A California Asset Protection Trust is an irrevocable trust that is set up in California to take advantage of California trust laws to protect assets and pass them along to your beneficiaries.
In this day, you need a structure to protect what you own against creditors, against lawsuits, and against the prying eyes of the public. This is where a California Asset Protection Trust comes in handy. Throughout this article, we’ll explore what this trust does, how it works, and why you should set up a California Asset Protection Trust.
What is an Asset Protection Trust?
An Asset Protection Trust (APT) is a type of trust that is designed specifically to protect a person's assets from creditors and judgments. First and foremost these types of trusts act as a fortification between someone’s assets and those who may want them from divorces, debts or any other kind of legal action.
The California Asset Protection Trust is becoming more widespread as increasing numbers of residents try to protect themselves against a litigious society. It’s an especially popular trust for high net worth individuals and people who work in high-risk professions for lawsuits.
Asset Protection Trusts can be an important tool for protecting assets from lawsuits and other threats, but it’s not always the best option. An APT does not discharge your debts or liabilities but is a method to structurally own assets with minimal risk of exposure to these liabilities.
Asset Protection Trust Basics
Essentially, an Asset Protection Trust is a trust that the grantor places their assets into. They then designate a trustee to manage those assets on behalf of the beneficiaries. All California Asset Protection Trusts are irrevocable, meaning that once you put your assets into the trust, you can’t change or modify the trust. At least, not without the approval of all your beneficiaries.
But why is it not revocable? Simply put, a revocable trust leaves the grantor with power over the assets. They can amend or revoke the trust whenever they choose. But that revocability no longer gives the grantor protection of their assets because it’s legally still a part of their estate.
On the other hand, a California Asset Protection Trust is irrevocable, meaning that you get asset protection as the main feature of the trust. It’s a significant defence against lawsuits and creditors.
Features Of Asset Protection Trusts
Protection from Creditors:
One of the most important functions that an APT offers is its ability to shield your assets from opportunistic creditors. When the grantor transfers assets to the trust, they are no longer considered the legal owner of those assets.
Tax Benefits:
Some asset protection trust structures can have tax benefits. You can reduce the size of your taxable estate by removing assets, so your tax bill could be considerably lower. Also, the trust is taxed as a separate entity.
Estate Planning:
California APTs also can make the estate transition smoother, as they help beneficiaries avoid probate issues when receiving their distributions.
Confidentiality:
Unlike wills and other estate documents, Asset Protection Trusts are not subject to public record. This means the grantor can keep their financial situation more private than a will, which exposes all the details in probate court.
Asset Protection Trusts can also be designed with other provisions to meet the grantor's particular requirements and objectives. For example, you can design the trust so that assets only get distributed after benchmarks are met, like graduation or at a certain age.
Also, the selection of jurisdiction is most important to create APTs. Some states are more favorable to asset protection, like California, Nevada and South Dakota. You want to choose a state with robust asset protection laws, which is why a California Asset Protection Trust is so popular.
Legal Considerations for California Asset Protection Trusts
Creating an Asset Protection Trust in California is easy when you know how the law works with respect to trusts. Because California law works differently from other states, grantors should become familiar with them before establishing a trust.
If you don’t set your California Asset Protection Trust up correctly, your assets could be at risk of being seized by creditors, retaliatory spouses, or the government.
California Trust Law Basics
The state of California is such a good example, I think, that its trust law is written almost exclusively in the California Probate Code. This code contains rules for the formation, administration and termination of trusts.
The law in California lists in detail the duties and obligations of trustees, which includes acting only for the good of all beneficiaries. The legal foundation of this concept prevents trustees from abusing their control rights. Instead, they legally are required to act in the best interest of the beneficiaries of the trust. They include buying and selling investments, distributing income, and retitling assets into the beneficiary’s name.
California law includes retirement savings as an asset you can place into a trust. The state also only imposes 1% as a property tax for assets in California Asset Protection Trusts.
Separate Criteria for Asset Protection Trusts
Californians cannot create a self-settled asset protection trust. This just means that it’s a type of irrevocable trust where the creator can also be a beneficiary.
More importantly, specific language must be included in an Asset Protection Trust to qualify it within that particular state. An advisor can assist in ensuring that the provisions of the trust are solid enough to protect against any legal battles down the road.
Also, remember that federal laws and state laws can and do crossover with each other. For example, asset protection laws at the federal level (known as the Uniform Fraudulent Transfer Act) allow creditors to attack transfers made with the actual intent to defraud them. This law makes sure that you haven’t created a trust with the intent to hide from what you legally owe, no matter the state you create it in.
How to Create a California Asset Protection Trust
Creating an Asset Protection Trust in California isn’t so hard. But you do have to follow the steps to get it right. Otherwise, your California Asset Protection Trust won’t function like you want it to.
