The Revocable Living Trust and Protection Against Creditors

One of the most common mistakes people make concerning the Revocable Living Trust is in thinking that this type of trust offers protection against creditors. The simple fact is that this trust will not provide any protection against creditors and debt collection because any assets held in that trust are still considered to be yours.

When deciding if you need a Revocable Living Trust as part of your estate plan, it is important to know exactly what this type of trust will do, and what it won’t do. What the Living Trust does, if properly structured and if assets are correctly titled in the trust name, is help you plan better for estate taxes, so that when the first spouse passes away, the estate tax is reduced as much as possible. The second reason for having a Living Trust is that it can help avoid probate after both spouses die. If the trust belongs to an unmarried individual, then the Living Trust will accomplish both of these things as well.

Although there are methods of protecting assets from creditors, the Revocable Living Trust will not accomplish this. The main reason is that the Grantor (the person who creates the trust) can add and remove assets from the trust at any time. They can also revoke the trust. These are reasons why the assets in that trust are still considered to be the assets of the trust’s creator. At one time an irrevocable Living Trust did provide some asset protection, but recent court decisions have held that assets in an irrevocable trust belong to the Grantor of the trust and therefore offer no creditor protection.

Basically, a trust will only provide protection for the beneficiary, if a third party creates the trust and places assets in the trust. For example, you can create a trust and fund the trust, making a grandchild a beneficiary. Properly designed, the trust will protect those assets from creditors and divorce of the grandchild because the beneficiary never had control of the assets funded to the trust.

If you are interested in lowering your estate taxes and reducing the chance that your estate will go through probate, then the Revocable Living Trust could be the answer. If you are interested in asset protection, you will want to contact an attorney that specializes in this area of law.

Larry Parman
Founding Attorney