Being a North Carolina business owner comes with a lot of benefits, including the ability to be your own boss and do what you yourself deem to be meaningful work. However, one of the downsides to owning your own company is that sometimes, the more successful you are, the more of a target you become for legal liability. This is the main reason we often advise our corporate clients at Wilson Ratledge to consider funding asset protection trusts to shield their business from legal threats.
There are all sorts of benefits associated with funding trusts, whether you own your own business or not. [link to a revocable living trust post? If we have one?] However, as someone who has their own company, you may have, or may be perceived to have a higher income than most who are traditionally employed, and you may own your own home plus a portfolio of rental properties or a vacation house. If this is the case for you, then taking time to learn more about asset protection trusts is critical. Below, we’ll share how specific trusts can protect your business and personal wealth so you can have more peace of mind knowing you have done all you can to provide for yourself and future generations.
Trusts That Protect Against Unknown Future Creditors
As suggested previously, your goal as the owner of your own NC business should be to focus on your business, not protecting your personal assets against anyone who might make a claim to them in the future through unexpected or unforeseen civil litigation or threats of civil litigation.
It is important to note that North Carolina prohibits “self-settled spendthrift trusts.” This means you cannot put your assets out of creditors’ reach by moving them to an irrevocable trust of which you are a beneficiary. Competent legal counsel is critical in navigating rules like this and others preventing “fraudulent transfers” (moving assets out of your name when a creditor threat is known). We can, however, use a variety of tools to position your assets to continue to benefit you and your family in a manner that works for you and complies with North Carolina law. Some of the best asset protection trusts in North Carolina include:
- Spendthrift or Protective trusts: Referenced in N.C. Gen. Stat. § 36C-5-502 and N.C. Gen. Stat. § 36C-5-508 the beneficiaries cannot give away any interest in, or borrow against, or sell property contained in the trust. These protective trusts are most commonly used to protect assets from being squandered by reckless or immature beneficiaries.
- Discretionary trust: Addressed in N.C. Gen. Stat. § 36C-5-504, trustees managing these irrevocable trusts exercise complete control over the amounts and when distributions from the trust will occur. Since the beneficiaries have no right to compel a distribution from the trust, the assets are protected. Since assets contained in the trust are held separately from those of beneficiaries, it protects them should the beneficiary file for bankruptcy or be sued by creditors, or have any other issues which indicate that assets should remain in trust or be used for the beneficiary’s benefit through direct payment to others (such as universities or health care providers) rather than be distributed outright.
- Spousal lifetime access trust (SLAT): This irrevocable trust allows for donor/settlor spouses to gift assets in trust for the benefit of their spouse(and sometimes other family members). In addition to the protective nature of these trusts, they can reduce the value of the combined taxable estate. Trusts like these result in a loss of control over trust assets, which means they give up say over their disposition or the ability to claw them back; however, grantors typically continue receiving indirect income from these trusts via their spouse’s role as beneficiary.
Out-of-State asset protection trusts (APT): The APT is often lauded as the strongest protector against potential judgments, lawsuits, and creditors who may attempt to stake a claim to your assets. This is a self-settled trust, meaning grantors can be permissible beneficiaries and, thus, access funds contained in it. North Carolina isn’t one of 17 states that allows you to set up one of these; however, some of our state’s business owners do so in other states. There are important advantages and disadvantages of this option, which you’ll want to discuss with legal counsel like ours at Wilson Ratledge.
How an Attorney Can Help You Decide Between Asset Protection Trusts
There are many intricacies that apply to each different type of trust depending on how much control you, as the grantor, wish to exercise over the assets placed into or whether you can ultimately revoke the trust, your intended beneficiaries, and how the trust should be taxed.
Insight gained through years of experience advising clients and developing a strong familiarity with the numerous options and factors involved in choosing an asset protection strategy that works for you and your family is crucial. Contact our law firm if you’re looking to improve or implement safeguards for your business and personal assets.