Irrevocable trust and asset control?

Question

I will try to keep this concise - I own a duplex in North Carolina outright that is currently in an LLC and got married about a year ago. My husband has been having legal issues due to a vindictive ex, and may need to default on a business note that she took over (railroaded) as part of divorce settlement, for which he is also personally liable and would likely be sued for. I have concerns that she would then try to come after my assets if he files for personal bankruptcy. We do not have any joint accounts and he has no association with the LLC, but I still don't trust she couldn't come after me.

My concern is that since he and I do not own a primary residence, which an LLC is designed to protect, the duplex as my main asset and source of monthly income would be at risk. I have read that an irrevocable trust would protect everything placed into it, but that I would not be able to access the income or other assets. Where I am confused is that my father had 3 properties in an irrevocable trust (in California) and lived on the income and managed his assets as both the grantor and trustee until he passed. I am not sure if this would have voided any protections from creditors he could have had, or if this was allowed in California law, but he did it for years.

I know this is not a legal forum, but I can't find an estate attorney who will take me as a client or answer the question of whether acting as both grantor and trustee can get you around that limitation on a Wyoming trust. The asset protection people I have talked to advised me either to divorce or do an offshore LLC, neither of which I am willing to do. If I designated another trustee to manage the trust, is there a way they could pass the income through? Any tips or referrals appreciated.

Richard Bechtol · Answer

I will say that what people think of as irrevocable trusts can vary all over the place. I have experience in Ohio working with a certain type of irrevocable trust used in planning for Long term Care. This specifically is an Intentionally Defective Grantor Trust. I wanted to give that caveat because there are many types of irrevocable trusts so I am just speaking from one particular kind.

The important role with a trust for creditor protection is going to be the beneficiary role. When a creditor pursues a trust that someone is involved in they are pursuing their role as a beneficiary because that is the only individual entitled to the assets of said trust. This basically means regardless of who plays the role of trustee and grantor in a trust the role of beneficiary is the crucial position because that is who the assets are used for the benefit of.

With the type of trust I use in Ohio the way we protect the assets is by having the lifetime beneficiary be someone other than the grantor. Typically they use children and pass the money through the children's name. The children can use it for anything they want so the parent can still end up with the money in the end. This may have been the type of setup your father had because he could still be the trustee and manage the assets himself.

This type of trust would likely protect you, depending on local laws, in your situation because the asset that is place in the trust would no longer be considered yours to a creditor. I hope this helps!

Darius Ogloza · Answer

Lots of questions here that REQUIRE specialized legal advice based on the law of the state you live in. In general, you can structure an irrevocable trust that generates lifetime income for you but unless you are very old or sick an irrevocable trust is usually a terrible idea as you lose total control over the management of the trust property. After all, you may wish to sell one day or trade your duplex for another and once it is in an irrevocable trust those options will be foregone.

The big question here is what claim could your husband's ex plausibly assert against your separate assets (assuming they truly are separate and no fraudulent conveyances have been made to make them so) unless local law? Can't speak for any state in particular, but I would think a spouse's genuinely separate property should not subject to capture on account of an alimony order. Moreover, your separate assets would not be at issue in your husband's personal bankruptcy (again, assuming the assets are truly yours and yours alone). Is your husband a member of the LLC? Has he ever been a member? Were any of his assets used to purchase the duplex? Was the duplex purchased during your marriage?

These are just a few of the many questions you need to work through with local legal counsel with expertise in family law and creditor's rights. The "advice" you have received seems extreme (unless of course there are facts you are not disclosing here).

Steve Vaughan · Answer

My experience (LOL) says assets acquired during marriage are community assets, prior to marriage- unless he is a named member/manager/governor should be separate.

Get a legal consult. Most are like $150. Pick the litigant pitbull you wouldn't want to go up against. The legal consult should prevent your opponent from retaining them against you for conflict of interest.

Irrevocable trust and asset control?

Irrevocable trust and asset control?

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