Contrary to what many people believe, trusts do not inherently protect assets. The amount of protection a trust can provide for your assets depends on how the terms are written. Some types of trusts can, indeed, protect your assets from creditors. However, not every trust can. Irrevocable trusts and asset protection can go hand in hand, if the trust is properly established.
Which type of trust can provide asset protection?
Protection from creditors can be accomplished to some degree with trusts, if it is an irrevocable trust. “Irrevocable” means the trust cannot be modified or revoked once it is created. Since you no longer control the property, and it cannot be revoked, the money is no longer considered to be yours. As such, that property is no longer subject to your creditors.
What are the proper terms to include for asset protection?
As with anything else you want to accomplish, the proper terms or provisions in a trust can ensure asset protection. First of all, the interest you leave to your beneficiary must either be contingent on some future event, or be subject to the sole discretion of the trustee.
Another option is to include, what is known as, a “spendthrift” provision. This type of provision keeps creditors from making a claim against a beneficiary’s interest. Just remember that the assets are only protected by these types of provisions, as long as the assets remain in the trust. Once they have been transferred out of the trust, they become subject to a creditor’s claim.
What is the difference between a revocable and an irrevocable living trust?
The purpose of a revocable living trust is to avoid the expense and delay of the probate process. Typically, a revocable living trust is used along with a will in estate planning. Property in a trust can be distributed upon your death with court approval. Thus, your heirs are not required to wait nine months, a year or more before receiving their inheritance.
A Revocable Living Trust is subject to creditors
A revocable living trust cannot provide protection for your assets because the property in the trust is still considered to belong to you. You are named as the trustee so you will still have control over the trust assets during your lifetime. Since the property is essentially yours, it remains subject to the claims of your creditors.
Another reason that a revocable living trust does not protect your assets is because you have the power to revoke the trust at any time. If you do, the trust property immediately becomes yours once again. Also, all of the income your trust assets may generate belongs to you and must be reported on your personal income tax return. All of those characteristics of a revocable trust mean it is not an asset protection vehicle.
If you have questions regarding irrevocable trusts, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.
To learn more, please download our free asset protection planning mistakes in Nevada here.