Here’s the straight answer: No, a living trust doesn’t protect your assets from lawsuits, creditors, divorce, or most other threats. But why exactly is that?
In this article, we’ll explain why living trusts don’t protect your assets and show you which kinds of trusts can keep your wealth safe from creditors:
- How Revocable Living Trusts Work
- Why Revocable Living Trusts Don’t Protect Your Assets
- Why an Irrevocable Trust Is Necessary for Asset Protection
- Does a Revocable Living Trust Protect Your Assets From Lawsuits?
- Can a Revocable Living Trust Be Seized During a Divorce?
How Revocable Living Trusts Work
A revocable living trust is a legal entity created by you or a financial professional during your lifetime. You select which assets are placed into the trust and then serve as your own trustee. Being the trustee means that you have total control over the trust and everything inside it. You can buy and sell stocks, move assets around, and manage investments as if they were in a traditional trading account under your name. In most cases, you’ll also be named as the primary beneficiary of the trust to ensure you reap all the benefits and income from your trades and trust-held assets.
As the person who created the trust, you also have the right to change it at any time. This is what makes it a “revocable” trust. In practice, you can change the terms of the trust, add new beneficiaries, and even dissolve the trust entirely, all without the input of any other party.
Thanks to their high degree of flexibility, revocable living trusts are a popular estate planning tool. Using one, you can directly funnel assets to your preferred recipient after your passing. Plus, if you ever need to make changes to your inheritance plan, you can carry out those adjustments at a moment’s notice.
Why Revocable Living Trusts Don’t Protect Your Assets
Unfortunately, the convenience and flexibility revocable living trusts offer is exactly what makes them poor asset protection tools. Since you control the trust’s assets, benefit from them, and can revoke the trust whenever you choose, judges treat those assets as if they’re still titled in your personal name.
If a creditor wins a judgment against you, they can petition the court for permission to claim assets in your trust. The court will likely grant that petition. In general, creditors are allowed to step into your shoes and lay claim to any assets you can easily access, which unfortunately includes anything in a revocable living trust. For example, a creditor could take money out of a checking account. Retaining full control over a revocable living trust allows a creditor to take anything you’ve placed into it.
The fundamental problem is that you never actually gave up ownership of your assets. You simply changed where they’re located. As long as you have total control over your wealth, you won’t enjoy any asset protection.
However, there is one scenario where a revocable living trust does provide asset protection. Once you pass away, your revocable trust becomes irrevocable. Your beneficiaries will not have the power to change trust terms or access assets at will. Only then can the trust protect assets from creditors. But during your lifetime, while the trust remains revocable, you get no creditor protection whatsoever.
Why an Irrevocable Trust Is Necessary for Asset Protection
So, if revocable living trust asset protection isn’t feasible, what does work? An irrevocable trust. Real asset protection requires giving up control to some degree. An irrevocable trust helps you accomplish this by creating genuine legal separation between you and your assets. Once you transfer property into a properly structured irrevocable trust, you no longer own it. You can’t revoke the trust, change its terms unilaterally, or withdraw assets as you please.
While that may sound like a big price to pay, that separation is what provides protection. When a creditor sues you and wins a judgment, they can only reach assets you own or control. If you genuinely don’t own or control the assets in an irrevocable trust, the creditor can’t touch them. After all, you can’t comply with a court order to turn over assets you don’t legally control. The court can’t force you to do something that’s legally impossible, and they can’t force a foreign trustee to obey U.S. court rulings.
Does a Revocable Living Trust Protect Your Assets from Lawsuits?
A revocable living trust cannot protect your assets from lawsuits. If you lose a lawsuit and have assets sitting in a revocable living trust, any creditor can lay claim to them. In the eyes of the court, these trusts are no different from any other sort of personal account where you retain full control of your assets. If you wish to protect your assets using a trust, you need to establish an irrevocable trust, preferably one based overseas.
Can a Revocable Living Trust Be Seized During a Divorce?
Yes, a revocable living trust and the assets it holds can be seized during a divorce. Even if living trust asset protection worked against lawsuits and other threats, it would still be vulnerable to an ex-spouse, as they are considered exemption creditors in many cases. The only type of trust that can protect assets during a divorce is an offshore asset protection trust.
Don’t Use a Revocable Living Trust for Asset Protection. Call Asset Protection Planners for Help
Setting up an asset protection plan requires significant legal and financial experience, and any mistakes can undermine all your hard work. Instead of making a critical error, like using a revocable living trust for asset protection, call the team at Asset Protection Planners. We’ve spent decades setting up powerful trusts that defend against lawsuits, creditors, and divorce.
Don’t wait until you’re facing asset seizure at the hands of a creditor. Contact us now for a free consultation.
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