How Does a Living Trust Protect Assets?
A living trust (or inter vivos trust) is a legal structure created during an individual's lifetime that is designed to administer the individual's assets without his involvement. Certain legal trusts can be classified as spendthrift trusts. These trusts limit or restrict the ways in which the trust beneficiary can use his trust assets; many jurisdictions' courts hold that such a trust protects the assets from the beneficiary's creditors. Those with questions about specific trusts should consult an attorney.
Other People Are Reading
-
Trust Structure
-
When a person creates a trust, he gives his assets over into the legal possession of a trustee. While the trustee owns the assets, he has a legal obligation to use and administer them only for the benefit of another individual, the beneficiary. Sometimes the trust's creator, known as the settlor, is also the beneficiary. However, the key characteristic of the trust is the fact that the settlor no longer has control of his assets.
Settlor's Creditors
-
Because a living trust removes the assets from the settlor's control, most courts find that such a transfer then insulates the assets from the settlor's creditors. Once the settlor transfers the assets into the trust, the beneficiary gains an interest known as an "equitable" interest in the assets, since the property must then act for the beneficiary's benefit. Since the beneficiary has an equitable interest, most courts find that it would be inequitable for a settlor's creditors to then be able to seize the assets.
-
Beneficiary's Creditors
-
In a typical living trust, the beneficiary has the right to alienate, or transfer, his interest in the trust as he pleases. Because the beneficiary has this control, many states do allow the beneficiary's creditors to reach the trust assets to satisfy his debts. Some states allow the beneficiary's creditors to force a judicial sale of the property, while other states allow a court to order the trustee to pay the beneficiary's income from the trust assets to a creditor until the debt is satisfied.
Spendthrift Trusts
-
The spendthrift trust is a specialized structure in which the settlor specifically stipulates that the beneficiary cannot transfer any part of his interest in the trust. Because this sort of trust allows the beneficiary no control over the assets, creditors cannot reach the assets and use them as part of the beneficiary's property to satisfy debt claims. Most jurisdictions have upheld this structure as protection for the assets, but many jurisdictions do allow the beneficiary's creditors to reach any distribution to the beneficiary in excess of what the beneficiary needs to maintain his current standard of living.
Preferred Creditors
-
Most courts hold that certain specialized classes of creditors can still have access to the future trust payments to the beneficiary, even in a spendthrift trust. These creditors, known as "preferred creditors," include alimony and child support creditors, government creditors, tort judgment creditors, and vendors who provided the beneficiary with "necessary" items.
-
References
Resources
- Photo Credit Jupiterimages/BananaStock/Getty Images
