Can a Revocable Living Trust Provide Asset Protection from Creditors?

By Jackson Law Group
January 3rd, 2024

Posted in Asset Protection,Probate & Trust Administration,Wills, Trusts & Estate Planning

A revocable living trust generally does not provide asset protection from creditors for the person who creates the trust (the grantor/settlor/trustor). Because the grantor retains control over the assets and can revoke the trust at any time, creditors can often reach into the trust to satisfy the grantor’s debts. Here’s why a revocable living trust typically does not offer creditor protection:

Control by Grantor: The grantor of a revocable living trust retains the power to alter, amend, or revoke the trust and has access to the funds within it. This level of control and access is equivalent to ownership, and thus, creditors can argue that the assets should be available to satisfy any of the grantor’s personal liabilities.

Estate Inclusion: Assets within a revocable trust are still considered part of the grantor’s taxable estate because of the control the grantor has. For the same reason, these assets can be subject to claims by creditors upon the grantor’s death before they are distributed to the beneficiaries.

However, once the grantor passes away, the trust generally becomes irrevocable, and the assets may then be protected from the beneficiaries’ creditors, depending on the terms of the trust and state law.

For actual asset protection during the grantor’s lifetime, individuals may consider establishing an irrevocable trust or other legal structures designed for asset protection. An irrevocable trust, once established, removes the grantor’s control over the assets and can offer a level of protection against creditors, depending on how it is structured and the regulations in the jurisdiction where it is established.

However, even with irrevocable trusts, there are limitations and legal considerations, such as:

Fraudulent Transfer Laws: If a court finds that a trust was funded with the intent to defraud creditors, it can overturn the asset protection features of the trust.

Look-Back Periods: Some jurisdictions have look-back periods where transfers to an irrevocable trust can be scrutinized and potentially reversed if they occur within a certain timeframe before a creditor claim arises.

Because asset protection planning is complex and legal strategies vary greatly by jurisdiction, it’s important to work with a qualified attorney who specializes in this area of law. They can advise on the best strategies and legal instruments for protecting assets from creditors while complying with all relevant laws and ethical considerations.

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