Does A Living Trust Protect Assets?

If you have a living trust it does protect your assets – but not in the way you are thinking.

A friend has been talking about putting his family trust together for the last 5 years. He finally got around to taking care of business and dropped me a note to let me know the good news. I asked Jay what motivated him to finally pull the trigger. He told me he did the trust in order to protect his assets in the event of a lawsuit. That’s when I had to deliver the bad news to my friend.

While I’m not an attorney I do know that a family living trust doesn’t offer the kind of protection that Jay was looking for. Here’s why. If you establish a living trust chances are very high that you still have complete access and control over the assets. That being the case, those assets are still fair game for any creditor.

Because I am not an attorney I cannot provide legal advice. Please consult with a qualified attorney to answer your legal questions.

How A Trust Can Protect You From Creditors

The only trusts that might keep assets out of the hands of creditors are irrevocable trusts. When you set up an irrevocable trust you can’t change it – hence the name “irrevocable”. And in order to really safeguard the assets, the irrevocable trust must provide ownership to someone else. You can’t have any control over the property. Oh….and one last thing……you can’t set up the irrevocable trust just to get out of paying a judgment.

In most cases the cure (setting up an irrevocable trust) is far worse than the disease. My advice? Play it clean and buy a good liability insurance policy. Enough said.

How A Living Trust Protects Your Assets

While the living trust doesn’t protect you in case you are sued, it does reduce the chance of your estate being sued by the heirs. That because once you establish a trust it clears up a lot of ambiguity. As a result, there is far less chance that people in your family will sue each other over your assets once you pass away.

The main reasons people set up living trusts are to:

• Avoid probate
• Provide a clear, quick, inexpensive method to pass assets from you to your heirs
• Maintain privacy
• Create a safety net in case you become mentally incapacitated

I am a big fan of the living trust for the right person. But it’s important to understand what the trust does and doesn’t do. If you are looking for a way to protect your assets against creditors, your family living trust isn’t the answer.

Do you have a trust? Did you create it in order to protect your family from lawsuits?