Protect What Is Important Through An Asset Protection Trust

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Chances are if you are reading this page you have had success during your life. Maybe you have built a home and raised a family. Maybe you have built a small business from the ground up. However you define your success, you want to know that the assets you have built in your lifetime are protected and secure.

Unfortunately, we live in a world in which success can often makes you a target. If you are sued, your property and other assets can be exposed to judgments. Similarly, if you have significant financial debt, creditors will likely knock at your door in an attempt to try to collect against those assets.

If you are facing lawsuits or creditors, understand that all the financial success you have had in your life is at risk. But there is a solution. There is a way to protect your assets from creditor claims and judgments. Use an asset protection trust. In Tennessee, the best trust to use is the Tennessee Investment Service Trust, or TIST for short.

How a Traditional Asset Protection Trust Works

Let’s say that you operate a business which has significant liability, such as a medical, accounting, or engineering practice. You have an expensive home you want to make sure it is protected in case a lawsuit is filed against you. If you place that home inside an asset protection trust it can be protected against creditors.

In many states, a traditional irrevocable trust is used as an asset protection trust. The person seeking to protect their property creates the trust, names their spouse or other loved one as trustee of the trust, and the trust is then funded with the property that person wants to protect. By doing so the property/asset is no longer owned by the individual the property. Rather legal title and control of the asset passes to the trustee.

Note that immediate creditor protection is not always ensured with using a typical asset protection trust. Depending on state law, those assets may have immediate protection from creditors, delayed protection, or very minimal protection.

Additionally, when an asset is placed in a traditional irrevocable trust, the former owner of the property must give up control over the property. They have no power to direct its use after the trustee takes over. This lack of control is a substantial downside to a traditional asset protection trust.

Another negative aspect for the use of the of a standard irrevocable trust as an asset protection trust is that the income from the trust can be taxed at a much higher rate than you would individually be taxed. Much of the taxation depends on how the irrevocable trust is written and formed.

Tennessee’s Asset Protection Trust

In Tennessee, using a TIST is by far the best option if you are looking to form an asset protection trust. This type of trust allows for complete creditor protection after a certain period and it gives you some control over the assets. Take a look at how it operates:

When the trust is created and assets are placed inside the trust, those assets will be protected against creditors after 2 years. However, this period is shortened to 6 months if you give creditors or potential creditors notice. You do not have to send creditors direct notice. Instead, notice to creditors can be given by filing notice with the Register of Deeds in county in which the asset is located.

Once the trust is funded, the trust is controlled by a trustee you appoint. Typically, with married couples the other spouse would serve as trustee, though anyone you trust to serve would be appropriate. The trustee just needs to understand their fiduciary duty and what is required of them in their role in managing your trust.

Unlike most states, the creator (or grantor) of a TIST has some significant controls over investment and management of the trust. The grantor has the power to:

  • Tell the trustee how to manage the assets in the role of an investment advisor
  • Receive all income from the trust
  • Receive 5% of the principal of the trust every year
  • Deny distributions from the trust
  • Remove and replace the trustee
  • Ultimately control where the assets go

Sounds pretty good, right? You maintain some control while having complete asset protection. So what’s the catch? Are there any negatives to a TIST? Yes, there are a few:

  • You still have to give up most of the control of the trust to the trustee
  • The trustee must be a Tennessee resident or an entity authorized to act as trustee in this state
  • This type of trust is complex and special attention to detail in its formation is critical

Can You Use an LLC as an Alternative to An Asset Protection Trust?

Limited Liability Companies (LLCs) are often promoted as an alternative to asset protection trusts. The idea behind this is that the LLC is a separate entity from yourself. Thus, if you place important assets into an LLC, creditors cannot come after the assets inside the company because that entity it is separate from yourself and any personal debt you may have. But in Tennessee that is not 100% true.

In this state, distributions from a Tennessee LLC to a member can be attached by a creditor. For example, let’s say you funded an LLC with an investment property that you wanted to protect. That investment property pays rent which in turn you distribute to yourself. If you are sued personally, a creditor can claim any disbursements from the LLC to you through what is known as a charging order. That means the rent you enjoy must stay in the LLC and not be distributed to you personally.

If you look online, you will find many articles promoting a Wyoming or Nevada LLC as an alternative to other state LLCs. The reason why these LLCs are promoted so heavily is that these states do not allow charging orders, so distributions from LLCs cannot be attached. While this may seem like a significant advantage, the problem with these types of LLCs is that they cost annual filing fees, have exposure to business taxation, and you still have register them in Tennessee.

By contrast, a TIST has no exposure to business taxation and does not require annual filing fees. Additionally, the creator of the TIST is taxed personally on any income the TIST makes. As such, it avoids the higher trust income tax that you would likely be exposed to with a limited liability company.

Finally, also consider that if you are using an LLC as an asset protection vehicle, and not for the operation of a regular business, it is much easier to “pierce the corporate veil.” What this means is that if there is little differentiation between the LLC and you, a creditor can file suit against the LLC and ask the judge to dispense with the entity’s liability protection in an attempt to attach the assets. While not an exhaustive list, piercing the corporate veil is usually accomplished when:

  • Not separating the LLC books from your own personal accounts
  • Transferring assets to the LLC to avoid then-existing creditors
  • The LLC was under-capitalized – i.e. was not properly funded at the outset

The bottom line with LLCs is that while they can be used successfully to protect your assets, they are inferior to a well written asset protection trust.

The Key Takeaway

If you are concerned about protecting your assets from judgments and creditors, a Tennessee Investment Service Trust may be the right fit for you. This type of asset protection trust provides more flexibility than an irrevocable trust as well as better tax advantages. Additionally, a TIST is a superior alternative to using an LLC as an asset protection vehicle. If you want to learn more about how this type of asset protection trust can help you, give us a call and tell us about your situation.

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