Do Living Trusts protect your assets from your creditors?
The short answer is “No.” If you get sued and a judgment is entered against you the creditor can reach the assets in your living trust just as easily as if the assets were in your name only.
However, it is important to note a few points:
- Your living trust can form the foundation for more advanced planning that does offer varying degrees of creditor protection. Examples of advanced creditor protection include Limited Liability Companies, Domestic Asset Protection Trusts, and Foreign Asset Protection Trusts (the gold standard in asset protection).
- Living trusts are often marketed as being useful for protecting your assets. This may have a grain of truth to it, but in my opinion it is misleading. The living trust can protect your wealth from probate when you die, from guardianship if you become incapacitated, and (for married couples) from estate taxes. But when people think of asset protection they reasonably take this to mean they won’t lose their house or savings account if they get sued for an uninsured or under-insured claim. It is important that everyone understand that living trusts do not offer this kind of protection.
- None of this should diminish the fact that living trusts, properly designed, can provide excellent protection from creditors for your spouse, your children and other beneficiaries when you die. If after your die and your children inherit in the form of a properly designed trust, they are protected from outsider attack such as divorce, lawsuits, and even bankruptcy. More on this in a future GET (Greg’s Estate Takes).