Trusts and Lawsuit protection

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Many people seek a Living Trust for a singular purpose: to protect their assets from a potential or pending lawsuit. The hope is that transferring assets from the person’s name to that of the trust can block a creditor’s ability to access them. This way of thinking is not totally correct.

There are two forms in which a Living Trust can be written:  the first is as a Revocable Trust, and the second is as an Irrevocable Trust. Each produce distinct consequences in regards to asset protection as a result of a lawsuit.

A Revocable Trust is one that can be revoked or revised in life, and it permits the original owner– as trustee of the trust–to maintain total control over his or her assets, including the ability to sell them if desired. Since the owner continues to have this control not only over the assets, but over the dispositions of the trust holding them, the Revocable Trust provides little to no protection for these assets in the face of a lawsuit. While it can be considered a deterrent to creditors, it is a small one, and not advisable as a singular asset-protection tool.

An Irrevocable Trust is one that cannot be revoked or revised. Its dispositions are firm and obligatory, eliminating completely the original owners control over the assets it holds. While this can provide a certain amount of protection from creditors (since the owner no longer controls the assets, but rather they are controlled and protected by the dispositions of the trust), it must be noted that a court has the power to revoke such a document created for the purpose of defrauding creditors. In other words, such a document will not be looked favorably upon by a judge if clearly created for the purpose of injuring a creditor’s rightful claim to compensation. That coupled with the undesirability of losing control over one’s assets also makes the Irrevocable Trust a poor asset-protection tool.

Put succinctly, in the face of a potential or pending lawsuit it is not advisable to use a Living Trust as a primary asset-protection tool. There are other ways, however, to provide yourself with adequate protection. Here are a couple possible strategies:

For a more in depth discussion on these strategies, follow this link to a useful, WealthCounsel article: