At New Mexico Financial & Family Law, we can provide you with an Albuquerque asset protection trust lawyer to help you strike the best balance between access to the trust’s funds and your ability to remain shielded from creditor claims.
An Albuquerque asset protection trust can potentially protect you from creditor actions, including those stemming from civil judgments. Asset protection trusts must abide by all laws and should follow recommended best practices.
The more protection you want to achieve as the trust creator (also called the grantor or settlor), the more control you must be willing to give up. Removing your ability to access the contents of the trust affords the greatest level of protection.
At the same time, this arrangement introduces the risk that a trustee will mismanage assets or manage them contrary to how you had originally hoped or intended.
From our experts at NMFF, you can learn about the different types of asset protection trusts and decide which one appeals the most to you, given your estate planning objectives.
To determine how much asset protection you need from your trust, first consider the types of assets you have, along with your expected risk of a large creditor claim.
First, know that an Albuquerque asset protection trust attorney can never shield assets from a creditor or liability claim you are already facing. If courts determine that you were already aware of an existing financial obligation — or that you had reason to expect that an obligation would be likely to arise — you cannot use an Albuquerque asset protection trust to avoid it.
You can instead think about your asset protection trust as a way to guard against potential risk. It is best, in fact, to form an asset protection trust as early as possible.
That way, you can clearly demonstrate that you had no foreknowledge of a debt or an event that was likely to lead to a substantial creditor claim.
When you meet with an asset protection trust attorney from NMFF, we can help you set expectations and understand the appropriate uses of this unique legal arrangement. During your appointment, you should be prepared to answer questions like the following:
Prepare for your meeting with an Albuquerque trust lawyer by considering how you might answer these questions. In addition, you should assemble a list of the assets you intend to use to fund the Albuquerque asset protection trust.
These materials will help you approach trust formation with the right mindset, making it clearer what type of protections you need to achieve your goals.
A trust is a legal entity that is allowed to own property, just like a human being, limited liability company, or corporation. To form the trust, the grantor funds it with assets.
These assets can include cash holdings, bank accounts, insurance policies, real property, personal property, business property (except S-corp stock), securities (stocks, bonds, etc.), or other investment property.
Once the trust is formed, a trustee becomes responsible for managing the trust’s contents. The trustee will be tasked with handling investment decisions, for example, which gives them the power to buy, sell, and trade securities or other property.
The trustee is also usually required to make distributions from the trust, according to the language of the trust formation document.
For a trust to provide any level of asset protection, it must be irrevocable.
Unlike a revocable trust, an irrevocable trust cannot be altered by the grantor once it is created. The grantor also does not have the universal right to access the assets inside the trust.
Nevertheless, the grantor can list themself as a beneficiary. This arrangement is known as a “self-settled” trust. The trustee is responsible for making distributions to the grantor and other beneficiaries, according to the terms set in the trust.
These terms could require the trustee to make distributions on a regular basis, or they could be required to pay out value when certain “trigger” events occur, such as an asset reaching its target price.
Trusts created during the lifetime of the grantor are known as “living” trusts. Because the grantor’s property officially left their hands and entered into the trust, the assets are considered separate from the grantor’s estate.
By comparison, trusts that are formed upon the death of the grantor (known as a “testamentary” trust), can only be funded with property that has first gone through probate proceedings. During probate, creditors have the opportunity to make claims on the estate, meaning they can intercept property intended for the trust.
For the maximum level of protection, an asset protection trust can be structured as a discretionary trust, and it should contain a spendthrift clause.
A discretionary trust gives the trustee sole discretion as to when to make a distribution, along with the power to make other alterations to the trust at any time, provided their actions fall within the instructions written by the grantor when the trust was created. This arrangement differs from trusts where the trustee is required to make a distribution or one where they otherwise have to obey instructions from the grantor or beneficiaries.
Instead, the trustee is given advisory guidelines known as “standards of distribution.” The trustee will make distributions, at their discretion, according to these standards, but they also retain the right to avoid making a distribution for whatever reason.
By giving the trustee sole control over distribution decisions, the grantor (or other beneficiaries to the trust) could reasonably state that they are unable to access the funds in the trust. Accordingly, a judgment would be unable to compel them to use the funds to pay off a debt or a tort-related financial liability.
A spendthrift clause states that a beneficiary cannot transfer their interest in the trust to another party. In other words, they legally cannot promise future distributions to a creditor or anyone else.
Spendthrift and discretionary provisions have the collective effect of placing distance between the trust and the grantor/beneficiaries. The provisions also remove these parties’ ability to control how and when they can receive funds from the trust, limiting the assets’ use as a way to pay off a debt.
Even if the grantor opts not to give their trustee absolute discretionary powers, they should still make efforts to avoid any sort of direct connection or control over the trust.
