50 Briar Hollow Land, West Building
Suite 210 West
Houston, Texas 77027

P: (713) 529-6047
F: 866.274.8369


James C. Mulder
attorney at law

The Magic of Irrevocable Trusts

This section shall cover some of the basics of how trusts can provide asset protection. First, I will cover some basic terms and principles of trusts and then I will provide some examples of how trusts can be a very powerful asset protection tool. 

A trust is an arrangement in which someone, the Settlor, transfers property to a Trustee who agrees to hold the property for the benefit of one or more beneficiaries. A trust can be either revocable or irrevocable by the Settlor. In Texas, the Settlor can be both the Trustee and Beneficiary of the trust he or she creates. If a trust is revocable by the Settlor, it will not provide any asset protection for the Settlor. Similarly, if the Settlor is a beneficiary of an irrevocable trust, it will not provide any asset protection for him or her, except in very unique circumstances. So, in Texas, in order to provide asset protection with a trust, it must be irrevocable and the Settlor must not be a beneficiary. This kind of trust is frequently called a “Spendthrift trust”. Spendthrift trusts originated to protect the beneficiary’s ability to transfer his or her right to future payments of income or capital from the trust, and his or her creditors are unable to subject the beneficiary’s interest in the trust to the payment of his or her debts. 

Spendthrift trusts are usually established with the object of providing a fund for the maintenance of another person, known as the spendthrift, while also protecting the trust against the beneficiary’s imprudence, extravagance, and inability to manage financial affairs. For example, a Settlor establishes a spendthrift trust for his son, a compulsive gambler, who spends money injudiciously with no concern for the future. Settlor contributes $400,000 to the trust. Under the terms of the $400,000 trust, which is to be administered by a trusted person or financial institution as Trustee, the son is to receive $15,000 a year. Any words that indicate the Settlor’s intention to impose a direct restraint on the transferability of the beneficiary’s interest can be used to create a spendthrift trust. 

Such trusts do not limit the rights of the beneficiary’s creditors to the income or property the trust distributes to him after it is received by the beneficiary from the trustee, but his creditors cannot compel the trustee to pay them directly. This means that any of the beneficiary’s creditors can seek to have the money the spendthrift has already received applied to satisfy their claims, but creditor’s claims to future payments under the trust, however, are denied. The beneficiary’s creditors cannot reach the $15,000 that he is to be paid in a subsequent year until it is actually paid out to him. If the beneficiary could dispose of his right to receive income or principal from the trust, his incompetence or carelessness might lead him to sell his interest in the trust and transfer it to a lender or purchaser and creditors the right to receive future income as it became due. By providing in the trust that no beneficiary can sell, pledge or otherwise give someone rights to his rights in the trust, no creditor of the beneficiary can do anything with the income until the trustee pays it into his hands. Therefore, he is more likely to be protected, at least to some extent, against losing what his father wanted to leave to him. 

Now, how does this kind of a trust help a Settlor to protect his or her assets from a creditor since he or she cannot transfer assets into a trust with spendthrift provisions and remain a beneficiary and protect it from his or her creditors? The answer is you wouldn’t use this technique for assets that you need to support yourself. Those assets that are not already exempt under Texas law should be put in an LLC that you control and in which you still own the lion’s share of the equity. But once you have accumulated sufficient assets in your exempt buckets (IRA, 401(k), annuities, etc) and then in your LLC, to provide for your future needs, the spendthrift irrevocable trust for your children or other loved ones is the best vehicle to protect excess assets. This trust is much better than an LLC because you no longer own the assets that you put in the trust. They never appear on your balance sheet or estate, if properly implemented. 

I have many clients that have difficulty pulling the trigger on setting up irrevocable trusts for their children and other loved ones because they think they will lose control. Far from it, you can remain the Trustee! The Trustee is the only one who manages the assets in the trust and determines if the beneficiary is entitled to distributions. 

When should you consider doing this? As said above when you have a comfort level on your own exempt and otherwise protected assets, but also consider setting up a trust like this for a new business venture or a new location for your current business. Hopefully, the endeavor is a success and since these trust assets are not part of your balance sheet, they can never be attached by a creditor of yours, or estate taxed. Yet, you still control it and if you work in the business endeavor, you can get paid from the business owned by the trust. These trusts can last for several generations and can be perpetual in some jurisdictions. A trust like this needs to be very carefully drafted so that 50 years from now it still has the flexibility to handle an unforeseen circumstance. They also must be carefully drafted so as not to bring the assets into your estate for federal estate tax imposition. 

