By: Christopher M. Arakaky

We live in an incredibly litigious nation. Every year, billions of dollars are spent on lawsuits across the country. Business owners, professionals, and high-profile individuals, among others, are constantly seeking ways to protect their assets should they ever experience legal problems. An asset protection trust, which is a type of irrevocable trust, may be a solid option for people whose line of work puts them at risk of legal liability. These types of trusts are not available everywhere. Virginia Code § 64.2-745.1 allows asset protection trusts to be formed if certain criteria are met. The attorneys at Dunlap Bennett & Ludwig are ready to assist you in determining the best option for you.

There are several flavors of asset protection trusts for a variety of purposes, such as Medicaid asset protection trusts, special needs trust, etc. This article will limit itself to examining how a grantor can establish a trust for themselves in order to protect their estate from creditors if they get sued, and the court awards a judgment against them. 

How Asset Protection Trusts Work

Asset protection trusts are irrevocable by their nature. Unlike a revocable living trust, the grantor cannot simply change, amend, or terminate the trust at their own discretion. This is why property you transfer into an irrevocable trust is not imputed to your estate for liability purposes. Essentially, it is no longer your property; it belongs to the trust. The requirements for an irrevocable asset protection trust vary from state to state (assuming the jurisdiction allows it). In Virginia, an asset protection trust must:

  • Be irrevocable;
  • Be created during the grantor’s lifetime;
  • Have at least one beneficiary other than the grantor;
  • At all times have at least one qualified trustee, who may be, but need not be, an independent qualified trustee;
  • Incorporate the laws of Virginia to govern the validity, construction, and administration of the trust; 
  • Contain a spendthrift provision that restrains both voluntary and involuntary transfer of the grantor’s interest; and 
  • Not allow the grantor the right to disapprove distributions from the trust.

Once your property has been retitled to make the trustee the titleholder, the trustee will make the determination on how the property should be distributed for your health, education, maintenance, and support (as well as for the support of your spouse, children, or any other beneficiaries whom you designate). These are some significant restrictions on how you can manage your estate while you are still alive. However, with careful, thorough, and robust planning, this type of arrangement can optimize the balance between enjoying the current use of the fruits of your labor and preserving your assets to pass on to your heirs. Furthermore, if creditors become aware your assets are off-limits, that can disincentivize legal actions and “scare them off” from pursuing a claim against you. 

Also, be aware however you cannot transfer property into an asset protection trust if you are already aware of claims against you. This would constitute a fraudulent conveyance and could land you in further legal trouble. There can also be complications if you have out-of-state property. 

Alternatives

Although they can offer incredible protection, asset protection trusts are complex and very nuanced compared to simple probate avoidance trusts, as well as generally more costly. One would be well served by first seriously considering alternatives to meet their asset protection needs. When it comes to determining the best option for you, hiring an experienced attorney can be beneficial in providing guidance on this important decision.

Limited Liability Companies and Corporations

The advantage of LLCs and Corporations over sole proprietorships and partnerships is that they offer their owners limited liability. The owners can lose what they invest into the company but are not liable beyond that, assuming they have avoided co-mingling their personal assets with business assets (and in the case of corporations, the corporate formalities have been met) and there is no piercing of the corporate veil. However, there are some serious limitations here. Many lenders, commercial landlords, etc., will force the owners to sign a personal guarantee on the contract because they are astute enough to understand how limited liability works. Furthermore, a business owner will always be responsible for their own torts. If you own your own medical practice and your patient sues you for medical malpractice, limited liability does not apply to you.

Tenants by the Entirety with Right of Survivorship 

In roughly half the states, married couples can own property as tenants by the entirety rather than by joint tenants. Titling property in this manner means each owner cannot voluntarily or involuntarily alienate their interest. Assuming creditors are seeking to enforce a judgment against only one spouse, property held as tenants by the entirety with right of survivorship would be off-limits in satisfying the judgment. This can be a great option if one spouse is a business owner in a high-risk field. However, the downside is it is only available to legally married couples. Even if the couple is married, prenuptial agreements may preclude this option as well. Furthermore, if it is a family-owned business, the likelihood that both spouses will be named as defendants in a lawsuit increases. 

Liability Insurance

A wide range of liability insurance options exists for people, including errors and omissions, general liability, personal injury, board of directors and nonprofit insurance, etc. Sometimes, coverage can be legally mandated (such as with workers’ compensation insurance). While general business insurance is often sufficient for start-ups and new businesses, there will always be policy limits and exclusions that apply. 

Conclusion

Only an in-depth consultation with an attorney can determine if an asset protection trust is the best available option for you and the best way to maximize its benefits. For many people, the liability protections afforded by LLCs, tenants by the entirety titling, and general liability insurance may be sufficient to reasonably cover their asset protection needs. For others, such alternatives may be lacking and not ideal in protecting your estate.

To learn about how Dunlap Bennett & Ludwig can assist you with your estate planning and asset protection needs, contact us by calling 800-747-9354 or by emailing clientservices@dbllawyers.com

To learn more about trusts and estates, visit our Trusts and Estates: Tax and Wealth Planning, Administration, and Probate page.


To learn more about trusts and estates, click here, or contact our Estate Planning partner lead below:

Rhonda Miller

Rhonda A. Miller is a partner at Dunlap Bennett & Ludwig. Ms. Miller runs Dunlap Bennett & Ludwig’s national estate planning department. She concentrates on sophisticated estate planning, including special needs trusts, asset protection trusts, spousal lifetime access trusts, charitable remainder trusts, qualified small business trusts, and other trusts used to
minimize or eliminate capital gains and estate tax. In addition, she focuses on administering large and complex estates, including litigation.

To learn how Ms. Miller can assist with your legal needs, click here.


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