If the goal is to protect assets from claims, then “the [grantor] obviously should not be a trustee, co-trustee, protector, co-protector, or retain a power to appoint a trustee or protector,” according to guidance published in the Journal of Asset Protection. In addition, “all trustees and all protectors should be independent and not subordinate to the will or control of the [grantor].”
The journal also states that if the trust is created in an offshore jurisdiction, then “no U.S. person or entity should fill those roles” of trustee and protector.
Putting distance between the grantor and the control of the trust reduces the risk that they (or their trustee) could be ordered by a court to use the trust to repay a liability.
Many times, holdings used to fund an Albuquerque asset protection trust are placed into one or multiple LLCs. These LLCs offer expanded protections because they can shield business or investment property owners from personal liability connected to the actions of one LLC.
Separate LLCs make the most sense when some assets are related to a particular business activity, such as assets purchased with proceeds from a medical practice. If someone wins a malpractice suit against the grantor, then at the very least, they will only be able to access funds directly connected to the practice, rather than the grantor’s entire holdings.
There are multiple types of asset protection trusts that can be formed. The most relevant types to know are as follows.
An asset protection trust created and maintained in the United States. Only certain states recognize and legally enforce these trusts, including:
Note that states may not recognize the protections of a trust if its assets relate to activities that primarily take place outside of the state where the trust was formed. For example, if the trust is funded solely from businesses or investment properties that lie outside the state, then that state’s judicial system may defer to the rules of the state where those assets are most closely connected.
Note, too, that New Mexico does not recognize the use of domestic asset protection trusts. Accordingly, someone wanting to create a domestic asset protection trust in Albuquerque would need to consider their options for an out-of-state jurisdiction.
An offshore asset protection trust is created in a foreign country with laws that are friendly to investors and asset holders. Common examples include the Cayman Islands and the Cook Islands.
Trusts formed in these jurisdictions can put physical and legal distance between the grantor and their assets. In addition, some countries commonly used to house OAPTs may not recognize or enforce judgments made on U.S. soil, meaning that it could be nearly impossible for a U.S.-based entity to access the assets used to fund the trust.
These trusts are also more complex and expensive to set up and maintain. The grantor must usually assign a foreign company as a trustee.
These companies can charge substantial fees for the maintenance and management of the trust.
The grantor will want to be familiar with the banking and financial laws of the nation housing the trust, as they may run into challenges with accessing the funds under certain circumstances.
A Medicaid asset protection trust can be used to remove certain assets from the grantor’s technical ownership, enabling them to qualify for Medicaid long-term care coverage. Medicaid programs are considered to be a “payer of last resort,” so they have strict income requirements.
In addition, the state may take estate recovery actions after the care recipient passes. For example, they may place a lien on the proceeds of property sales for property owned by the recipient.
To avoid estate recovery while also lowering the amount of assets held to meet eligibility criteria, individuals can place their money, real property, and other holdings into a Miller trust. This trust must be created before the start of the state’s “lookback period.” In New Mexico, the lookback duration for determining Medicaid long-term care coverage eligibility is 60 months (5 years).
It’s worth repeating that an asset protection trust is best used as a way to protect against future obligations — ones that the grantor cannot reasonably anticipate.
If, on the other hand, a grantor creates a trust with assets at a time when they are currently facing — or are very likely to face — a creditor claim on those assets, they could be accused of fraud or other illegal activity.
A 2021 Iowa case, Kruse v. Repp, illustrates a situation where the intention to use a trust to shield and conceal assets from a car accident liability claim can lead to not just additional liability but also criminal charges. In fact, the attorney responsible for arranging the trust was pursued under Racketeer Influenced and Corrupt Organizations (RICO) charges. The case also underscores why the asset must be placed in the trust before the liability is incurred.
The grantor and their attorney eventually settled the case, leading to the dismissal of related charges.
With this cautionary tale in mind, those seeking to create an asset protection trust in Albuquerque should be careful to avoid taking actions that could be seen as a deliberate attempt to avoid known (or reasonably anticipated) liabilities. If there is a measurable risk that a specific creditor claim or plaintiff’s tort could affect their financial situation, they should set aside enough funds to fully pay off the value of any resulting liability.
Their remaining assets can be used to fund an asset protection trust.
Forming an Albuquerque asset protection trust is a major decision, one that requires a significant amount of time and effort. You will also need to invest money in the process of creating the trust, compensating your trustee, and handling other administrative and legal issues.
With the right mindset and planning, though, your asset protection trust can provide immeasurable benefits — not just for your finances but also for your peace of mind. If you are in a profession or working in a business that faces a substantial amount of liability, working with our Albuquerque asset protection trust law firm could be the best decision you ever make.
Find out more about how these trusts work and how to start your own during a no-risk case evaluation with our experienced attorneys. Schedule an appointment at New Mexico Financial & Family Law today when you call us at (505) 503-1637 or contact us online.
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