Revocable trusts, sometimes called “living trusts,” do not protect assets from creditors. They are subject to collections actions and lawsuits and can be included when third parties evaluate personal assets, as explained in a recent article titled “Will Revocable Trusts Protect My Assets From Creditors” from yahoo!
There are many different types of trusts. However, the overwhelming majority fall into two categories: revocable or living trusts and irrevocable trusts. With a revocable trust, the grantor has full access to the trust’s terms, beneficiaries, and assets. They can change how the trust operates, who benefits from it, and even dissolve the trust as they wish. They can also take assets out of the trust.
Contrast this with an irrevocable trust, where the grantor can’t take any of these actions. A revocable trust is considered a legal entity existing as an extension of a person’s financial and estate plan, while an irrevocable trust is an independent legal entity. Once it has been created, the grantor can’t easily change the terms of the trust or access its assets.
What, then, is the purpose of a revocable trust? As a legal entity, the revocable trust survives the grantor’s death. Assets can then be distributed to heirs without having to go through probate. A revocable trust is also helpful if the grantor becomes incapacitated or cannot make decisions about the assets in the trust.
Creditors can access a revocable trust. While the revocable trust is beneficial as a planning tool, the level of access means the grantor is the legal owner of the trust and its assets. Courts and creditors alike can fully access the contents because its assets are indistinguishable from the grantor’s. If the grantor owes money, any assets in a revocable trust are considered part of their net worth.
A court can order a grantor to pay debts based on what’s in the trust. During a bankruptcy proceeding, they are considered part of the grantor’s total assets.
Some irrevocable trusts can be used to protect assets. An irrevocable trust is an entirely separate legal entity from its creator. Therefore, the grantor loses control of any assets placed into it, subject to the terms of the trust. However, those assets are then legally considered no longer owned by the grantor.
This depends upon the jurisdiction and the nature of the trust, as state laws vary. Some trusts don’t work for protecting assets, especially not if the grantor has been named as a beneficiary. Some jurisdictions don’t recognize this, but it is a viable option under the right circumstances. But if a court determines the grantor moved assets around to keep them away from creditors, it would be considered fraud.
If you’re considering using trusts in your estate plan, speak with an estate planning attorney who can determine which type of trust is best suited to your needs.
Reference: yahoo! (Jan. 27, 2023) “Will Revocable Trusts Protect My Assets From Creditors”
