The decisions you make when setting up your estate plan have a powerful effect on the legacy you leave behind to your loved ones and heirs. A proper estate plan can help to ensure that your end-of-life financial needs are met, your final wishes seen to, your assets protected and your children and other heirs spared the hardship of court battles and probate.
One of the most popular ways to handle asset protection is through the establishment of a trust. Different kinds of trusts exist, however, and choosing the wrong one can mean your assets aren’t actually protected. When making your estate plan, remember that your heirs aren’t the only ones to consider — creditors will also seek to recover their losses from your estate. Let’s look at the different kinds of trusts — revocable and irrevocable — and whether they can protect assets from creditors looking to recover credit debt.
Irrevocable vs. Revocable Trusts
There are two major categories of trusts you can set up: revocable and irrevocable trusts. An irrevocable trust means that the trust cannot be shut down, and anything that you put into it is no longer yours. It legally belongs to the trust. The trust manages and distributes any assets put into it. You are, in creating such a trust, surrendering your ability to modify these assets at a later date.
While this might sound scary, it also means that any assets in the trust aren’t yours, and therefore cannot be targeted for the collection of credit debt. A creditor cannot touch assets placed into an irrevocable trust, except in very specific circumstances, which we’ll look at a bit later.
A revocable trust, on the other hand, doesn’t require you to completely surrender control over the assets placed into it. These trusts are also called living trusts, in which you will still own the assets placed into it. While you can make changes to a living trust and still have a degree of control over the assets, creditors can also force the surrender of those assets to collect on debt owed.
When an Irrevocable Trust Doesn’t Protect Assets
The degree to which assets are protected in an irrevocable trust is generally adjudicated by the individual state. In general, however, there is one way that creditors can still access assets within such a trust. If the courts find that you made the transfer of assets with the specific intention of defrauding your creditor, the transfer itself is considered fraudulent and not only carries legal penalties, it can also open up the assets within the trust to seizure for credit debt collection.
That’s why it’s so important to enact your asset protection early, before you even become the subject of liability. A strong history of asset protection will help to fight off accusations of fraudulent transfers and can help to keep creditors at bay.
When Should I Use Revocable Trusts?
Revocable trusts are also sometimes called living trusts. This kind of trust exists specifically to spare the family the expense and stress of going through probate courts. This is a worthy goal, as it greatly streamlines the process of distributing your assets, much more so than a simple will. Property that you leave to others via a revocable trust does not need the approval of probate courts before it’s passed on.
A simple will, on the other hand, can require probate approval. The probate process can get expensive and complicated, taking up to a year and absorbing as much as 5 percent of the estate in costs, depending on your individual situation and where you live.
Further, living trusts allow you to name a successor trustee, which is the person who takes over management of your estate after your death. This person can also step in and manage the assets of the trust should you ever become incapacitated from accident or illness, ensuring your ongoing expenses are met.
Why Living Trusts Don’t Protect Assets From Creditors
We live in one of the most litigious countries in the world and, unfortunately, revocable trusts can be targeted by someone who has a legal claim against you. Even though the trust itself is established as a legal entity, you own the assets within the trust. You are the trustee of the trust, and you have absolute control over any assets held by the trust. You can place property in, take it back out, sell it or make a gift of it as you like, without restriction.
In addition, you can revoke the trust. That means you can simply make the trust go away and all assets will revert to your personal ownership again. Any income generated by assets in the trust while it is active is taxed on your personal income tax every year. Though the trust is a legal entity, it is not a tax-paying entity.
For these reasons, anyone who has a legal claim against your assets, such as creditors seeking to recover any credit debt you owe, can target the assets in the living revocable trust. It will not protect your assets from debt collection.
How Can I Protect My Assets?
Protecting assets is not always as simple as it might appear. If you don’t have a history of asset protection, there’s a risk of any effort you take being found fraudulent as an effort to avoid paying your debts. If, however, you have the right help, you can take steps to make sure that your assets are secure and your heirs get the money you intend for them to have. A homestead exemption can protect a certain amount of money from creditor claims, so investing in your home or property can help.
Life insurance and retirement accounts are also typically protected from creditors, as are any annuities you purchase. Transferring ownership of assets into a limited liability company or a limited family partnership is another way to protect assets. Finally, an irrevocable trust can present effective asset protection options against credit debt.
In the end, it comes down to your specific needs and the assets you have to protect. The right estate planning and trust attorney can help you set up an irrevocable trust or advise you on other steps to protect your assets and ultimately ensure your heirs receive what you intend, without undue hassle. Tanko Law Office is here to Montana residents with asset protection and estate planning in all regards. Give us a call to schedule a free consultation with one of our attorneys.