It is a common misconception that a trust inherently protects the assets that are in that trust. Certainly, if you go through the trouble of establishing a trust for your property, it should provide the protection of those assets that you need. While some types of trusts can protect assets from creditors, a garden-variety trust likely will not. Will an irrevocable trust protect assets?
What type of trusts protect assets?
Although most trusts will provide some protection from creditors, the best option is an irrevocable trust. With that type of trust, because you no longer control the property and the trust cannot be revoked. This means that, since the money is no longer considered yours, it will not be available to your creditors.
What about an irrevocable trust allows for asset protection?
There are specific terms or provisions that can be included in an irrevocable trust that create protection for assets. First, the beneficiary’s interest should be contingent on a future event or be subject to the discretion of the trustee. Another option is to include a “spendthrift” provision, preventing creditors from making claims against the interest of a beneficiary. When a trust includes these types of protections, the assets will be protected from creditors, until the assets are transferred out of the trust. As long as the property remains in the trust, it will be protected from creditors.
How are Revocable Living Trusts different?
Revocable living trusts are usually recommended along with drafting a will and other common estate planning tools. The purpose of a revocable living trust is simply to save the expense and delay of probate, upon your death. Probate avoidance can be useful. Property in trust does not require court approval before it can be inherited. So, your family will not be required to wait six months to a year before receiving the property, which will be reduced by a certain percentage in fees.
Why Revocable Living Trusts are subject to creditors
The reason a revocable living trust does not shield your assets from legal claims is that the trust is considered a legal entity, belonging to you. Usually, a revocable living trust would name you as the trustee so that you can retain control over the assets during your lifetime. You retain the ability to take the property out of the trust, sell it or give it away, as you wish. Therefore, the property is essentially still yours.
More importantly, because the trust is revocable, you can revoke it at any time and the property becomes yours again. Furthermore, while the assets are in the trust, any income they generate is to be included on your personal income tax return.
If you have questions regarding irrevocable trusts, or any other asset protection planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.