Protecting Your Estate from Creditors

Asset protection is a complicated field. There is a whole range of parties from whom you may want to protect your estate, preferring that your assets should instead go to your family. But protecting your estate from creditors is legally very difficult – and, depending on the action you take, you run the risk of falling foul of fraud rules.

Why would I want to protect my assets?

There is a potentially unlimited range of reasons why you might want to protect your assets. For example, many people want to prevent portions of their estate going to previous spouses, while others wish to keep their assets away from Inheritance Tax.

But, while these practices are pretty well documented, many people overlook the protection of their estate from creditors. Many people would rather see their assets transferred to their loved ones when they die, not to their creditors. This is a particularly common problem for business owners.

It is often possible to protect your estate from creditors, for example using an asset protection trust.

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What is an asset protection trust?

An asset protection trust is a type of trust designed specifically to limit the exposure of your assets to claims by creditors or other interested parties. On a basic level, you ‘settle’ assets into a trust, thereby giving up your legal title to them. They are considered separate from your estate, and therefore out of the reach of creditors.

Or that’s the idea. In reality, asset protection trusts are fraught with difficulty, and are vulnerable to challenge. For example, if you are declared bankrupt but you have significant assets held in trust, you can be fairly sure that your creditors will do all they can to get to those assets.

You should also note that asset protection trusts must be irrevocable in order to be effective. Revocable trusts do not provide protection from creditors. More information on the difference between revocable and irrevocable trusts is available elsewhere on this site.

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Is it legal?

This is a difficult question. To begin with, you should understand that setting up a trust is perfectly legal; everyone is entitled to do this. This does not, however, mean that you are free to transfer whatever you want into that trust.

It is vital to note that you are legally prohibited from settling assets into a trust if you have been declared bankrupt. If you try to do this you are breaking the law.

But it is also illegal to settle assets into a trust (or transfer assets in any other way, for that matter) if that transfer could be deemed to be ‘fraudulent’. Basically, this means that you are prohibited from settling assets if that settlement would mean that you are defrauding your creditors of money they are owed. There are stiff penalties for fraudulent activities of this sort. Additionally, you can be pretty confident the trust itself would be subject to legal challenge.

Protecting your assets from creditors is something of a legal minefield. While it may not necessarily be illegal to take some action to protect certain assets, it is actually quite difficult to stay on the right side of the law. As such, it is vital that you take independent legal advice before taking any action.

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Now that you have read through the advice above, you might want to put it into practice. Our Estate Planning Checklist lets you tell us about your circumstances and get a personalised estate planning checklist covering wills, trusts, and inheritance tax. Try it now →