experts: real estate column Wednesday, December 21, 2011

Protecting Your Assets From Creditors: Do Trusts Work?

The answer is not a simple yes or no: the answer is a trust can protect your assets from creditors. I will explain.

By Dave Liden

I received the following comments from one of my clients shortly after my Newsletter for November of this year was sent out:

"I have gone to presentations by estate planners, and my understanding is that they strongly advocate using 'trusts'. I would say they insinuate a trust will protect your assets from lawsuits and creditors. Are these estate planners telling us the truth?"

Before I answer my client's question, I need to explain what a trust is, and what happens when property is transferred to a trust.

A "trust" is a legal entity just like any adult individual or corporation is a legal entity. This means a trust can purchase, own, manage and sell property just like any adult individual or corporation can.

Every trust is made up of the following:

- one or more trustees

- one or more beneficiaries

- the trust property - this is all property owned by the trust

From a legal perspective, there are two different kinds of ownership in property: (1) "legal" (sometimes called "registered") ownership; and (2) "beneficial" ownership. When property is transferred to a trust, the two kinds of ownership are split up: the "legal" ownership in the property is transferred to the trustee; the "beneficial" ownership is transferred to the beneficiary. All of the value in the property is in the beneficial ownership, not the legal ownership.

So, does a trust protect your assets from creditors? The answer is not a simple yes or no: the answer is a trust can protect your assets from creditors. I will explain.

The first requirement is that the transfer of property from the debtor to the third party cannot be a fraudulent conveyance. In other words, the result in the Braydon case would have been the same if the debtor, Botham Holdings Ltd., had transferred the property to a trust instead of to a corporation.

So, how can a trust protect your assets from creditors? The answer is there needs to be a valid transfer of the beneficial ownership in the property to one or more third parties.

Let's say you have a spouse and two adult children, and you are the sole owner of a family cottage. If you transfer ownership of the cottage to a trust, and you are the only beneficiary of the trust, the ownership transfer to the trust will accomplish nothing, because your creditors can seize your beneficial ownership in the cottage.

If, on the other hand, your spouse and your children are the sole beneficiaries of the trust, the cottage will be protected from your creditors because you no longer have any beneficial ownership in the cottage.

I welcome your comments. My goal is to provide my clients with information on legal topics I think are likely to be of interest to them. If there is a legal topic you would like me to address in my Newsletter, please let me know by sending me an email to dliden@remediosandcompany.com Thank you.

Quote of the month:

"A generous man will prosper; he who refreshes others will himself be refreshed." Proverbs, 11:25




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Recent Articles by this columnist:

Beware Of This Lethal Trap In Commercial Agreements
Friday, October 21, 2011


Business Owners: Make Sure You Know What's In Your Lease
Wednesday, June 22, 2011


All articles by Dave Liden

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