Selecting the Suitable Trust
The first thing to do in setting up a trust is to choose the right type of trust. You need to walk into this process knowing exactly what your goals are, how you’d like your assets managed, and what your plans are for building a future legacy. For example, you can setup whats known as a domestic asset protection trust in California. State laws around DAPTs help provide a lot of asset protection and estate planning for your financial future.
An experienced estate planning attorney can help provide guidance on these decisions and customize the trust to fit the needs of the individual. If you’re working with a legal professional in California, you’ll get the specific advice you need to make your trust functional and operational. You’ll also avoid any pitfalls that could collapse your trust down the road.
Think about the trust document, which will be one of the most important documents that make your trust successful. In this document, plan out your short-term goals and long-term goals. Think beyond yourself and plan for your loved ones. Short-term goals might be how you distribute your assets and what kind of investments you’d like to include. Long-term goals might be charitable donations or how you pass along property to your loved ones.
How To Set Up A Trust
After choosing the kind of trust, you then draft a trust document. It has to contain the terms of the trust, describing the respective duties of the trustee and beneficiaries as well as particular directions. Your legal professionals will help you create an iron-clad document that will last for years.
Once this is done, you have to fund the trust. This is when you transfer assets into the California Asset Protection Trust. Unless properly funded, the asset protection which would otherwise protect against his claims will not be available.
Although this is an irrevocable trust, it’s a wise move to review your trust every few years, especially as you build more assets and make new plans. Remember that since this is an irrevocable trust, you won’t easily be able to make amendments, but if you communicate with your beneficiaries, it is possible.
You’ll also want to know your tax strategy. Once you fund the trust, it’s now a legal entity, separate from you in every way. Your personal estate is now smaller, and it should attract fewer taxes. But you’ll have to file taxes for the trust every year. Ask your legal experts about capital gains taxes, income taxes, and estate taxes.
There can be different estate tax and income tax effects of the various kinds of trusts, and it affects how much money is left at the end. A tax advisor can offer a more holistic approach for your estate. With a tax advisor and a legal expert on your team, you get a birds-eye view of exactly how your trust will operate.
How Trustees Work in an Asset Protection Trust
If there’s one person that’s absolutely essential to this whole process, it’s your trustee. They are going to be the fulcrum of your California Asset Protection Trust. Everything balances on them.
They have a fiduciary role to make sure the trust is carried out as you intended and act in the best interests of the beneficiaries. Anyone who is setting up an asset protection trust needs to have a good handle on what makes for a good trustee.
Who Can Be a Trustee?
The trustee you choose in California will substantially impact the functionality and value of the trust. Trustees can be people like family members or friends. Or you could choose professionals like accountants, lawyers and banks. The key is to choose someone reliable that you can trust to oversee the duties associated with maintaining the trust.
The trustee should be financially astute, honest and able to act independently in the best interests of all beneficiaries. California laws put a heavy burden on the trustee, making sure they act in accordance with the law.
But your trustee will also be an expense as well. Often, a trustee charges a percentage of the total value of the trust. Or maybe they charge an hourly rate. In any case, you’ll want to account for the ongoing costs of running your California Asset Protection Trust.
It is also wise to be mindful of even subtle conflicts of interest, as in where family dynamics are at play. An independent trustee may be able to offer a neutral point of view, which can help reduce disputes among beneficiaries and the required trust decisions made in the best interest of the trust.
Responsibilities of a Trustee
A trustee has a broad duty which includes maintaining the property, keeping records, and making distributions to beneficiaries as dictated in the trust guidelines. Trustees must also be able to assist the trust with all legal inquiries related to the trust or its assets.
Uniquely, a trustee must also be accountable to their beneficiaries. Their job includes ongoing communication with the beneficiaries. That means reporting, filing, and communicating with everyone listed within the trust.
In addition to those basics, trustees have responsibility for investment decisions that serve the greater good of the beneficiaries. This may include diversifying the trust's portfolio between different types of investments to reduce risk and increase return in accordance with the investment rules provided in the trust document. They could buy and sell property, act as landlords, and consult with advisors to get the best tax rates on the assets in the trust.
As long as the trustee can faithfully say that they’re acting in the best interest of the beneficiaries, they have a lot of autonomy to make decisions and follow through with them.
The California Asset Protection Trust: Is It Time?
If you’re ready to look into the California Asset Protection Trust as your chosen method to safeguard what matters to you, we can help.
Fill in the form below and we’ll get in touch with you. We’ll talk about your plans, your goals, and what you’d like your trust to achieve.
There’s no reason to delay it. Set up California Asset Protection Trust today with us.
