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Too Good to be True? by Phil Runyon

5/21/2012

 

Too Good to be True?

First a disclaimer:  I'm certainly not in favor of people evading their legal obligations!

Having said that, I'll also state that much of what lawyers do is based on helping people preserve their assets.

OK, so how do these apparently conflicting approaches get reconciled?

One answer is by means of an "asset protection trust", a new concept now on the books in New Hampshire that allows people to protect their nest eggs from adverse claims under certain circumstances, without giving up all access to or control of the property in trust.  In fact, the trust can be written very flexibly, say, to allow for income and principal distributions back to the owner; to allow the owner to veto distributions to others; to let the owner direct how the assets will be distributed at the owner's death; to permit the owner to remove and replace the trustee; and even to have the debts, taxes and expenses of the owner's estate paid by the trust.

So what's the catch?  Well, the trust can't be used to avoid claims already in existence when the assets are transferred into it - that would be a fraudulent transfer, which I've already said is a no-no.  It also can't be used to prevent the claims of current or former spouses to alimony or child support; and it can't be used to defraud even future creditors, if the result of the transfer to the trust is to make the owner insolvent and incapable of paying even normal obligations.  And just in case your wheels are really spinning, it can't keep the trust assets from being considered on a Medicaid application - sorry about this last one!

When, then, might such a trust be useful - and legal?  Let's say the owner is a single person in a risky occupation - maybe a surgeon or a daycare center operator who doesn't want to spend all their income on liability insurance to protect their critical assets.  Or maybe a budding entrepreneur who is about to start up a new business and doesn't want to lose everything if it goes under.  Or perhaps a young person who has inherited/earned substantial assets and wants to protect them from future claims, even those of a future spouse.

I've glossed over a lot here to keep it simple, but I think you get the picture.  As long as you're not trying to escape something bad or costly you've already done, or to avoid obligations to your family members, or to make yourself incapable of paying even your cable bill, then an asset protection trust might be something to consider under the kinds of circumstances I've mentioned.  New Hampshire may be stodgy in some respects (like being the last state where you don't have to wear a seat belt - live free and die!), but it's way out ahead of the curve when it comes to trust law.

(Posted on May 21, 2012)


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