Trusts that Protect Against Creditors

There was a time when estate planning was as simple as going to your attorney’s office and signing a will. Today, estate planning encompasses much more. You have a variety of estate planning documents available depending on your specific goals and needs. A comprehensive estate plan includes provisions to distribute your assets upon your death, provide for minor children, appointing someone to act on your behalf if you are incapacitated, and appointing someone to make healthcare decisions for you if you are unable to do so yourself.

In addition to the above, one of the other goals of estate planning is to protect your assets for your heirs. Using trusts is one way you can protect your assets from creditors; however, you must be careful of the type of trust you choose because not all trusts are the same.

Does a Revocable Trust or Living Trust Protect Assets from Creditors?

To answer this question, you may need to research your state laws applicable to trusts. Some states have chosen to limit the protection that revocable or living trusts provide from creditors. One of the theories behind these limitations is that the transfer of assets to a living or revocable trust is not a true “transfer” of ownership.

Because the maker can end the trust at any time or regain ownership of the assets by transferring them out of the trust, the maker still has an interest in the assets. Therefore, creditors may still be able to attach liens to the assets in a revocable or living trust depending on your state laws.

Revocable and living trusts have advantages for many people and these types of trusts can be very useful as you develop your estate plan. However, if you are searching for a way to protect your assets from creditors, these types of trust may not be the best choice for you.

Do Irrevocable Trusts Protect Assets From Creditors?

If your main goal is to protect assets from your creditors, an irrevocable trust may give you the protection you desire. Unfortunately, there are several downsides to using an irrevocable trust. A serious disadvantage of an irrevocable trust is that it is irrevocable. Once you establish the trust and fund the trust, it cannot be undone. However, it is for this reason that an irrevocable trust offers a higher level of protection against creditors.

Another disadvantage of an irrevocable trust is the fact they are more difficult to create and maintain. An irrevocable trust is a separate entity that is required to file tax returns each year; therefore, the cost and time involved in managing an irrevocable trust is much higher than the cost involved with a revocable trust.

Even if you decide to use an irrevocable trust to protect assets from creditors, creditors may be able to void the transfer of assets to the trust if they can prove the transfer was fraudulent. For example, if you have several collection lawsuits pending against you when you transfer all or most of your assets to an irrevocable trust, the creditor can argue that you made the transfers with the sole purpose of avoiding the creditors.

Are Trusts Worth The Time And Effort?

Yes, trusts are a valuable estate planning tool that can help you protect assets and provide for your heirs. Some advantages of using a trust as part of your estate plan include:

  • You may be able to avoid estate and income taxes by using a trust
  • You may be able to avoid probate or reduce the size of your probate estate
  • Provide for minor children and protect their inheritance
  • Benefit charities and other volunteer organizations
  • Provide for the care of a beloved pet
  • Protect and manage your assets if you become disabled or incapacitated
  • Flexibility in choosing how to manage assets as part of your estate plan

Do I Need An Attorney To Establish A Trust?

Some individuals attempt to set up their own trust; however, even a simple trust must be created and executed properly to be valid and effective. Furthermore, the laws of each state vary with regard to trusts; therefore, you must research the laws in your state to determine if the trust you are choosing will accomplish your goals and needs.

Consulting with an attorney experienced in estate planning and trusts can be very beneficial when you are trying to decide the best way to protect your assets and provide for your heirs. An estate plan does not need to be expensive or complicated but it does need to be executed properly. An attorney can ensure that is accomplished.