The following discussion is for general informational purposes only. It is intended only to enable the reader to have a more informed conversation with his or her attorney. It should not be relied upon in making estate planning decisions. The reader should consult with his or her attorney regarding his or her particular circumstances.
In Utah, a person can establish a substantial measure of asset protection from his or her future creditors through the combined use of a self-settled asset protection trust and limited liability entities. This is particularly true in light of Utah’s new self-settled asset protection trust law, which is discussed in detail below.
In addition, through the use of traditional irrevocable trusts and limited liability entities, a person can set aside property for his or her children and other beneficiaries while shielding that property from the beneficiaries’ creditors.
It is important to understand, however, that there are no guarantees when it comes to asset protection. The law in this area is not fully developed, and the best that one can hope for is to reduce the odds that a creditor will be able to reach the property.
It is also important to understand that legitimate asset protection techniques protect assets only from future creditors. They provide no protection from existing creditors. Attempts to keep assets from existing creditors may constitute fraudulent transfers, and should never be undertaken.
The Role of Trusts
Simply put, a revocable trust does not provide protection from creditors. Because a revocable trust is revocable and amendable by the person who created and funded the trust, that person’s creditors can reach the trust assets just as they could reach assets that are owned directly by him or her in his or her own name.
Irrevocable Trusts for Third-Party Beneficiaries
In Utah, a properly-designed irrevocable trust that is created by someone other than a trust beneficiary can provide meaningful asset protection from the beneficiary’s creditors. If the trust requires that all distributions from the trust be in the trustee’s discretion (i.e. that there be no mandatory distributions), and if the trust contains other appropriate provisions, property that is held in an irrevocable trust can be reached by the beneficiary’s creditors only after it has been distributed to the beneficiary. The creditor can neither attach trust assets, nor force distributions, nor require that distributions to be made to the beneficiary instead be made to the creditor.
The protection is not absolute. Certain creditors, such as governmental entities and persons to whom the beneficiary owes child support payments, may be able to require that distributions be made directly to the creditor. If the trust provides for mandatory distributions, any creditor of the beneficiary can force the trustee to make a distribution if it is not otherwise made in a timely manner. Where the trustee’s discretion is subject to a standard, a creditor of the beneficiary who is owed spousal support or child support can force the trustee to make even a discretionary distribution if the trustee has abused its discretion in withholding a distribution.
But in many cases, an irrevocable trust created by someone other than the beneficiary can provide significant protection from the beneficiary’s creditors. For example, suppose a mother creates an irrevocable trust of which her daughter is a beneficiary. If the trust provides that all distributions to the daughter may be made only in the trustee’s absolute discretion, and if the trust contains other appropriate provisions, the daughter’s creditors may be prevented from reaching the trust assets.
Self-Settled Irrevocable Trusts
Unless the trust qualifies as a self-settled asset protection trust (described below), an irrevocable trust of which the person who created and funded the trust is also a beneficiary offers relatively little protection from his or her creditors. The creditors can generally reach the maximum amount of the trust’s assets that could be distributed to the debtor.
Self-Settled Asset Protection Trusts
As of May 14, 2013, Utah has a new self-settled asset protection trust statute. The new law provides the greatest degree of asset protection of any such law in the country.
Under Utah’s new law, a person can create and fund an irrevocable trust with his or her own assets. As long as the requirements of the statute are satisfied, the person’s future creditors will not be able to attach the trust property, will not be able to force distributions from the trust to the trust’s creator, and will not be able to require the trustees to pay directly to the creditor distributions that would otherwise be made to the trust’s creator. The creditor must wait until the trust distribution is actually received by the trust’s creator.
To qualify under the new law, the trust must have at least one trustee who is a Utah resident or a Utah trust company. The creator of the trust may serve as a co-trustee, but he or she may not be permitted to participate in distribution decisions. Distributions from the trust would be made in the discretion of the other co-trustee.
