think trusts are just for the wealthy? Think again. They’re worth considering at any stage of your career.

These versatile legal structures can put your money beyond the reach of creditors, whether the claim ensues from a malpractice case, an accident on your property, or a divorce. They can save your heirs (or your heirs' heirs) hundreds of thousands of dollars in taxes.

In all kinds of trusts, you arrange for a trustee to manage certain assets for a beneficiary. Some trusts are revocable, which means you can modify or cancel them at any time. Others are permanent once you create them.

You'll pay only about $500 to $2,500 to set up a basic trust. But more complex arrangements—such as those in which a foreign trustee takes title to your property to keep creditors at bay—can run tens of thousands. While that may seem like a lot, attorney Barry Engel, an asset-protection specialist in Englewood, CO, says it's not, in light of what you're getting.

"Think of it as paying a single, up-front premium for an insurance policy that will protect your assets no matter what the problem," he says. "When you look at it that way, the price seems pretty reasonable."

If cost isn't a sticking point for you, loss of control might be. When you arrange a trust, you relinquish at least some control over the assets. How much depends on the trust's nature. If you want asset protection, for instance, the more removed you are from the money, the greater the protection.

But there are ways to minimize that drawback. With certain charitable trusts, for example, you can serve as the trustee, which gives you back control. Foreign trusts can also be structured as you maintain control, as well as the right to receive income and trust capital.
Here's a look at some commonly used trusts, and what they can do for you.

If you're a young physician with affluent parents but few assets of your own, the most useful trust for you is likely to be one your parents set up to shelter your inheritance.

Tell them you'd like your inheritance in the form of a spendthrift trust, suggests Denver estate-planning attorney Richard W. Duff.

In most states, such a trust can protect the bulk of your inheritance from creditors' claims, though creditors can still seize income you receive from the trust.

You can protect the income, too, if you give the trustees the power to use it for your benefit—for instance, they could directly pay your mortgage, electric, and phone bills. Alternatively, you could have your parents assign the income to a separate trust for your children.

As the name implies, these were originally set up to give the trustee enough power to prevent a spendthrift child from squandering his inheritance. The more discretionary power you give the trustee when designing this trust, the greater the asset protection. These trusts allow some flexibility, though, so it's best to work with your parents and financial planners to make sure you achieve a workable balance between access and asset protection.

While it may seem awkward to broach the subject of your inheritance with your parents, ask them whether they'd be willing to have afamily meeting to discuss it, says Duff. Do it while they're both in good health. Explain how a trust will help keep the money inthe family, in the event someone sues you or them. Since few parents would relish seeing their hard-earned dollars end up in astranger's hands, they may be more amenable to talking about this than you think.

If they balk at the cost, offer to pay the planning fees yourself, or divvy the fee among your siblings.

Protecting your own assets from creditors

If you've already amassed considerable funds on your own—say, $500,000 in liquid assets or $1 million in net worth—you may wantto consider an asset-protection plan through a foreign or domestic trust. While certain new domestic trusts (such as the Alaskatrust, which we'll get to shortly) are less expensive—$6,000 to $12,000—foreign trusts have shown more clearly that they canwithstand legal challenges, says Duff. But you have to set them up well before there's even a hint of trouble. Otherwise, youradversary will claim that you acted to circumvent the law

Even meticulously crafted asset-protection plans can face legal challenges. If the planning was done right, however, the assetowner usually prevails. In one such case attorney Barry Engel handled, a 60-year-old Ob/Gyn was unexpectedly named as a defendantin a nuisance suit. After the claimant's attorney found out the physician had a foreign trust and lacked insurance, the claimantagreed to a token settlement from him.

If creditors are already after you, it's generally a bad idea to try to shift your assets offshore. Some individuals who'vetried have ended up in jail.

In rare circumstances, however, asset-protection planning—done by a reputable firm—can reduce the damage even after courts have madeawards.

Engel cites a case involving a podiatrist in his 50s, who was subjected to groundless lawsuits for years after receiving some bad press. Although the laws against using trusts to circumvent legitimate creditors limited his options, his financial planners were still able to make some of the physician's assets appear less accessible—and therefore less attractive—by transferring ownership to trusts and limited partnerships. The planners settled each of his outstanding malpractice suits for $2,500 or less, and the asset-protection plan withstood several additional legal challenges, according to Engel.

