Asset Protection Trust Planning
dan • March 2, 2022
In a previous post, I provided basic information about asset protection. As I noted then, asset protection isn’t just about rich people hiding their ill-gotten gains from the IRS in offshore accounts. You may not think that asset protection is something you need, but if you’ve bought insurance, formed a business entity, or separated out money into several different types of accounts, you have already engaged in at least a little asset protection planning.
The question is, do you need to have a more comprehensive, deliberate, coordinated asset protection plan in place than what you currently have, and if so, what are your options for accomplishing that? Here are four critical points to understand about effective asset protection:
- It usually requires several different strategies and approaches. The adage about not putting all your eggs in one basket applies here.
- Just like the best time to borrow money is when you least need it, the best time to protect your assets is when you don’t face any threats. If you try moving assets into a spouse’s name or establishing irrevocable trusts after you’ve gotten into a situation that is likely to result in a lawsuit, you will be putting yourself at risk of a fraudulent conveyance charge.
- Along the same line, you need to be reasonable about the amount of assets you include in your asset protection plan. You can’t protect everything. Your asset protection plan must leave you fully solvent outside of the protected assets and able to pay any claims that you knew or should have known about at the time you were shifting your assets around.
- The level of protection you are able to achieve will depend on the amount of control over your assets that you give up. You cannot put your assets into a revocable trust that you control and of which you are a beneficiary and expect that a court is going to let you ignore those assets for purposes of satisfying a judgment that has been entered against you.
Below, I describe seven trust-based asset protection strategies and how they can:
- Protect your assets from creditors, including former spouses and other litigants.
- Protect assets gifted to, or inherited by, your spouse, children, or other beneficiaries.
If done correctly, these seven trust-based asset protection strategies can put significant, sometimes insurmountable, obstacles in the way of a creditor. If you have questions or would like to discuss your options for trust-based asset protection, please call our office to discuss this further.
Lifetime Asset protection trusts -- having your cake and eating it too
A
Lifetime Asset Protection Trust
is an irrevocable trust created
during your lifetime that can be used to accomplish several goals.
- A Medicaid Planning Trust may qualify you or your spouse for Medicaid while preserving an income stream for the well spouse and protecting the trust assets from estate recovery after death.
- A Lifetime QTIP Trust is a lifetime trust for your spouse’s benefit that takes advantage of the gift tax marital deduction. This can provide asset protection plus a reduction in overall estate taxes.
- A Family Bank Trust , also known as Spousal Lifetime Access Trust (“ SLAT ”), is a lifetime trust for your spouse’s benefit that uses the annual exclusion gifts and the lifetime gift tax exemption. Again, these trusts can provide asset protection plus a reduction in overall estate taxes.
- A Domestic Asset Protection Trust (“ DAP  T ”) is a lifetime trust for your benefit, primarily for the purpose of asset protection.
1. medicaid planning trusts
Medicaid Planning Trusts
may help you and your spouse:
Planning Tip : Medicaid is jointly funded by the federal and state governments, and each state sets its own rules and guidelines for Medicaid eligibility and estate recovery. Therefore, a Medicaid Planning Trust must be tailored to the laws of your state of residence. Trusts may also be subject to a look-back period ( not “disqualification period”) of three or five years. Medicaid Planning usually works best if done as early as possible, so please call our office now if you have Medicaid planning questions. 
- Qualify for Medicaid while protecting an income stream for the benefit of the well spouse.
- Avoid estate recovery. Assets held in this trust will pass to your heirs protected from the government’s estate recovery, which would otherwise require paying back Medicaid benefits that were received during your lifetime.
Planning Tip : Medicaid is jointly funded by the federal and state governments, and each state sets its own rules and guidelines for Medicaid eligibility and estate recovery. Therefore, a Medicaid Planning Trust must be tailored to the laws of your state of residence. Trusts may also be subject to a look-back period ( not “disqualification period”) of three or five years. Medicaid Planning usually works best if done as early as possible, so please call our office now if you have Medicaid planning questions. 