The trust does not protect any property that was transferred to the trust with the intent to defraud an existing creditor. A creditor of the trust’s creator who exists at the time the trust is created must bring an action to enforce his claim within the later of two years after the property is transferred to the trust or one year after the creditor could have reasonably discovered the transfer. However, the creator of the trust may shorten this limitations period to 120 days by sending notice to known creditors and publishing notice in a newspaper of general circulation in the county in which he lives.
For more information on Utah asset protection trusts, see the bookmarks below: “Frequently Asked Questions on Utah Asset Protection Trusts” and “Advanced Q&A on Asset Protection Trusts.”
The Role of Limited Liability Entities
Limited liability entities, such as limited liability companies (LLCs) and limited partnerships (LPs) play a critical role in asset protection. They potentially offer two types of asset protection. First, they offer protection from liability that arises out of particular assets from extending to the owner’s other assets. Second, they may prevent a general creditor from reaching the LLC assets themselves.
Liability Arising out of Entity Assets
As a general principle, if a limited liability entity holds an asset, a creditor whose claim arises out of that asset should be able to reach only the assets that are held in the entity. Thus, if someone slips and falls in the public area of an apartment building and sues the owner of the building, and if the building is held in a limited liability entity, the creditor should be able to reach only the apartment building and any other assets that are held in the entity, such as a bank account. The creditor should not be able to reach other assets that are owned by the member of the LLC or the partner of the limited partnership.
Thus, a person who owns several pieces of investment real estate might be well-advised to create a separate LLC for each building. By using that technique, a creditor with a claim arising out of one building would not be able to reach the other buildings or the person’s other assets. The creditor would be able to reach only the assets in the LLC that owns the building with respect to which the claim arose.
Protection from General Creditors
In Utah, a general creditor of a person who owns an interest in a multi-member limited liability entity must obtain a charging order with respect to the entity if he wants to reach the person’s interest in the entity. A charging order gives the creditor only the rights of a transferee, meaning that the creditor has only the right to receive distributions that may be made from the entity. The creditor does not have the ability to force distributions. The creditor has a right to foreclose on the charging order, but even foreclosure gives the creditor only the rights of a transferee.
For example, suppose a person is successfully sued by a person he hit with a golf ball. The victim/creditor may have a difficult time reaching assets that are held in a multi-member limited liability entity.
It is important to remember, however, that this protection does not exist for single-member LLCs.
Keeping Assets from Public View
Just as trusts and limited liability entities can provide legal protection from creditors, both trusts and limited liability entities can offer a softer form of protection by keeping the existence of one’s assets private. To be sure, if a judgment has been entered and the defendant refuses to pay, legal proceedings can be brought that would force the defendant to disclose her or her assets through the discovery process. But prior to that time, it is possible to shroud one’s assets from public view. Doing so can help to conceal deep pockets and can send a message that reaching the assets may be very difficult.
As discussed above, irrevocable trusts can provide real protection from a beneficiary’s creditors. Revocable trusts, on the other hand, do not offer any such protection. However, both revocable and irrevocable trusts can help to keep the existence of the trust assets private.
When assets are held in a trust, title to those assets is held by the trustee. If the trustee is neither the person who created the trust, nor the beneficiary, it can be very difficult for an outsider to find the assets.
Suppose, for example, that Mary Jones creates an irrevocable trust, the Alta Trust, for the benefit of her daughter Anne Davis, and names her friend William Thomas as the trustee. Title to real property that is held in the trust will in the name of “William Thomas, trustee of the Alta Trust.” Anyone searching for assets that are owned by either Mary Jones or Anne Davis, would not find this property. Similarly, bank and brokerage accounts that are held in the trust will be in the name of “William Thomas, trustee of the Alta Trust.”
