Legacy Trusts Protect Beneficiaries From Divorce and Lawsuits
January 4th, 2017
Doctors, attorneys, and other professionals have the capacity to accumulate significant wealth as a result of their specialized and sought-after services. Unfortunately, those professionals are also vulnerable to lawsuits, when the outcome of the service has not met the expectation of the client or patient. Others vulnerable to litigation include business owners, including farm business owners.
Both civil lawsuits and divorce can take a serious toll on a professional or business owner's assets. Many professionals are interested in protecting their hard-earned wealth from unknown future creditors. Ohio Legacy Trusts (OLT) offer one way to do that.
What is an Ohio Legacy Trust?
A Ohio Legacy Trust is a trust that an individual creates specifically to protect personal or family assets from creditors. These trusts are usually irrevocable, at least for a specified period of time. The grantor (creator) of the trust funds it with assets, and may retain the right to receive property or income from the trust at some point in the future. Wealth protection trusts are also called domestic asset protection trusts (DAPT) or asset protection trusts (APT).
Like a "spendthrift" trust that you might set up for your children or grandchildren with the intention of protecting them from their own creditors or poor choices, the OLT is, in effect, a spendthrift trust that you are able to establish for yourself. If you are later sued, or find yourself in the midst of a contentious divorce, the assets are much more difficult or impossible for a judgment creditor or spouse to reach. In general, the more control that you, as grantor, relinquish over trust assets, the more difficult those assets are for your creditors to access.
A limited number of states and offshore locations permit the creation of DAPT/APTs, but one generally need not be a resident of those jurisdictions to create a trust there. However, experts agree, at least with respect to protecting real estate, the strongest protection is afforded someone who is a resident of a DAPT state.
Limitations of Domestic Asset Protection Trusts
One drawback to DAPTs is that by the time you realize you need one, it might be too late. DAPTs are intended to protect your wealth from future events; if an event has already occurred that you fear may lead to personal liability, it is likely too late to create a DAPT to protect your assets. However, for professionals in fields where the probability of being sued at some point is high, it may be wise to establish a trust early on in one's career, knowing that the question is not if a lawsuit will happen, but when.
Another limitation of DAPTs is that they require the grantor to sacrifice some control of trust assets. These trusts are not intended to be a mere "cover" or "shelter" to protect from liability or divorce that otherwise allows the grantor free access to trust assets.
Also worth mentioning is that DAPTs typically do not offer any significant tax benefits to grantors, so if tax planning is a priority, other types of trusts, or a very carefully designed DAPT, should be considered instead of or in conjunction with a standard DAPT. Speak to an estate planning attorney with extensive experience planning for professionals and farm business owners about your particular needs.