These trusts have many different names in the public, such as generation skipping trust, legacy trust, and heritage trust. It doesn’t matter what it is called, what matters is what it says. 

Another planning tip is to approach your parents to set up a trust for you like I have described in this article and give you control over it as Trustee and beneficiary. It is still not your asset and is totally “bullet proof” if properly structured and administered. For sure, your parents should do this for you in their estate planning documents, but if they set one up for you now and seed it with gifts, you can start that new business venture or location inside your trust in which you are the beneficiary and Trustee! 

There are many more planning opportunities using trusts that are beyond the scope of this section, but I hope I have whetted your appetite to jump into the world of irrevocable trusts.

Practical Problems in Asset Protection

Now that you have your asset protection plan, what do you do? Effective asset protection involves three aspects, planning, implementation, and maintaining. We have discussed many times the planning and implementation aspects of asset protection planning, but haven’t really focused on the maintaining of your asset protection plan. It is not difficult, but involves monitoring and consistency. Some of the common issues that need to be addressed and maintained are discussed below.


Insurance covers two aspects,(1) one making sure you have casualty coverage for assets that you used to own personally, but that are now owned by an entity and (2) making sure you do not drop your liability coverage, now that you think you are “bullet proof”.

We advise our clients to notify in writing their casualty insurance carriers as to ownership changes on property. In fact, we advise our clients to check with their casualty agents during the planning process so that the client will know of any rate or coverage changes because that rent house is now going to be in an LLC, for instance. Business assets that once were owned by the operating company, but now are going to be owned by a leasing company, need to be covered by the operating company still, but the leasing company needs to be listed as an additional insured on the policy.

Even if the hospital you work at would allow you, don’t drop all your liability coverage. Just because you are asset protected doesn’t mean that you should not have liability coverage. Liability coverage provides an attorney for you should you be sued and have a defense. Liability coverage provides recompense to an injured party who really deserves it. You may want to consider the liability limits you currently have and see what cost savings you can make by lowering the coverage, but you should still maintain some liability coverage.

Mortgage Companies

In order for you to get the asset protection you desire, you must transfer the asset into your entity (LLC or Limited partnership). If it is a piece of real property, you need to record the transfer in the real property records, otherwise a creditor can ignore the transfer. Mortgage companies generally have a right to demand you pay off your mortgage should you transfer the property on which the mortgage company has a lien. This is often called a “due on sale” clause. It is not limited to a sale though and will apply to a transfer to your LLC, for instance. So, you need to either (1) notify the mortgage company before transferring and get their consent and be prepared to get other financing should they not give consent, or (2) transfer it and hope they don’t object and if they do, be prepared to get alternate financing then.

Accounting and Contracts

Because you are forming new entities that have substance, you must treat them as a separate “business” and consequently account for them separately. Many times these structures won’t require a separate income tax return, but they do need to be accounted for separately. What I mean by this is the following:

Suppose you have formed a limited partnership or LLC holding company that acts as your own private “bank” and owns all of your liquid assets as well as your subsidiary LLCs that own pieces of real property that are leased out. The tenants in the properties need to be leasing from the subsidiary LLC, not you and you need to be collecting rents under the name of the subsidiary LLC that actually owns the property or have a contract with another LLC that handles all property management for all LLCs. You should have a set of books for each LLC and account for all expenses and income. The net result is reported for federal income tax purposes on the holding company’s partnership return.

This is not as cumbersome as it may seem. Most of this can be kept in Quick Books or simply on a spreadsheet. You should have been accounting for all of this prior to the planning implementation anyway. It really is easy to do, but absolutely needs to be done.

Part of ensuring the business relationship is to have contracts between your entities and your tenants that show the new relationship between landlord and tenant. The tenants need to make their rent checks out to the LLC owner or LLC management company. As stated above, your liability and casualty insurance companies need to show the new owner LLC as the insured.

Cumbersome and Increased Annual Cost

What I have presented here might seem cumbersome and it will increase your annual accounting fees to your CPA or tax preparer and may increase your casualty and liability insurance premiums. That is the price for sleeping well at night. It shouldn’t cost you significantly more than before the planning and implementation and will ensure that your plan if ever challenged will stand up.

  • What other issues are presented?
  • What will be the income tax consequences of implementing an asset protection plan?
  • What are the additional expenses that will be incurred in the planning and implementation?
  • What are the ongoing costs of implementation?

For more information on the basics of asset protection for your business or family, contact WealthKeepers today at 713.461.9699 or info@WealthKeepers.net