Creditors may be able to make claims on revocable trusts.
Many people believe trusts are a magical solution to their estate planning and financial fears.
Trusts are certainly valuable tools when created properly, but not all trusts are equal.
Some trusts are best for maintaining control of assets and simplifying asset distribution.
Others provide greater protections from personal liabilities.
Others provide little to no protections.
According to a recent yahoo! article titled “Will Revocable Trusts Protect My Assets From Creditors,” people often conflate the purposes of irrevocable trusts with revocable trusts.
In reality, these two trusts are inherently distinct.
With a revocable trust, the trustmaker (also known as the grantor, settlor, or trustor) can fully access the assets held by the trust and update the beneficiaries and terms of the trust at any time.
A revocable trust is typically used to allow for more control in asset distribution to heirs and to keep certain assets from entering probate.
In addition, a revocable trust can also simplify managing finances when the trustmaker becomes incapacitated and is incapable of serving as trustee.
Unlike an attorney in fact appointed under a general durable power of attorney, the successor trustee actually holds “legal title” on behalf of the trust.
An attorney in fact does not.
Consequently, third parties are reluctant to honor the authority of an attorney in fact, but not a trustee.
Assets can be easily removed from the trust when revocable, and the trust itself can even be dissolved at any time.
The amount of access the trustmaker still retains over a revocable trust attaches the trust and its assets to the trustmaker.
This means creditors can make claims on the assets titled to the revocable trust.
A court can order debts or lawsuits paid from trust assets.
Additionally, trust assets are used to determine net worth in bankruptcy proceedings.
In contrast, some irrevocable trusts can be created to shield assets from these situations.
Unlike revocable trusts, an irrevocable trust is a separate entity from the person who creates it.
Assets placed in the trust are gifted to the trust and are no longer the property of the person who created the trust.
The trustmaker has no further control of the assets.
Instead, the assets are governed by the rules of the trust outlined at its creation.
Are there exceptions to irrevocable trust protections from lawsuits and creditors?
States have varying laws on these protections.
Common exceptions include if the trustmaker is also a named beneficiary or if the court determines the trustmaker used the trust to commit fraud with creditors.
If you are considering irrevocable or revocable trusts, you should discuss your needs and goals with an experienced estate planning attorney.
This certainly is not one of those DIY-friendly projects.
Reference: yahoo! (Jan. 27, 2023) “Will Revocable Trusts Protect My Assets From Creditors”