Does a Living Trust Provide Asset Protection?
A living trust is an arrangement in which a person or couple, called the grantor or settlor, places assets in a trust while still living. A trustee is responsible for distributing the assets to a beneficiary according to terms established by the grantor. How much asset protection, if any, a living trust provides depends on whether the trust is revocable or irrevocable.
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Revocable vs. Irrevocable
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Under a revocable living trust, the grantor maintains control of the assets and can change the trust's terms or even abolish it altogether. Under an irrevocable living trust, however, the grantor completely relinquishes ownership of the assets and cannot alter or abolish the trust.
Revocable Living Trust Asset Protection
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A revocable living trust normally does not protect assets from seizure by creditors. The states of Alaska, Delaware and Nevada have passed domestic asset protection trust laws that allow creating revocable living trusts with assets that are off limits to creditors, but even those protections may not always hold up in court.
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Irrevocable Living Trust Asset Protection
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Because the assets in an irrevocable trust no longer belong to the grantor but to a third party (the trust), creditors have no right to them. However, creditors may circumvent this protection if they can demonstrate that the grantor created the trust in order to defraud the creditors.
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