A revocable trust that is set up in this manner for the sole purpose of concealing particular assets is sometimes called a “title holding trust.” Suppose Mary Jones were to create a revocable trust, the Canyon Trust, to hold the real property. Again, title to the property could be held by “William Thomas, trustee of the Canyon Trust.” Anyone searching for assets that are owned by Mary Jones, would not find this property.
LLCs and LPs
Limited liability entities can also be helpful tools to keep one’s assets private. When an LLC is created, the only information that is a matter of public record is the name of the LLC and the name of the registered agent. The name of the owner of the LLC is not made public. Thus, if Mary Jones places her real property in the Timpanogos LLC and names her attorney as the registered agent, anyone searching for assets that are owned by Mary Jones would not discover the property.
When a limited partnership is registered with the State, the name of the LP and the identities of the general partners become a matter of public record. An LLC may therefore be preferable from a privacy perspective.
Frequently Asked Questions on Utah Asset Protection Trusts
As mentioned above, on March 28, 2013, Governor Herbert signed into law Utah’s new self-settled asset protection trust statute. The new law places Utah in the top tier of states that have enacted such laws (along with Alaska, Nevada and Delaware), and potentially provides the greatest measure of asset protection and flexibility of any such law in the country. Rust Tippett was the author of this legislation.
Utah asset protection trusts are sometimes known by their acronym (UAPTs), and sometimes as UDAPTs (which stands for “Utah Domestic Asset Protection Trusts”). Both of these terms refer to self-settled asset protection trusts under this new law.
The following are some frequently asked questions about Utah asset protection trusts:
Can I be a trustee of my asset protection trust?
Yes. You may serve as a co-trustee for purposes of managing and investing the trust assets. However, you may not participate in distribution decisions. Your co-trustee (who will make the distribution decisions) can be a family member, a trusted friend or advisor, or a trust company. Also note that the trust must have at least one trustee who is a Utah resident or a Utah trust company.
Can I be a beneficiary of the trust and receive distributions from the trust?
Yes. However distributions should be made only in the trustee’s discretion. If you are a trustee, you may not participate in any decision to make distributions to yourself. Your co-trustee would have to make the distribution decisions.
Can I revoke the trust?
No. The trust must be irrevocable.
What property can I put into the trust?
The trust can hold marketable securities, closely-held business interests (such as LLC interests), and primary residences and vacation homes, as well as other assets. There are no restrictions on what type of property you can contribute to the trust. Of course, you cannot transfer retirement plans to an asset protection trust because retirement plans are generally non-transferable during your lifetime. But the laws governing retirement plans provide a significant measure of protection from creditors anyway.
How much property can I put into the trust?
The new law does not impose a limit on how much property you may contribute to the trust. But you should think carefully before you transfer a large portion of your assets to the trust. Remember that you will not be able to withdraw funds from the trust; your co-trustee will make the distribution decisions. Do you really want to put most of your assets into a trust from which you cannot withdraw funds? Moreover, under the new law, the value of the property you transfer to the trust may not be so great that the transfer renders you insolvent.
What degree of asset protection does the new law give me?
An asset protection trust is designed to protect you from your future, involuntary creditors. It is not designed to protect you from your existing creditors. Fraudulent conveyances to the trust can be set aside. At the time you transfer assets to the trust, you must sign an affidavit stating that the transfer does not render you insolvent and that the purpose of the transfer is not to hinder, delay or defraud known creditors. The affidavit must also state that you are not in default of any child support order.
How is an asset protection trust different from my revocable trust?
Revocable trusts offer no protection from your creditors. Because a revocable trust is fully revocable and amendable by you, it is treated as your alter ego for asset protection purposes.
Are Utah asset protection trusts foolproof?
No. It is impossible to offer any guarantee when it comes to asset protection. But a Utah asset protection trust can increase the chances that your assets will be protected.
Advanced Q&A on Utah Asset Protection Trusts
How is an asset protection trust different from other trusts?
