Text Box: Timing is Crucial. It is important to note at the outset that to successfully protect assets from one’s own creditors, steps must be taken before a claim is asserted. Once a claim arises, an attempt to shelter assets by using the techniques described in this article will likely be disregarded by the courts as a fraudulent conveyance. Advance planning is thus essential. TRANSFERS IN TRUST. Trusts are the most common asset protection tool available to families. Trusts are very flexible, and can be customized to fit each family’s unique needs. Self-Settled Trusts. As a general rule, a grantor’s creditors can reach the assets in a self-settled trust (defined as a trust funded with the grantor’s own assets) to the extent that the trustee has the discretion to make distributions to the grantor. For example, if the trustee is limited to distributing only the income, the trust principal can be protected. To be effective against creditors, a self-settled trust must be irrevocable. A few states such as Alaska, Delaware, and Utah (not Pennsylvania or Florida), have recently enacted statutes that attempt to offer greater creditor protection to grantors of certain self-settled trusts. These statutes typically require that the trustee be a bank or other independent trustee that is located within that state, and that the trust assets be physically held in that state. A word of caution: The effectiveness of such trusts when used by out-of-state grantors has not yet been tested in the courts. Trust for Beneficiaries. Unlike the limited creditor protection available with self-settled trusts, trusts you would fund for the benefit of third parties, such as children and other family members, can provide significant protection against such beneficiaries’ creditors. With few exceptions, creditors cannot reach assets that have been placed in trust for the family member’s benefit if the trustee is given appropriate discretion regarding when assets may be distributed. Careful drafting of the trust instrument is essential in this case in order to successfully avoid creditor attack. CO-OWNERSHIP OF PROPERTY Co-ownership of property can provide some protection against creditors. Tenancy by the Entirety is a special form of joint ownership available only to spouses. Property held by spouses as tenants by the entirety is totally protected from either (but not both) spouse's creditors. Where one spouse is in a high risk profession, holding assets as tenants by the entirety provides a simple way of achieving creditor protection. By contrast, joint tenancy with right of survivorship and tenancy in common provide only minimal creditor protection. Text Box: Page # Text Box: Asset-Protection Planning Is An Important Goal for Families (Continued) Text Box: Summer, 2004

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