Asset Protection Trusts in Florida
What is Asset Protection
If you’ve been on Instagram or TikTok anytime in the last few years, odds are you’ve seen an influencer "talk" (i.e. sell you on) about asset protection. In entrepreneurship, financial, and real estate circles, asset protection is often talked about, but little understood. So, what is it?
Asset Protections are State-Specific
Asset protection is the name given to a variety of methods that legally allow you to keep possession of an asset despite other parties having legal permission to take it, like judgment creditors, creditors in bankruptcy, or a divorcing spouse. There are different techniques that fall under the scope of asset protection, and their availability varies by state.
In Florida, for example, there’s the homestead exemption in the state constitution, exemptions codified in Chapter 222 of the Florida Statutes, like the protection of Head of Household wages, IRAs (both traditional and Roth), and 529 plans.
Business entities, like corporations and limited liability companies (“LLCs”) also offer a form of asset protection, by separating business entities’ assets from the personal assets of the business entities’ owner. This form of asset protection makes it so that only business assets available to the business’s creditors. The personal assets of the business entities’ owner are not. This is called “limited liability protection” (the scope of this protection and how to get it also varies state by state.)
Another aspect of asset protection includes keeping your name off the public record, which could become quite the undertaking depending on, you guessed it, your state’s public record disclosure laws.
Using Trusts for Asset Protection in Florida
All in all, asset protection is a broad field that touches many areas of law. One of those areas is estate planning. Trusts are commonly understood by the public as a means of getting asset protection. And while there’s some truth to this, like many of the other asset protection methods described, it depends on the laws of your state.
How a Trust Works
But first, a quick review of a trust and the roles within the trust framework. This will be super important later on. In a trust, there are three main roles.
The Grantor (also called a Settlor or Trustmaker), who creates the trust or contributes property to the trust.
The Trustee, who manages the assets contributed by the Grantor
The Beneficiary, who receives the benefit of the Trustee’s management of the Grantor’s contributed assets.
While the roles are distinct, the people in these roles do not have to be. Meaning, the same person can serve in one, two, or all three roles at the same time without invalidating the trust.
In fact, in the typical revocable living trust, the married couple initially hold all three roles.
They create the trust, so they are the Grantors.
They manage rust assets for their benefit while they’re alive, so they are the initial Trustees.
They manage these assets for their benefit, so they are the initial Beneficiaries.
What Makes a Trust Self-Settled?
These roles are important because of how Florida law approaches asset protection through a trust. Florida law has a strong public policy against providing asset protection to self-settled trusts. A trust is “self-settled” if the Grantor is also a Beneficiary. This means that a self-settled trust is not an asset protection tool under Florida law. This is true even if the trust is irrevocable, meaning the rules of trust cannot be changed after it has been created.
Domestic Asset Protection Trusts in Florida
Other states do not have this strong public policy and have explicitly allowed for irrevocable self-settled trusts to grant asset protection to the Grantor-Beneficiary. These trusts are called “Domestic Asset Protection Trusts” and are allowed in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
Using a Trust to Set Up Asset Protection for Your Beneficiaries
It is important to note that, just because Florida law does not allow you to use get asset protection through a trust you created, doesn’t mean that Florida law does not allow for asset protection through a trust at all. You can create a trust that offers asset protection to others, you just can’t set one up that offers asset protection for yourself.
Using the typical revocable living trust as an example. You and your spouse are the Grantors, Trustees, and Beneficiaries. Because you both serve as Grantors and Beneficiaries, neither of you can receive asset protection from your revocable living trust. When the second of you passes away, two things happen.
The trust becomes irrevocable.
You Beneficiaries become entitled to your assets.
Because these Beneficiaries become entitled to your assets after you & your spouse have both passed away, these Beneficiaries are NOT also Grantors of your trust.
This means the trust is not self-settled with respect to your Beneficiaries.
Since the trust is no longer self-settled, your Beneficiaries can receive asset protection from your revocable living trust after you pass away. This would allow them to receive their inheritance protected from creditors, divorce, and bankruptcy.
This has to be set up ahead of time, i.e. before you or your spouse pass away, but it is very possible & commonly done.
Tell TealAcre to Tackle the Task
If your looking to set up a trust to provide asset protection, please reach out. To contact TealAcre you can:
Schedule a complimentary 15-minute consultation by clicking here.
Register for our next webinar by clicking here.
To check out our social media, click here.
To sign up for our newsletter & receive exclusive offers, articles, and insights, click here.