.
Most irrevocable life insurance trusts make the mistake of giving the assets directly to the children after the death of the parents. This is a mistake because it causes the proceeds to be put at risk if the children are sued, divorced or bankrupt after the money is paid to them. Rather than giving the money outright to your children, I suggest that you divide the trust into separate trusts for your children and allow each child to serve as a trustee or co-trustee over his or her separate trust. This gives your children access to their money, but it protects the money for their lifetime from a lawsuit, divorce, or bankruptcy.
Dynasty Trusts
A dynasty trust is a more sophisticated version of the asset protection trust and the irrevocable life insurance trust. The dynasty trust is designed to be outside of your taxable estate. You would establish the dynasty trust in a jurisdiction that allows a trust to continue for many generations and you would allocate your generation-skipping tax exemption to any gifts to the trust in order to ensure that the dynasty trust is completely exempt from estate taxes and generation-skipping taxes for multiple generations.
You could sell a business or income producing asset to the dynasty trust in exchange for a promissory note. This is a tax free transaction because it is a sale from a grantor to a grantor trust. You would design the dynasty trust so the income is taxable to you. This would allow the assets of the trust to grow tax free.
You could spend down the assets in your name in order to cover living expenses, income taxes, property taxes, and the taxes on the income earned by the business. After several years, you will have fewer assets in your own name, but the trust would have a valuable business and a significant amount of assets because of the tax free growth inside of the trust. The assets of the dynasty trust could continue to be held for you and future generations in an environment that is protected from estate taxes, generation-skipping taxes, creditors, divorces, etc.
The Beneficiary Controlled Trust
The Beneficiary Controlled Trust is an even better version of the Dynasty Trust. If you can get your parents or another person to serve as the grantor and fund the trust with $5,000, then you can serve as the trustee and beneficiary of your own dynasty trust. This gives you direct legal control in addition to asset protection. It also reduces the risk of having the assets included in your estate or attached by creditors.
What Next?
Give me a call (801) 765-0279 or send me an email ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) and I will design a proposal just for you.
For more information about irrevocable trusts, read my blog or check out the articles on my website – www.assetprotectionatty.com.