Many people believe that a living trust can protect your assets, but a creditor, judgment holder, or even your ex-spouse can force you to access at least one type of trust to settle judgments and other financial obligations.
Revocable Living Trusts
As the name suggests, a revocable living trust is one that the creator – known as the “grantor” or “trustmaker” in legal terms – can revoke or withdraw at any time. The trustmaker retains the right to change the beneficiaries of the trust and any other aspect of its formation documents. They can reclaim the property and assets they funded in the trust.
Note: Usually, the trustmaker is the trustee of this type of trust, managing it and overseeing its assets. You still own the assets designated in the revocable trust because you retain control over them. You can reclaim ownership if you see fit. You may appoint someone else to be the trustee or name a successor trustee to take over in case of your mental incapacity, but you remain the legal owner of the property you funded in the trust. Creditors can seize the assets you own if they obtain a judgment against you in court, so the funds you place in a revocable trust are not safe from their grasp if you default on repayment terms.
Irrevocable Trusts
An irrevocable trust is more complex. The trustmaker transfers ownership of the assets to the trust, and then the trustmaker must step aside. They cannot revoke the trust or change its terms after it is created. They cannot be the trustee. Another person or an institution must be appointed as the trustee.
Note: Your assets are transferred to the irrevocable trust regardless of the people you owe money to. You cannot reclaim the assets you funded in this type of trust. They are no longer yours, so they are unavailable to your creditors under any circumstances. They are also safe from estate taxes. They do not contribute to your total taxable estate after your death because you no longer own them.
Testamentary Trusts
A testamentary trust is created under the terms of a person’s last will and testament. It does not exist until the trustmaker dies. Their will will include instructions regarding the properties to be transferred to the trust as part of the probate process, and their executor or probate attorney typically forms the trust according to the deceased’s wishes.
Unlike revocable trusts and irrevocable trusts, a testamentary trust is subject to probate because it is formed through it. And because the property does not transfer to the trust until the trustmaker’s death, it is available to their creditors during their lifetime.
Strategic Asset Protection Planning
Potential measures for strategic asset protection planning include:
- Investing in your primary home if your state provides an exemption from the forced sale of your home to pay off your debts.
- Purchasing life insurance that accumulates cash value.
- Funding retirement accounts like IRAs and 401ks. Qualified retirement accounts under ERISA are typically safe from creditors under federal law.
- Purchasing sales contracts.
- Establishing a family limited liability company or family limited partnership and transferring ownership of assets to either of those entities.
Conclusion
A revocable living trust cannot reliably protect your assets, although an irrevocable trust can do so; however, forming an irrevocable trust means relinquishing control and ownership of your assets forever. Instead, you might consider an advanced, multi-faceted plan utilizing combinations of these strategies for comprehensive long-term asset protection planning.
Note:
The information contained in this article is not legal advice and does not substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your specific state laws or the latest changes in federal law. Please consult with a financial professional or attorney for current advice.
Source: https://www.thebalancemoney.com/revocable-living-trusts-3505395
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