If you're uncomfortable using a foreign firm, consider Delaware or Alaska.

Engel's firm, which has created more than a thousand offshore trusts, considers the Cook Islands in the South Pacific the best venue."While there have been positive changes in law in several other jurisdictions, including the Bahamas, the reported and unreported cases have proven the Cook Islands to be the friendliest," says Engel.

If you're uncomfortable with the idea of making a foreign firm the trustee of your assets, consider setting up a trust in Delaware or Alaska.

The Alaskan trust—a better bet, right now, the experts say—became an option in 1997, when the state's legislature enacted a statute that, in effect, said you can establish a trust in which the asset owner is also a beneficiary. Previously, that wasn't acceptable anywhere in the United States. Delaware came on board more recently. Its laws governing asset protection are more liberal than Alaska's, which make observers nervous about how the courts will view them. Neither state's laws have yet faced a legal challenge.

Slashing estate taxesfor your heirs

If asset protection isn't a priority, but you want to save your heirs as much in estate taxes as possible, you have a lot of options. One ofthe most commonly used is a marital deduction and bypass trust, known as the A/B trust. This one seeks to take full advantage of federal lawthat allows you to pass $650,000 to family members without incurring the $211,300 in estate taxes that would otherwise be due. (The $650,000allowance will increase to $1 million by 2006.)

The A/B trust is useful in situations where it makes more sense to bequeath your assets to your spouse than your children or other heirs.Perhaps the children are too young, or your spouse is retired and needs the income more than your wage-earning children do.

If you will the income directly to your spouse, without the trust, the "exempt" $650,000 won't be taxed when you die, becauseyou can pass along an unlimited amount to your spouse tax-free. But it will become part of your spouse's taxable estate. That's likethrowing up to $211,300 in the trash, since the heir next in line will pay estate taxes on some or all of the $650,000. How much will betaxed depends on the amount of other assets your spouse already has; the exemption protects only $650,000 of the total estate.

But a marital deduction and bypass trust can give your $650,000 exemption double mileage. It starts off as a revocable, single trust, while the husband and wife are alive. When one partner dies, the trust is split into "A" and "B" trusts. The "B" trust is from the deceased partner, and an amount equal to the current federal estate tax exemption is placed in that trust. This gets the money out of both estates, so it escapes taxation after the second spouse's death, too.

The surviving spouse is entitled to all income produced by the "B" trust, can annually withdraw the greater of $5,000 or 5 percent of the principal, within certain limits, for expenses related to his or her maintenance, health, support, or education.

When the surviving spouse dies, the assets in the "B" trust pass to the named beneficiaries, estate tax free. If the "A"trust is set up to take advantage of the surviving spouse's current estate tax exemption, when that spouse dies the assets in that trustwill pass to the heirs he or she names, free of estate taxes, as well.

Protecting assets for generations to come

If you want to preserve family wealth for many generations, ask your financial planner about setting up adynasty trust (or "family bank") in conjunction with a generation-skipping trust. Duff calls this "the most valuable conceptavailable for passing assets to future generations." It can save your great-great grandchildren a small fortune in estate taxes.

Here's how it works: Using current gifts, or an eventual bequest, you set up a trust fund for selected beneficiaries, such as your children, grandchildren, and great-grandchildren. With the proper arrangements, the money in the trust—up to $1 million if you alone make the gift, or up to $2 million if your spouse makes an equivalent gift—can dodge estate tax, the 55 percent generation-skipping tax, or both for many years. Depending on the size of your estate, however, some estate tax still may be due when you die, before assets are transferred into the dynasty trust.

In most states, you can provide for the trust beneficiaries for up to about 100 years. During the trust's life, the beneficiaries won't face estate or gen- eration-skipping taxes. The trust will terminate 21 years after the death of the last of the named descendants. In other words, if you name your great-grandson, the trust will terminate 21 years after he dies. If your great-grandson's son inherits what's left of the trust, estate tax or generation-skipping tax will become due on the amount remaining when that child dies.

You can be pretty creative with these arrangements, giving the trustee discretion to make payments of income or principal, or tax-free loans, to any beneficiary. You can even design it to freeze distributions if creditors come looking for assets.

Using life insurance trusts to preserve wealth

Life insurance trusts, while complex, are also premier estate-planning tools. They're unbeatable when it comes to shifting and preservingwealth for the family in a way that escapes taxes, probate, and creditors.

