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Living Trusts: Do They Protect Your Assets From Creditors?

July 24th 2006

Living Trusts: Do They Protect Your Assets From Creditors?

Living Trusts

A surprising number of readers want to know "Can a living trust protect my family's assets from creditors and lawsuits?"  I think there are some promoters out there that use this as a pitch to get people to set up a living trust using their services:

"Transfer your assets to a living trust and hide them from your creditors," are the claims.

Sorry, that's not the law.  Let's have a quick review of a revocable living trust. Basically a trust is "a legal arrangement where property is held for the benefit of someone." In other words, you "entrust" title to your assets to "someone" who is instructed to use and manage those assets per the terms of the trust document.

 

A trust is revocable if it contains language that allows you to change your mind and terminate or modify it. In California, the Probate Code specifically states that all trusts are revocable, unless specifically stated otherwise.  A trust is called a "living" trust because it is set up by you while you are living. If you set up a trust through your will, it's called a "testamentary" trust since it is created through your last will and testament.

The right to revoke your trust means you can remove any asset from the trust title at any time you choose.  Since you have the right to revoke the trust, you are treated as the legal owner of the trust assets for purposes of income tax law or creditor collection law.

 

So, the general, basic answer to the question, "Will my revocable living trust protect my assets from my creditors?" is no. Since you can remove any asset at any time, your creditor can force you to remove the asset. Now there are types of "irrevocable" trusts that can be used for protection of "spendthrifts."

(That's the fancy term for someone who can't manage their own property due to lack of sophistication, gullibility, or other problems). I know a family where one son spends money as soon as he gets it.  He gives it to friends, spends it on new toys, whatever. He just doesn't have a healthy concept of money and can't keep it. He is a classic "spendthrift."

In his parents' case, what they have done in their living trust is said, in effect, after they're both dead, the spendthrift son's share of the estate will be held in an irrevocable trust for his benefit.  He is to be given a monthly draw on the trust until he dies or until the money runs out.  In that case, the money in the "spendthrift trust" is sheltered from the son's creditors since he does not, nor did he ever, own the assets held inside the trust.

Sure, the creditors can get his monthly draw once he gets it, but the main trust is sheltered for his benefit.  That is a classic and perfectly legal way of sheltering assets from the creditors of a "spendthrift" using a living trust (it can also be done using a testamentary trust).  Good luck and until next time,

Phil Craig

P.S. Feel free to forward this on to any friends.

Phil Craig, All Rights Reserved

http://www.LivingTrustSecrets.com

 
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Phil Craig
Phil Craig is a licensed attorney and entrepreneur. He started practicing law at age 25 in 1979. He does not take on any more clients, but is advisor to some of the biggest names in the internet world. He shares his knowledge gained over the last 25 years at his Living Trust Secrets newsletter site: click here http://www.LivingTrustSecrets.com

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Important:  The material on Best Syndication is for informational purposes only and is not meant to be advice. You should always seek professional advice before making financial decisions. 
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