How an asset protection trust can safeguard assets

On Behalf of | Oct 21, 2022 | Estate Planning |

When a New Jersey resident begins to consider making an estate plan, one of the first questions asked is “How can I protect my assets from the claims of creditors?”

Estate law has many answers to this question, far more than can be described in a blog post. However, one type of legal protection – an asset protection trust – offers many advantages, especially to a person who has accumulated significant assets.

A brief overview of trusts

A trust is a legal entity that is usually established to accept the conveyance of the assets of the person who established the trust. The trust is managed by a trustee, who is bound to comply with the terms spelled out in the trust document.

The person establishing the trust – called the “grantor” or “settlor” – can use the trust document to direct disbursement of trust assets in many different ways. These directions are used to accomplish the settlor’s intent in establishing the trust. The principal difference between the various trusts described below is the intent of the settlor as expressed in the trust instrument.

Spendthrift trust

This type includes a provision that prevents the beneficiary from demanding payment of trust assets to the beneficiary’s creditors or transferring any portion of the beneficiary’s interest to a creditor. The basic intent of a spendthrift trust is to ensure that the assets in the trust (which will eventually be transferred to the beneficiary) are not wasted because of the beneficiary’s imprudent financial habits.

Discretionary trust

This type gives the trustee wide latitude in choosing to make or withhold distributions to a beneficiary. A discretionary trust is often used to provide income to a disabled person in order to preserve benefits available under one or more government assistance programs such as Medicaid.

Support trust

This type is used to supplement the income of the beneficiary. The standards for making distributions are established in the trust agreement. These distributions are ordinarily permitted for living expenses, education, medical expenses and similar purposes.

A qualified Medicaid income trust

This type is used to allow recipients to receive government financial assistance benefits when they may have assets and income over the program limits. The trust thereby maximizes the effect of the government support payments.

FindLaw Network

RSS Feed