2. Lifetime QTIP Trusts
When one spouse is significantly wealthier than the other spouse, a
Lifetime QTIP
Trust offers the following benefits:
Planning Tip : Lifetime QTIP Trusts offer a great deal of flexibility when spouses have lopsided estates. During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive principal. If the less wealthy spouse dies first, then the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption. Although some of the estate tax savings might be obtainable with “portability,” the asset protection aspects are only available with a Lifetime QTIP.
Depending on applicable state law, the remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit. These trust funds will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed according to the wealthier spouse’s wishes. 
- Makes use of the less wealthy spouse’s federal estate tax exemption.
- Provides a lifetime, asset-protected trust for the benefit of the wealthier spouse if the less wealthy spouse dies first. (Subject to state law.)
- Insures that assets left in the trust (after both spouses die) get distributed according to the wealthier spouse’s wishes.
Planning Tip : Lifetime QTIP Trusts offer a great deal of flexibility when spouses have lopsided estates. During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive principal. If the less wealthy spouse dies first, then the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption. Although some of the estate tax savings might be obtainable with “portability,” the asset protection aspects are only available with a Lifetime QTIP.
Depending on applicable state law, the remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit. These trust funds will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed according to the wealthier spouse’s wishes. 
3. Spousal Lifetime Access
SLATs or “Family Bank Trusts” became popular for married couples in 2012 when it was looking like we were going to go over the “fiscal cliff.” They remain popular today as an estate tax reduction and asset protection strategy.
This trust is sometimes also referred to as a “Lifetime Bypass Trust” since it is funded with lifetime gifts that are held for the benefit of you or your spouse. As with a Bypass Trust created after the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose.
Planning Tip : SLATs are useful if you live in a state that does not collect a state gift tax but collects a state estate tax and the state exemption is expected to remain significantly lower than the federal exemption (e.g., Maine, Massachusetts, Minnesota, New Jersey, Oregon, Vermont and Washington). 
This trust is sometimes also referred to as a “Lifetime Bypass Trust” since it is funded with lifetime gifts that are held for the benefit of you or your spouse. As with a Bypass Trust created after the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose.
Planning Tip : SLATs are useful if you live in a state that does not collect a state gift tax but collects a state estate tax and the state exemption is expected to remain significantly lower than the federal exemption (e.g., Maine, Massachusetts, Minnesota, New Jersey, Oregon, Vermont and Washington). 
4. Domestic asset protection trusts
The goals of a DAPT are to allow you to fund the trust with your own property, maintain some degree of interest in the trust as a beneficiary, and protect the trust’s assets from your creditors. Currently 16 U.S. states permit creation of DAPTs and the number will likely continue to grow, although laws vary widely from state to state.
Planning Tip : The laws governing DAPTs are relatively new and still evolving. U.S. courts have had limited opportunities to evaluate them thus far. We do know that bankruptcy laws allow trust assets to remain exposed to the claims of your creditors for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right person. 
Planning Tip : The laws governing DAPTs are relatively new and still evolving. U.S. courts have had limited opportunities to evaluate them thus far. We do know that bankruptcy laws allow trust assets to remain exposed to the claims of your creditors for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right person. 
Testamentary asset protection trusts -- ruling from the grave
A Testamentary Asset Protection Trust is an irrevocable trust created after your death and used for a variety of reasons.
- Irrevocable Life Insurance Trusts (“ ILITs ”) protect life insurance proceeds for the benefit of your heirs.
- Standalone Retirement Trusts protect retirement accounts for the benefit of your heirs.
- Discretionary Trusts protect other assets for the benefit of your heirs.
1. Irrevocable Life Insurance Trusts
An
ILIT
is a powerful tool for leveraging generation-skipping planning and protecting insurance proceeds for the benefit of your intended beneficiaries. In addition to asset protection, an ILIT can remove life insurance proceeds from your estate for estate tax purposes and, with proper planning, provide much-needed liquidity for owners of illiquid assets, like farms, closely held businesses, or real estate.

2. Standalone Retirement Trusts
Because of the recent U.S. Supreme Court decision in
Clark v. Rameker
(which held that an IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors), the
Standalone Retirement Trust
has become an important vehicle for protecting retirement accounts from the creditors of your beneficiaries.
