A Revocable Trust vs. Irrevocable Trust

Posted on 2010-09-02 (UTC) by under Financial Services.

Lots of people establish a living revocable trust thinking they are creating some sort of an asset protection trust. A revocable trust fund is not an asset protection trust. Whether the trust is a living trust, land trust, family trust, or any other type of trust you can conjure up, if it is revocable it does not protect its assets if the grantor is sued. On the other hand, a revocable irrevocable  trust can protect assets if the grantor is sued. It becomes a type of asset protection trust. But, you have got to realize that if you establish an irrevocable trust and move assets into it, they are no longer your assets. You can't get them back.

There is a special type of irrevocable trust called an "asset protection trust." The following states have passed laws that create an "asset protection trust." The first asset protection trust was created in Alaska. Yes, it protects assets, allows the trust to retain its assets for centuries, and has some major tax advantages. But, I think you need to look at why the Alaskan Asset Protection Trust was created.

Every state that has created a form of asset protection trust has the underlying goal of getting more money into their state for the banking industry. Alaska needed a source of new investment in their state. So, they create the asset protection trust and promise asset protection. People want the long life of the asset protection trust (999 years), the asset protection and the tax advantages, so they dump their money into Alaska.

Note that all of the states require a bank to be the trustee. The banks make money off the asset protection trusts as the trustee in addition to the money they make from the investment of the money in the trust. That means you are paying to have your "asset protection trust." You have given up control of the assets. In fact, you have given up the assets period.

Generally, people within the state, where the asset protection trust is authorized by state law, can't establish an asset protection trust in their own state and get the "neat benefits." They have to go to another state to establish their trust to get the asset protection trust benefits, because the state where they are already resident doesn't need to "attract" their money. That state already has their money, and it would be unfair to give special tax benefits and asset protection benefits to state residents, just because they establish an asset protection trust.

In case you couldn't tell, I feel like the asset protection trusts are a come on by some states, banks and attorneys and is in heated debate when it comes to the wills vs trust argument. When I actually explain an asset protection trust to my clients, they usually decide they don't really want one. They don't want to give up their property to the degree it is actually required by the states that have passed the asset protection trust laws. They figure out that a limited liability company coupled with a living revocable trust can provide management, asset protection, and tax advantages. Basically, using these more simple tools, they can get the advantages they could get with the asset protection trust.

I always point out one other thing. How do you write a document that will be visionary for a thousand years? The argument can be made that the asset protection trust that goes on for centuries and provide a huge legacy for dozens of generations. Actually, that is true, if there is a huge chunk of wealth in the asset protection trust. If there are millions and millions of dollars in the asset protection trust, it is an inspired tool, but I don't think it is worth the hassle to get the benefits for $10,000 or even $100,000. If that's all you have to play the game with, a state-created "asset protection trust", I think you would be happier getting asset protection and tax benefits out of some of the other tools that are available.

My course, Accumulation and Preservation of Wealth, will lay out a lot of those tools for you and teach you how to use the tools. Check them out before you jump head long into an "asset protection trust."



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