There is a belief out there in the world that states that if you have a trust and you put your assets inside a trust, those assets are now protected from creditors. Sorry to be the bearer of bad news, but that is false. A revocable living trust will not protect assets from creditors, legal judgments, or bankruptcy. If they could, I would not have time to write this blog because I'd have a mile-long line of customers wanting to set up a trust! But don't get me wrong, it is still critical for most individuals and/or families to set up a revocable living trust. And there are legitimate ways to protect assets from creditors -- it just won't happen inside a living trust.
A revocable living trust helps to define how you want your assets to be handled should you become incapacitated and how you want those assets distributed when you pass away. However, the trust is an extension of you and is thus subject to lawsuits. Because of the purpose of the trust and the control you are able to exercise over the assets, a creditor can try to access them.
So how can you legitimately protect assets? One way is to create a Limited Liability Company (LLC) with a specific business purpose, such as managing rental properties. By removing the rental properties from your name or from the name of your trust, and by creating a very strong and well-drafted operating agreement for the LLC, assets transferred into the LLC can receive protection from "outside" creditors that come after your personal assets. (The assets outside of the LLC can also be protected from creditors "inside" the LLC, but that will be a blog post for another time.)
Another way to protect your personal assets is to buy an umbrella insurance policy. I recommend you speak with a qualified insurance agent to determine the exact amount that is right for you, but this can be the first line of defense if someone were to ever come after you legally.
Finally, there are trusts out there that do protect assets but they are distinct from the trusts that most people are familiar with. They are trusts for specific purposes, such as holding life insurance, and they contain restrictions over how much control you can have over the assets inside the trust. (And again, that could be another blog post entirely.)
But for our purposes today, please know that this fact alone does not mean you shouldn't get a trust. A trust is still the best way to avoid probate and for your assets to pass to whom you want, when you want, and how you want. Plus, even though public policy does not allow a trust to protect you, if your trust is drafted by Morris Hall, PLLC, the trust can provide asset protection to a surviving spouse and to your beneficiaries. Please call us today to set up a free consultation to discuss how this can work for you.
About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years. Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects. We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead. Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe. Contact us today at 888.222.1328 to schedule an appointment!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.