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If you own your assets, then they’re not protected - by Vaughan de Kirby

This sounds absurd, but it’s the truth. If you own your assets—that is, if your assets are owned in your name—then they’re not protected from the expenses, leakages and delays of probate, nor are they safe from liability, creditors or estate taxes. A properly drafted trust can ensure that the wealth that you worked so hard for goes to those you love most. If you’re like me, supporting your family is the reason you worked so hard in the first place, and you want to make sure that, if you were to pass away suddenly, your wealth—personal, financial and spiritual—would be protected.

Most people don’t understand the first thing about how a trust works, and why it works so well. In a nutshell, a trust is such an effective means of estate planning because it means creating a separate legal entity. Like a person, a trust can own property. When you create a trust, you transfer your assets into the trust. Strictly speaking, you no longer own the property (though you retain complete control over it while you’re alive). Your trust owns it for you.

However, unlike a person, a trust can never die, so it’s assets never go through probate. If you were to pass away with most or your assets in your name, the bulk of your estate would go through the probate process. During this year-long court proceeding, which would deprives your loved ones of the emotional closure and financial means that they need to heal, a significant portion of your wealth would be siphoned off. If, on the other hand, you transferred your assets into a trust, your family would receive the money they need immediately, rather than waiting for lawyers, accountants and the government to take their cuts.

If your estate is large enough for estate taxes to be a concern, creating a trust is without doubt your best course of action. Here's how it works: the estate tax is essentially a transfer tax. If you died, the assets that you own would be transferred to the people you named, and this transfer of wealth is what activates the tax. However, if you create a trust, nothing is really transferred. The property continues to be owned by the trust after you died, but the money can be used for the benefit of your loved ones, who you name as the “beneficiaries” of the trust. That’s why, with a properly drafted trust, you can avoid the estate tax altogether.

A trust can also never be liable or subject to creditors. In other words, while a person can be sued, a trust can’t. Let’s say that, after probate concluded, your children received their inheritance. Let’s also imagine that, a few years later, one of your children got into a car accident and it was her fault. Unfortunately, she then gets sued and loses. Worst of all, she is forced to pay the majority of her inheritance as damages to the person who sued her. This kind of thing happens all too often, and it’s completely avoidable.

Recall that the money is still owned by the trust after you’re gone. In our car accident scenario, this means that your daughter wouldn’t technically own the property in the trust (though the money is available for her support). So, she could never be sued for money that’s not hers.

The protection that a properly drafted trust provides isn’t absolute, however. We’re talking about the law after all, and there could always be extraordinary circumstances that might create an exception to the most solid of legal rules. While the protection of a trust isn’t absolute, it is the closest you’re going to get. Think of a trust as a wall of fortification that prevents creditors from getting to the assets that you leave for your loved ones. If you consult a qualified Personal Family Attorney who has the necessary expertise to draft the trust properly, the wall will be all but impenetrable.

People pass away and their assets go through probate. They transfer their wealth to loved ones when they die, and they pay estate taxes. They can be liable and they can be sued. Trusts can’t, which makes them one of the most basic, most effective means of estate planning. It’s hard to put a price on the peace of mind that comes with knowing that your wealth will go to those you love most. On the other hand, without sound estate planning, the price that your loved ones will pay—in lost time, in lost sleep and lost financial support—will be far too high.