Will a Living Trust Protect My Assets from Creditors?

Many people develop trusts, particularly living trusts, for the purpose of safeguarding their assets and maintaining control over how they are passed down to their beneficiaries. However, you should not assume that a living trust alone will protect your assets from creditors or claimants if you die owing money. Most of the time, a standard living trust will not be sufficient to provide you with reliable protection against creditor claims.

Here is some useful information to keep in mind about living trusts as you work with our legal team.

Creditors can get at assets in revocable living trusts

Revocable living trusts have a variety of benefits, including helping you avoid probate and passing property on to your beneficiaries with privacy and efficiency. They also help you outline your wishes and manage your affairs and assets in the event of your incapacitation.

However, people who have legal claims against you will still be able to go after your assets, even if you placed those assets in a living trust. The trust is a legal entity, but you are still legally treated as the owner of the assets in that trust, unlike other types of irrevocable trusts.

In a standard revocable living trust used primarily for probate avoidance, you will name yourself the trustee, which will give you full control over any assets you place in the trust. You can put property in the trust, take it out, give it away or sell it, and there are no legal restrictions, because the property is still technically yours.

The drawback of this flexibility is that there is no legal protection afforded to those assets if creditors come calling. This is simply the price you pay for being able to transfer assets to and from the trust at any time and maintain all the benefits of ownership.

What types of trusts will protect my assets from creditors?

If protecting your assets is a goal of yours when developing a trust, there are other options you can use that will afford you that protection. An irrevocable trust is not as flexible as a revocable trust—you can’t remove assets from the trust, because by placing them in the trust you transfer ownership to the trust’s legal entity. However, because you are no longer the owner of assets placed in an irrevocable trust, creditors cannot come after those assets.

You also don’t need to develop a trust solely to protect your assets—there are other methods available to accomplish this goal. For example, you could choose to put money in assets protected by your state against creditors. Some types of retirement accounts are shielded against creditors, for example. There are also some states that have specific assets that are off limits, such as houses, regardless of their worth.

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Misha Gill is an Alexandria estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own will, living trust, and other estate planning documents, Misha can be reached at (703) 553-2577 or [email protected].

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.