To establish a life insurance trust, you create an irrevocable trust and make it the owner and beneficiary of your insurance policy. This way, the proceeds aren't taxable to anyone. Some experts say it's safest to have the trustee apply for the policy.

You typically choose an institution or financial professional to serve as trustee.

The tricky part about insurance trusts is how to fund them without getting into tax trouble. Gifts made in trust aren't considered direct gifts.

It's up to the trustee to make policy payments and manage the proceeds later on. Your spouse could serve as a co-trustee and stillreceive the trust's income for life, even dipping into the principal, if necessary.

The tricky part about insurance trusts is figuring out how to fund them without getting into tax trouble. Under the law, the only gifts that qualify for tax-free treatment are those made outright to the individual. Gifts made in trust aren't considered direct gifts, because they're given to a trustee for someone else's benefit.

A way around that was established by the 1968 benchmark Crummey case, however. When you set up the trust, a special Crummeywithdrawl trust, make it clear to the beneficiaries, in conversation, that it isn't in their interest to withdraw the money. Then,as you make payments into the trust, notify the beneficiaries and offer them the chance to withdraw the cash. You must give themnotice that says, in effect, "Here's a gift that has come into the trust, but you can choose to take the money,instead." Then the beneficiary, or someone acting on his behalf, either ignores the notice or say's "Leave it in thetrust."

How much will this save? Duff cites an example of a 50-year-old who earns $250,000 annually (plus investment income) and has three children. Since the law allows spouses to each give $10,000 tax-free to an unlimited number of people, the couple could give the kids $60,000 a year ($20,000 per child) without incurring gift taxes. But that may not be the best use of that money.

If they gave that $60,000 annually to a Crummey withdrawl trust instead, they could acquire a $5 million life insurance policy on the doctor's life and leave their children $5 million free and clear of estate taxes.

To leave $5 million for their children without the life insurance, they'd probably have to amass at least $10 million; estate taxes could eat up the difference. If you were to put $60,000 a year into investments earning a 10 percent after-tax rate of return, it would take more than 29 years to accumulate $10 million.

Giving one person income, another person assets

If you want to provide your spouse with an income after you die, but want the bulk of your assets to pass to someone else—such as a child from your previous marriage—a qualified terminable interest property trust (Q-Tip trust) is worth considering. You and your financial advisor determine how much trust principal your spouse will receive, and over what period. You name the other individual as the trust's ultimate bene-ficiary.

Your spouse must receive all the income in the trust for life, but the trustees can make payments of principal at their discretion. That way, you take advantage of the marital deduction, which means that the transfer won't incur estate taxes. Most creditors will be kept away until the trust ends. The arrangement can be amended or revoked during your lifetime.

These are only the most common trusts. There are many others, which is one reason you need an experienced financial attorney to determine which trust best suits your situation and goals. Make sure you select someone who belongs to the National Association of Estate Planners and Councils (610-526-1389), and who can provide names of several satisfied clients. To join the NAEPC, estate planners must be recommended by their peers and voted in.

Want to know more?

Medical Economics regularly covers the subject of asset protection. See "Is this the best asset protection method ever?" published Feb 23, 1998, to learn more about asset-protection opportunities in Alaska; "Putting a moat around your money," Dec. 8, 1997, for information on foreign trusts; and "Your single best shield against estate taxes," March 24, 1997, for a closer look at life insurance trusts. You can access these articles through our Web site,

Helpful books on the subject include Richard W. Duff's "Keep Every Last Dime: How to Avoid 201 Common Estate Planning Traps and Tax Disasters" (RWD Enterprises, 1998) and "The New Book of Trusts" by S. Leimberg, (Leimberg Associates, 1997).

Seminars & Events:

April, 2017 - CELESQ
“An Asset Protection Planning Primer for Estate Planning, Tax and Creditors Rights Lawyers”
Live Web Cast
May 31 – June 1, 2017 - 

SOUTHPAC TRUST OFFSHORE PLANNING INSTITUTE CONFERENCE 2017, “Asset Protection in a Changing World” (31 May 2017) and “Questions & Answer Panel on Industry Challenges to Asset Protection Structures” (1 June 2017)
Las Vegas, Nevada


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Barry S. Engel