A living trust provides many benefits, including making it easier for your assets to be distributed to your heirs after your death. Unfortunately, one thing it can't do is prevent creditors from taking your assets to satisfy debts. Here's more information about this issue and what you can do to place your assets out the reach of lawsuits and other debt collection action.
The Lowdown on Living Trusts
The way a living trust works is, assets are transferred into the responsibility of a trustee who then manages the assets for the benefit of the named beneficiary. For example, the trust creator would place his or her home into the trust and name an adult child as the trustee who would then take care of the asset for the person or other beneficiary.
There are two types of living trusts, but the most common type formed is a revocable living trust. Many people like this type of living trust because it can be changed at any time, assets can be added or removed at will, and the trust creator retains ownership of the asset. The person can also create the trust and name his or herself as both the trustee and beneficiary.
However, since the person still owns the assets in the trust, creditors can legally go after them. While the person is alive, lenders can file court orders to force the trust creator to remove and sell (or return) assets within the trust. After the person's death, creditors can go after the people who inherited the assets and compel them to sell or hand over any money or property they obtained from the trust to satisfy debts.
Protecting Your Property from Creditors
If you want to ensure your assets are protected from creditors, one way to go about it is to create an irrevocable trust. In this setup, ownership of the assets is transferred to the trust, which removes the trust creator's rights to it. Once the trust is created, it cannot be changed and the assets can only be removed upon terminating the trust.
Since the person no longer owns the assets, creditors have no legal recourse to go after them. You'll still enjoy most of the benefits a living trust provides, but control over the assets will be in the hands of the trustee.
Be aware, though, that creditors can sue to have the trust dissolved if they can prove it was set up to dodge debt obligations or for other fraudulent reasons. Therefore, it's essential that you work with an attorney who can ensure the trust is set up correctly so you can avoid accusations of impropriety. For more information, contact a local law firm like Tessneer Law Office.