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Does a Trust Protect You From a Lawsuit?

Can a trust be sued
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Trusts can provide certain benefits for estate planning, including asset protection. But can you sue a trust?

If you have a trust, plan to create one, or are the beneficiary of one, you’ll want to understand whether or not anybody can sue a trust. It’s not a simple yes/no, according to a recent article titled “Estate Planning: Can You Sue a Trust?” from Yahoo! Finance. For instance, a trust generally cannot be sued, but a trustee can.

When creating an estate plan, understanding when someone can bring a lawsuit against a trust should be considered an excellent reason to work with an experienced estate planning attorney.

A trust is a legal entity used to hold and manage assets on behalf of one or more beneficiaries. A trustee can be a person or business entity responsible for managing the trust and the assets it holds. Trusts can be revocable, meaning the person who created them (the grantor) can make changes, or irrevocable, meaning transfer of assets is permanent (for the most part).

Trusts are used to manage assets while the grantor is living and after death. There are many different types of trusts, from a Special Needs Trust (SNT) used to manage assets for a disabled person or a CRT (Charitable Remainder Trust) used for charitable giving.

A trust cannot always protect the grantor or beneficiaries from litigation. If a person has debt and creditors want to be paid, they can sue a revocable trust, as you have not given up much control using this type of trust—you still directly own the assets in the trust!

Irrevocable trusts provide more protection. Once assets are in the trust, the grantor has given up control of the assets. However, suppose you created the trust mainly to protect assets from creditors. In that case, a court could determine the trust was created fraudulently and rule against the grantor, leaving all of the assets in the trust vulnerable to creditor lawsuits.

Can you sue a trust directly? Generally, no, but you can sue the trustee of a trust. You can also sue beneficiaries of a trust.

Here’s an example. Suppose you transfer a car into a revocable living trust and cause an accident leading to the death or severe injury of another driver. In that case, the driver or their family could sue the trust for damages indirectly by suing you as the trustee.

Trustees are bound as fiduciaries to manage trust assets as directed by the grantor for the best interest of beneficiaries. The trustee can be sued if someone, typically a beneficiary, believes the trustee is not carrying out their duties. A beneficiary might sue a trustee if they were supposed to receive a certain amount of money at a specific time, but the trustee has not distributed the funds. This type of suit is known as a “breach of fiduciary duty.”

Trustees are also prevented from self-dealing or using trust assets for their benefit. If a beneficiary believes a trustee is taking money from the trust for their benefit, they can sue the trustee.

A trust can also be “contested,” which is different from suing. Contesting a trust occurs when someone believes the grantor was coerced or subjected to undue influence in creating the trust. It also happens if someone thinks the trust or amendments to the trust were the results of elder financial abuse or if it appears trust documents have been forged or fraudulently altered.

Before anyone can contest a trust, there needs to be a valid suspicion the trust is somehow in violation of your state’s estate planning laws. You also have to have legal standing to bring a claim. The court may or may not side with you, so there are no guarantees.

Reference: Yahoo! Finance (Nov. 17, 2021) “Estate Planning: Can You Sue a Trust?”