Does My Trust Provide Asset Protection?
I recently had this question raised at a speaking engagement so I thought I would reprise a blog post from several years ago. One of the most common misconceptions about trusts that I run into is that all trusts provide asset protection. If an asset, say my house, is in my trust then no creditor can take it. Wrong. While it is true that some trusts can provide asset protection, the traditional revocable living trust most people have where the individual who created the trust (often called the grantor, trustor, or settlor) is still alive, does not provide asset protection. Such a trust can be changed or revoked at will. The grantor is also the beneficiary of the trust and can compel distributions (usually from himself/herself as trustee) at any time and in any amount. Because you as the grantor can do these things, a court will not afford you any protection from creditors. For a trust to provide asset protection it must be irrevocable. Irrevocable trusts can come in many varieties, but the basic reason for asset protection is the inability of a grantor to change or revoke the trust or beneficiary to compel distributions. Depending on your particular asset protection goals different irrevocable trust structures are used. Asset protection trusts are quite complicated and have some significant downsides. Failure to carefully follow the applicable rules can mean that the trust fails in its purpose. Therefore, seeking qualified advice is crucial.