A Utah asset protection trust provides protection that no other Utah revocable or irrevocable trust can provide. A revocable trust offers no protection from creditors because it is fully revocable and amendable. Nor does a traditional irrevocable trust of which you are a beneficiary provide any meaningful protection from creditors. Under Utah law, your creditors can reach the maximum amount that could be distributed to you from a traditional self-settled irrevocable trust.
Is a Utah asset protection trust better than a Nevada trust?
Over the years, some Utahans have gone next-door to Nevada to create their asset protection trusts. With this new law, Utah
residents should create their asset protection trusts here in Utah for the following reasons: First, with a Utah trust, there is no
need to find a Nevada trustee. Second, with a Utah trust, there is no need to move assets to Nevada. Third, for a Utah resident,
there is greater assurance that the asset protection benefits that are sought will be available through a Utah trust than would be the case with
an out-of-state trust. And fourth, in Utah the limitations period can be shortened to 120 days.
How is the new law different from the old law?
Utah’s old self-settled asset protection trust statute was not popular. One reason for this was that it required that the trust have an institutional trustee, and most individuals who create trusts do not want to pay trustee fees while they are still living. Another reason was that the old law listed various classes of creditors who could reach the trust property, notwithstanding the other protections provided by the law. This list of “exemption creditors” in the statute restricted the protections provided by the law, and also increased the danger that the trust property would be subject to estate tax at death. The new law neither requires that an asset protection trust have an institutional trustee, nor does it have any exemption creditors.
What creditors does the trust protect against?
As mentioned above, the trust does not protect any property that was transferred to the trust for the purpose of defrauding known creditors. However, a creditor of yours who exists at the time the trust is created must bring an action to enforce his claim within the later of two years after the property is transferred to the trust or one year after the creditor could have reasonably discovered the transfer, and you may shorten this limitations period to 120 days by sending notice to known creditors and publishing notice in a newspaper of general circulation in the county in which you live.
It is this ability to shorten the limitations period that potentially makes the statute more attractive than similar statutes in other states. Several other states keep their exemption creditors to a minimum and have two-year limitations periods. But Utah is unique in allowing you to shorten the limitations period to only 120 days.
Can (or should) the trust be a grantor trust?
Your asset protection trust can be (but does not need to be) a grantor trust for income tax purposes. If it is a grantor trust, income tax on income generated by the trust assets will be paid by you – not by the trust or by other beneficiaries who receive distributions. Ordinarily, this can result in estate tax benefits because you effectively make a transfer to the trust equal to the amount of the income tax paid, and you do so without any gift or estate tax consequences (i.e. it is a “tax-free” gift). A similar result can perhaps be achieved in the asset protection context. You would, in essence, make a transfer to the trust equal to the amount of the income tax paid, and would potentially do so without starting a new limitations period for the transfer or having to send or publish notice to creditors in order to shorten the limitations period.
Can a QPRT be a Utah asset protection trust?
Because distributions from a Utah asset protection trust must be discretionary, you might think that a QPRT (a qualified personal residence trust) cannot be a Utah asset protection trust. After all, if you create a QPRT, you have a right to live in the residence during the initial term. But the new law contains a provision that expressly permits a QPRT to qualify as an asset protection trust. Thus, you can transfer your residence to a QPRT and receive the tax benefits attendant to a QPRT, and even though you continue to have the right to live in the residence, your future creditors would not be able to reach the residence, if the trust otherwise meets the requirements of a Utah asset protection trust.
Can a charitable remainder trust be a Utah asset protection trust?
Similarly, because distributions from a Utah asset protection trust must be discretionary, you might think that a charitable remainder trust (CRT) cannot be a Utah asset protection trust because annuity payments and unitrust payments from a CRT must be mandatory. But the new law contains a provision that expressly permits a CRT to qualify as an asset protection trust. Thus, your future creditors must wait until the annuity or unitrust distribution gets into your hands (if the trust otherwise meets the requirements of a Utah asset protection trust), even though the distributions are mandatory.