Planning Tip : If you have more than $200,000 in a retirement account and you have named your children as primary beneficiaries of the account, then please call our office now to discuss how a Standalone Retirement Trust can be used to protect the account from your children’s creditors after death.
Planning Tip : If you have more than $200,000 in a retirement account and you have named your children as primary beneficiaries of the account, then please call our office now to discuss how a Standalone Retirement Trust can be used to protect the account from your children’s creditors after death.
3. Discretionary Trusts
A
Discretionary Trust
is an irrevocable trust that can be built into an ILIT and is an integral part of a Standalone Retirement Trust. You can also include a Discretionary Trust for each of your beneficiaries in your Revocable Living Trust to protect other assets.
Planning Tip : If you are concerned about an heir who is a spendthrift, married to an overreaching spouse, bad at managing money, in a high-risk profession, or otherwise worried about being sued, we can help you incorporate Discretionary Trusts into all of the testamentary trusts created in your estate plan.
Planning Tip : If you are concerned about an heir who is a spendthrift, married to an overreaching spouse, bad at managing money, in a high-risk profession, or otherwise worried about being sued, we can help you incorporate Discretionary Trusts into all of the testamentary trusts created in your estate plan.
Trust-Based asset Protection -- The bottom line
Although asset protection trusts must be irrevocable to safeguard the trust property, they still offer a great deal of flexibility and protection for your own property as well as property gifted to, or inherited by, your loved ones.
This type of planning can become complicated and should not be attempted without the assistance and counseling of an experienced attorney. We are here to answer your questions about trust-based asset protection strategies and advise you on planning options. Please feel free to call our office at your convenience. 
This type of planning can become complicated and should not be attempted without the assistance and counseling of an experienced attorney. We are here to answer your questions about trust-based asset protection strategies and advise you on planning options. Please feel free to call our office at your convenience. 
What Next?
If you think it might be time to think through your estate plan, you can:
- Give us a call at 303-578-2745 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
- Get a copy of our estate planning checklist to see where you currently stand.
- Learn more by reading our blog or watching our videos.
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What Are the Required Documents to Create a Will in Colorado?
Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively.  What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. Steps in the Colorado Probate Process While the specific steps in probate can vary depending on the type of probate and the complexity of the estate, the general process in Colorado typically includes the following: Filing the Probate Petition The process begins with filing a Petition for Probate with the appropriate Colorado probate court. The petition is usually filed by the executor named in the will or an interested party if no will exists. Appointment of the Personal Representative The court will appoint a Personal Representative (executor) to manage the estate. If there is a valid will, the person named as executor is typically appointed. If no will exists, the court will appoint someone, usually a family member, to serve as the Personal Representative. Notice to Heirs and Creditors The Personal Representative must notify all potential heirs and creditors of the probate proceeding. This step is essential for providing an opportunity for interested parties to come forward and make claims against the estate. Inventory and Appraisal of Assets The Personal Representative must create an inventory of all the deceased’s assets and have them appraised if necessary. This inventory will include real estate, personal property, financial accounts, investments, and any other assets owned by the deceased. Paying Debts and Taxes Before distributing assets, the Personal Representative must pay off the deceased’s debts and any taxes owed. If the estate does not have enough assets to cover all debts, Colorado law dictates the order in which creditors are paid. Distribution of Assets Once all debts and taxes have been paid, the Personal Representative can distribute the remaining assets to the beneficiaries according to the will or, if no will exists, according to Colorado’s intestacy laws. Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. Resolving Disputes If disputes arise, an attorney can provide representation in negotiations, mediation, or court hearings to protect your interests and work toward a fair resolution. Minimizing Costs and Delays With the guidance of a skilled attorney, you can often minimize the time and expense associated with probate, helping ensure the process goes as smoothly as possible. How The McKenzie Law Firm, LLC Can Help At The McKenzie Law Firm, LLC, we understand the complexities of the probate process and are committed to helping families navigate it with compassion and expertise. Whether you’re an executor needing assistance with your duties or a family member looking to understand your rights, our experienced probate attorneys can provide the support you need. If you have questions about probate in Colorado or need legal assistance, contact us today to schedule a consultation. We are here to guide you through the process and ensure your loved one’s wishes are honored.
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