By Kirk R. Wilson, J.D., LL.M.

Traditional estate planning has expanded in recent years to include asset protection planning for clients who have concerns about protecting their estates from future lawsuits or claims. Fortunately, Texas is a very debtor-friendly state, with laws that protect your homestead (regardless of value), your retirement accounts (IRAs and 401K plans), the cash value of your life insurance or annuities, funds held in college savings plans, and $60,000 of certain personal property (home furnishings, clothing, jewelry, etc.) from the reach of your creditors. So putting money into these exempt asset categories is a good first step in asset protection planning.
Liability insurance is also an important part of a good asset protection plan, including homeowners, auto, business or professional errors and omissions coverage, and an umbrella policy.
Here in Texas, a husband and wife can build asset protection planning into their estate plan to provide protection for the surviving spouse and later for their children. If the couples? Wills, or their living trust, creates a separate irrevocable trust for the benefit of the surviving spouse after the first spouse?s death, that trust can be structured to provide asset protection to the surviving spouse (against any future claims). This is done by having someone other than the spouse (e.g. a trusted friend or an adult child) serve as the trustee, and by giving the trustee full discretion with regard to trust distributions. This allows a trustee to exercise his or her discretion to say ?no? to creditors who come calling.
Parents can set up irrevocable trusts for their children or grandchildren, either while they are living or after their deaths, that will effectively shield the trust assets from the reach of the children?s or grandchildren?s creditors or spouses. These are not self-settled spendthrift trusts, as described below, because the parents are not the beneficiaries. The trust assets can be fully shielded by having a third party trustee and making the trust distributions fully discretionary, or the children can serve as their own trustees provided that trust distributions can only be made for a beneficiary?s ?health, education, maintenance or support?, which limits a creditor?s access to only the amounts, if any, that a beneficiary objectively needs for such purposes.
\ In Texas the law has always been that while you are living you cannot transfer assets to either a revocable or irrevocable trust to shield the assets from the reach of your creditors if you retain the right to use and enjoy those assets (i.e. if you are a beneficiary of the trust). With a ?self-settled spendthrift trust?, as this is often called, your creditors have the right to access the trust assets to the same extent that you can.
However, there have been some recent changes to the law in Texas that may allow, at least in the view of one commentator, the creation of self-settled spendthrift trusts in certain cases in this State, such as having one spouse set up an irrevocable trust for the other. This commentator acknowledges that there is no indication this was the intent of the Texas Legislature when these changes were made, i.e. it was perhaps the inadvertent result of a change made for another purpose. So given the uncertainty about this, and the fact that this approach is untested by the courts, it must be considered a very risky asset planning option.
But a number of other states have recently passed legislation expressly designed to shield assets in self-settled spendthrift trusts from creditors. Banks and trust companies in those states are now actively marketing this asset protection option since it is available to out-of-state residents who name an in-state bank or trust company as the trustee.
So a Texan can set up such a trust in one of these states, such as Nevada or Alaska, with an in-state trustee, to put those assets outside the reach of their future creditors. However, there are also some statutory exemptions under these new laws, such as for unpaid child or spousal support obligations, which cannot be shielded. And since these laws are fairly new, until they are fully tested in the courts of those states, their effectiveness is still not certain.
Similarly, for many years, ?offshore? asset protection trusts have been used in exotic locals, such as the Isle of Man, Jersey, Guernsey, and the Cayman Islands, where assets are entrusted to local banks in irrevocable trusts. These trusts have been effective in many cases to shield assets from creditors, but they have also been thwarted by U.S. courts in some cases. In those cases, the settlors of these trusts have been held to be in contempt of court and put into jail for failing to instruct the trustee to release funds to them to pay their creditors. So even these offshore trusts are not bullet-proof and you are entrusting your assets to a foreign institution that is not subject to our laws, which involves some level of risk.
In lieu of sending assets abroad or out of state, setting up a Texas limited partnership is a frequently used asset protection option. A limited partnership is not an absolute shield against creditors, but the most a court can do on behalf of a creditor is to issue a charging order against a partnership holding a debtor?s assets. This charging order gives the creditor the right to collect any distributions the partnership makes to the debtor partner. But if the general partner of the limited partnership (often the debtor) decides not to make any distributions, there is nothing for the creditor to collect. This can effectively stymie a creditor?s collection efforts.
Another and very common Texas asset protection option is to put rental property or a business in an entity, such as an LLC or a corporation, so that anyone having a claim against that property (e.g., someone injured on the property), or against that business, is limited to collecting the assets held by that entity. Assets held by the owners outside of the entity generally cannot be reached.
For all of these asset protection structures to be effective, they must be created and funded before there is an actual claim or lawsuit pending. Otherwise, they will be set aside as a fraudulent attempt to avoid an existing creditor.
In conclusion, not everyone needs asset protection planning, but for those who have concerns about potential future liability, Texas is a good place to live because of our homestead protection and other generous exemptions. Liability insurance is always a good option for mitigating risk, and there are legal structures that can be used to provide additional protection if it is needed.

[The author is a Woodlands-based estate planning attorney at the firm of O’Donnell, Ferebee, Medley & Frazer, P.C. He is licensed to practice law in Texas and California, is a board-certified probate, estate planning and trust law specialist in California, and holds an advanced law degree (LL.M.) in taxation. He can be reached at (281)875-8200. The firm’s website is]

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