Can the Revocable Living Trust Be Sued?
The legal and tax consequences for not understanding estate planning and asset protection concepts can be disastrous. There may be no worse feeling than believing your assets are protected only to have someone sue you and leave you with you with nothing. A common misperception with revocable or living trusts is that any assets placed in the trust will be protected. This is simply not true. You can ensure your assets are protected whether you have a revocable trust or not.
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Revocable Trusts
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The most common type of trust in estate planning is the revocable living trust. The purpose of a revocable living trust is to avoid probate and pass any valuable assets to your intended beneficiaries efficiently at the time of your death. If you simply have a will or have not done any estate planning, your estate will be settled in probate court. It can potentially take over a year to complete the legal process. In addition, probate fees may total up to 8 percent of the estate's assets. With a competent revocable trust however, this process can be avoided.
Suing the Trustee
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Because a revocable living trust is simply designed to avoid probate and transfer your assets at the time of your death, it does not offer any form of asset protection. In most cases, the grantor or trustee of the trust is the person who placed the assets in the trust. This means that even if the assets are titled in the name of your living trust, you remain the owner of the assets in the trust in the eyes of the law. If for any reason you are sued successfully, the court can force you to transfer any property of value in your living trust to your judgment creditor. This is because you are a trustee and are still in charge of the assets within the trust. More simply stated, the revocable trust itself cannot be sued, but you as trustee can. A revocable trust can also not protect against an upset heir after your death. If the heir is upset for any reason, he can legally challenge the trust much in the same way a will can be challenged.
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Asset Protection Alternatives
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If asset protection is your primary concern, there are some estate planning alternatives. The first option would be an irrevocable trust. These types of trust can be very effective in protecting assets from creditors or anyone who may try to sue you. The key difference here is that once assets are placed in the trust, the grantors no longer have control of the assets. The assets are now controlled by the trustee, which can be a third party such as an attorney, a bank or other family member. Keep in mind that once you make this leap, you cannot change that decision; hence the name irrevocable trust. If you own a business, there are even more options for you to protect your assets. Consider forming a family limited partnership, or FLP, or creating a limited liability company, or LLC. An LLC can protect the business owner's personal assets from financial liability if your company is sued. Always consult an attorney before implementing a trust or creating a business structure.
Insurance
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Another way to protect your assets is simply an insurance policy. Whether you own a business or a home, professional and liability insurance policies can protect your assets and minimize your financial responsibility. A liability policy will cover any damage for personal injury or property damage deemed your responsibility or anyone associated with you. This could be anyone in your household such as your children or, if you own a business, your employees. Property insurance can cover your home or your company's assets. If you are really concerned with asset protection, then consider an umbrella insurance policy, which simply adds another layer of protection to your auto, liability and property policy limits.
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References
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