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Can a Spendthrift Trust protect your own assets?

This column first appeared in the San Antonio Express-News on December 1, 2017. 

Dear Mr. Premack: I have a question about asset protection. Can you create a Trust where the spouse that sets up the Trust can also control the Trust while having the assets in the Trust protected from creditors? Basically I want to set up a self-established Spendthrift Trust. I understand that a 2013 change to the Texas spendthrift statue [probate code 112.035 (g)] now allows for a person to set up this type of Trust. Can you help explain this? Would it be better to set up a spendthrift Trust where my adult child is the Trustee? Will this type of Trust offer the creditor protection? I’m not trying to defraud any one, I just run a business that has the potential for lawsuit exposure and I want to protect what I’ve earned. Thanks, A.P.

In 2013, the Texas Legislature amended section 112.035 of the Texas Property Code (not the Probate Code) to expand asset protection opportunities. They did not, however, make the new law simple or understandable and there have been no reported court decisions interpreting the 2013 law changes.

Historically, the idea of a person hiding their own assets from their creditors was largely disfavored. If you incurred a debt, you and your assets were liable for the payment of that debt. In the last twenty years, several states passed statutes allowing a person to create a trust (the trust creator is called its “settlor”), to put their own assets into the trust, and to bar creditor’s claims against the trust. Texas moved in that direction in 2013, but not without reservations.

Property Code 112.035(g) says that assets contributed to a trust are not considered to have been contributed by the Settlor when a) the trust is irrevocable, b) it is for the benefit of the Settlor’s spouse, and c) the Settlor becomes beneficiary only after the other spouse dies. The assets in the trust are free from claims by the beneficiary’s creditors. So you can self-establish a Spendthrift Trust, but you cannot be its beneficiary until after your spouse has died.

You ask if it would make a difference if you name your adult child as Trustee. The answer is no; if you are both the Settlor and the beneficiary, there is no creditor protection under Texas law. To get the protection, you must not be considered the Settlor, and the only way to do that is to follow Property Code 112.035(g).

You own a business that has potential for lawsuit exposure. You want to protect your assets if the business loses a lawsuit. The spendthrift provisions in 112.035(g) would not make it possible for you to run the business and profit from the business while still avoiding liability. So, what else can be done?

Consider separating the business from your personal assets by making the business into properly established LLC (limited liability company). You need to set it up with legal expertise from an experienced attorney, register it with the Texas Secretary of State, and convey the current business assets into the new LLC. If you do business through the LLC, then any future lawsuit would be against the LLC instead to against you. Any judgement against the LLC can only be satisfied from assets owned by the LLC, not from your other personal assets.

It is also important for you to understand that Texas law provides other automatic asset protections. For instance, your homestead can never be taken away in a business lawsuit. Your retirement accounts, like IRAs and 401ks, are likewise protected from liability. Life insurance and death benefits are protected from liability. You should consult with an experienced Will, Trust, and Business Entity attorney to determine the best course to protect yourself, your family, your assets, and your business.

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