Many people imagine a trust as a "box" where they can place assets to keep them safe from creditors or legal trouble. However, in the eyes of the law, a trust is not actually a separate legal entity in the same way a corporation or an LLC is. Instead, it is a legal relationship.
The Relationship Between Trustee, Beneficiary, and Asset
A trust is fundamentally a relationship created through legal documents. When you "put an asset in a trust," you aren't sending it to a separate legal "person"; rather, your legal relationship with that asset changes. In Texas, the Texas Property Code defines a trust as a fiduciary relationship with respect to property which subjects the person holding title to the property to equitable duties to deal with the property for the benefit of another person.
This distinction is crucial for asset protection. If you maintain total control—serving as the trustor, trustee, and beneficiary—the law generally views the asset as still yours. While an irrevocable trust can provide protection by physically and legally separating you from the asset, it comes with a significant trade-off: to protect the asset, you must give up the right to use it for yourself.
Trust vs. LLC for Asset Protection
While trusts are common, they are often overused or misunderstood. In many modern legal strategies, the Limited Liability Company (LLC), and specifically the Series LLC, has become the preferred vehicle for asset protection. Unlike a trust, an LLC is a distinct legal entity.
LLCs are often easier for banks and title companies to manage because their structure is standardized and widely recognized. Furthermore, the Texas Business Organizations Code provides specific statutory protections for LLCs, such as the "charging order" protection, which limits a creditor's ability to seize the assets within the entity to satisfy a personal debt of a member.
Strategic Anonymity and Layering
Even though a trust isn't a separate legal entity, it can still play a role in a sophisticated asset protection plan through "strategic anonymity." By using a trust with a generic name and a trustee who is not the primary owner, you can make it more difficult for creditors to link you to specific properties or accounts.
Many high-net-worth individuals use a "layering" approach:
- Trusts are used to hold the membership interests of an LLC.
- LLCs are used to hold the actual income-producing assets or real estate.
- Anonymity is maintained by using different names across these layers to avoid serving up your assets "on a silver platter" to potential litigants.
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