Will My Revocable Living Trust Protect My Assets from Creditors?
Jan. 8, 2015
Revocable living trusts have become a popular estate planning tool. Some media sources promote preparation of this form of trust as an effective strategy for protecting assets from creditors. This misinformation leads some individuals to contact document preparation services or to purchase estate planning software. Neither of these options is a substitute for informed legal advice, and those who use such resources are shocked when they are subject to creditor liens on real property, wage garnishments, asset seizures and bank levies. Although a living trust can be used for asset protection purposes both for the trust creator and beneficiaries, a basic revocable living trust is not an effective approach to protecting a trust creator’s assets.
Benefits of a Revocable Living Trust
The principle function of a living trust is to ensure a more substantial portion of your estate passes to your beneficiaries. Assets placed in a trust do not need to go through probate to pass to your family members and loved ones. While avoiding probate can be a worthy objective because of the cost, complexity and delay that is associated with probate proceedings, this does not mean that assets placed in a revocable living trust are protected from claimants and creditors.
Another important benefit of a living trust is to ensure that your financial affairs are managed during an emergency. Even if the creator of the trust is the trustee, an alternate trustee can be appointed to manage the assets and income of the trust if the trust creator is unable to do so because of an emergency, severe illness or devastating injury.
Why a Revocable Living Trust Will Not Protect Your Assets
A basic revocable trust will not protect the trust maker’s assets even though the trust is a separate legal entity. Because the trust is revocable, the individual who makes the trust does not actually relinquish ownership and control over the assets in the trust. Therefore, the assets remain available to creditors seeking to use debt enforcement procedures.
One of the advantages of a revocable living trust is that it permits the trust creator to maintain a high level of management, control and ownership over your assets. Even if the assets are transferred into the trust, you can continue to exercise the full spectrum of powers and management over your assets. These powers include the following:
Taking assets out of the trust
Selling the assets in the trust
Collecting income from the trust
Give away trust assets
Changing the beneficiaries of the trust
Modifying the trust
Dissolving the trust
The key is that the revocable nature of the trust means that the trust creator has the right to revoke the trust so the assets are again held in the trust creator’s name. During your lifetime, the income of a revocable trust is personal income, so the trust will not be treated as a separate entity for IRS and state authority purposes during your lifetime.
Alternate Strategies for Asset Protection
While a revocable living trust does not provide asset protection, there are a number of alternative estate planning strategies that can be highly effective at protecting assets from creditors and lawsuits. There are many kinds of sophisticated irrevocable living trusts where someone other than the trust creator is the trustee. Because this form of trust means surrendering control over the assets and forfeiting the right to revoke the trust, this type of trust can be structured to shield your assets from creditors. There are also other strategies that can be used to protect your assets, such as the creation of a limited liability company.
Sound legal advice about the best choice of estate planning tool is as important as competent drafting of the necessary documents. You should consult with an experienced Wichita estate planning attorney. If you have questions about estate planning issues, we welcome the opportunity to talk to you about an estate plan suited to your needs and goals. We invite you to call us or submit an inquiry form through this website to schedule your initial consultation.