Are Living Trusts Legal for Asset Protection?
The most common types of living trusts are not legally effective at providing asset protection. If you have personal creditors trying to go after your property, those creditors will probably be able to access your assets even if they are held in trust. There is a small exception for irrevocable and spendthrift trusts, which can provide some form of asset protection.
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Irrevocable
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By far the most common type of living trust created in the United States is the revocable living trust. The primary purpose of the revocable living trust is to avoid probate of your property after you die. By definition, you always have the right to revoke -- meaning terminate or modify -- the terms of a revocable trust, which means you always have the right to access the property in the trust. Because you have this right, your creditors also have the right to access the property.
Irrevocable
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Irrevocable trusts are much less common than revocable trusts, but they provide better asset protection from creditors. Unlike a revocable trust, an irrevocable trust cannot be unilaterally modified or terminated. This means you cannot access the trust property, which in turn means your creditors cannot do so. Many people are unwilling to give up total control of their property, so they hesitate before creating an irrevocable trust.
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Spendthrift
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Another type of trust that provides some asset protection is called the spendthrift trust. A spendthrift is a trust typically used to care for irresponsible children who can't handle their own money. The terms of the trust are irrevocable, and the beneficiary can only access a certain portion of the trust property at one time. This protects the trust assets from the beneficiary's creditors but only so long as the property remains in the trust.
Temporary Protection
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Even irrevocable and spendthrift trusts provide only limited asset protection. As long as property remains in the trusts, the property is safe from creditors. However, as soon as the trustee disburses the trust assets to a beneficiary, the beneficiary's creditors can then access the property. It is harder for creditors to track trust disbursements, but it is possible once each disbursement is made.
Fraud
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Many states have enacted a fraudulent conveyances or fraudulent transfers statute. These statutes make it a crime to transfer or convey property for the sole purpose of protecting the property from your creditors. Such transfers are considered fraudulent under the statute. To avoid problems with those statutes, you should always consult a competent attorney before attempting to transfer property as part of an asset protection strategy.
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References
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