Can a Living Trust Be Attached by a Lawsuit?
A trust is a contract that allows a person (the grantor) to transfer assets to another person (the trustee) to hold and manage for the benefit of the named beneficiaries. A living trust or "inter vivos" trust is one that is set up and funded while the grantor is alive. Living trusts usually come in two flavors: revocable or irrevocable. A revocable trust can be changed any time, while an irrevocable trust cannot be altered. A revocable living trust can be attached by a lawsuit.
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Revocable Living Trust
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The main reason most people choose to place their assets into a revocable living trust is to avoid the often drawn-out and expensive probate process (proof of validity) for loved ones, upon the grantor's death. With the majority of revocable living trusts, the grantor is also the trustee of the trust. In the case of a revocable living trust, you (as the grantor) can make changes to the terms of the trust whenever you choose. Assets can be added or removed, and you retain complete control over all property in the trust, while you are still living. A revocable living trust allows for the smooth distribution of trust assets to your beneficiaries upon your death, without the hassle of probate or court supervision, as with a will. However, your assets are not safe from creditors.
Irrevocable Living Trust
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Once established, an irrevocable living trust cannot be altered, without going through the courts in a proceeding known as reformation. Generally, you forfeit all control of the assets placed in the trust, and property ownership passes to the trust and is managed by an independent trustee. An irrevocable living trust also avoids the probate process upon your death, and it can provide superior protection for your assets, compared to that provided by a revocable trust.
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Creditor Lawsuits
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If you have a revocable living trust, chances are you are both grantor and trustee for the trust. As such, you retain ownership of all assets in the trust, and creditors are not prevented from accessing those assets for payment of your debts. A revocable living trust offers no protection for your property and can be attached by a creditor's lawsuit. Creditors' rights allow them to file a claim against your trust, for any outstanding debts. Even if you are not listed as a beneficiary of your own trust and only hold the power to revoke the trust at any time, you are still considered to be the absolute owner of all trust assets.
Asset Protection
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An irrevocable living trust is more likely to provide asset protection. The key to asset protection with this type of trust is an independent trustee. As long as you are okay with giving up control of the property you transfer to the trust and have an independent trustee managing the trust assets, it will be difficult for the trust to be attached by a lawsuit. With a third-party trustee, you and your beneficiaries never have control over the trust assets, which protects the property from creditors, divorce and lawsuits.
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