Does a Living Trust Protect Your Assets from Lawsuits?

Many people use estate planning tools to protect their families and ensure proper asset distribution. A living trust is one popular estate planning instrument worth considering.

Living trusts help beneficiaries avoid probate. Probate can be long, expensive, and difficult to navigate. In some cases, living trusts can also protect assets from lawsuits.

Not all living trusts protect assets from legal claims. If you’re concerned about keeping your property safe from potential lawsuits, you’ll need to choose the right type of living trust.

What Is a Living Trust?

A living trust is a legal arrangement that protects assets and ensures proper distribution after death. When set up correctly, property doesn’t need to go through probate after the grantor passes away.

Typically, a grantor sets up a living trust with help from an estate planning lawyer. The living trust consists of a legal document establishing the terms and included assets.

The grantor assigns a trustee who maintains control of the assets. The trustee distributes them according to the trust’s terms. The eventual recipients are beneficiaries, whom the grantor designates when creating the trust.

The trustee has fiduciary responsibility to care for the assets. They must manage them in the beneficiary’s interests.

Living trusts are typically complex. Only qualified estate planners should establish them. The legal terms for the trust must be precise.

Most estate planners consider a living trust more practical than a will. It goes into effect while the grantor is alive. The grantor may actively change certain types of living trusts as needed.

There are two types of living trusts: revocable living trusts and irrevocable living trusts.

What Types of Assets Does a Living Trust Include?

You may include any assets that hold financial or sentimental value in a living trust. Common types of property include:

• Real estate, like homes, land, or commercial property
• Personal property, like jewelry or artwork
• Ownership in a business
• Checking or savings accounts
• Stocks and bonds
• Mutual fund accounts
• Title to receivables
• Life insurance policies
• Some types of annuities

Grantors may include almost any type of asset in a living trust. However, specific retirement plans like 401(k)s or IRAs should not be held in the trust. They can create adverse tax implications.

What Is a Revocable Living Trust?

A revocable living trust is the most common type of living trust. The individual who establishes the trust maintains control of all assets until they die.

The revocable living trust remains fluid. You can change its terms at any point. You can add or remove assets as you please. You can also add or remove beneficiaries.

A revocable living trust remains in effect until the grantor dies or terminates it. The trust’s primary purpose is to ensure proper transition of assets. It protects against illness or death.

Usually, a revocable trust includes language that it becomes irrevocable upon the grantor’s death.

What Is an Irrevocable Living Trust?

The main difference between revocable and irrevocable living trusts is asset ownership. In a revocable trust, you maintain complete control and ownership until incapacitation.

In an irrevocable trust, the grantor transfers ownership of all property to the trustee. Full ownership changes hands immediately.

Irrevocable trusts cannot be changed or amended once they go into effect. The terms define asset use and beneficiaries. A grantor of an irrevocable trust can’t appoint themselves as trustee.

The designated trustee becomes the owner of the assets. The grantor no longer legally owns them.

An irrevocable trust is the only type that can completely protect your assets from lawsuits or creditors. People susceptible to legal claims often find irrevocable living trusts attractive. Business owners and doctors frequently use them.

However, you must understand the permanent nature of irrevocable trusts. While the trust offers almost total protection from lawsuits, it’s virtually impossible to change. Transfer of ownership title is permanent.

If you find changes are necessary for the future, you may need to go to court. Courts rarely grant modifications except in extreme circumstances.

How Does an Irrevocable Trust Protect Assets from Lawsuits?

An irrevocable trust protects assets because you no longer own them. You’ve transferred legal ownership to the trustee.

Creditors and lawsuit plaintiffs cannot seize assets you don’t own. The separation of ownership creates a legal barrier between you and the trust property.

If someone sues you for debt collection or personal injury, they can only go after your personal assets. The irrevocable trust assets remain protected.

However, timing matters significantly. You must establish the irrevocable trust before any legal claims arise. Courts can reverse fraudulent transfers made to avoid paying creditors.

If you’re facing a lawsuit or significant debt, our partner Solo can help you respond properly. You need to address the legal claim directly.

What Are the Limitations of Living Trusts?

Living trusts have important limitations you should understand. Revocable living trusts offer no asset protection from lawsuits.

Because you maintain ownership and control, creditors can still reach those assets. Revocable trusts only help avoid probate.

Irrevocable trusts offer protection but require permanent sacrifice of control. You cannot change your mind later. You cannot access the assets for personal use.

Living trusts also don’t protect against all types of claims. They won’t shield you from:

• IRS tax liens
• Federal student loan debts
• Child support obligations
• Alimony payments
• Some types of creditor claims

Additionally, fraudulent transfer laws prevent you from using trusts to avoid existing debts. Courts can reverse transfers made with intent to defraud creditors.

Should You Create a Living Trust?

Creating a living trust depends on your specific situation and goals. Consider your assets, family structure, and potential legal exposure.

A revocable living trust makes sense if you want to avoid probate. It simplifies estate administration for your heirs. It maintains privacy around your assets.

An irrevocable living trust makes sense if you face significant lawsuit risk. Doctors, business owners, and high-net-worth individuals often benefit.

You should consult with an estate planning attorney before establishing any trust. They can assess your situation and recommend the best approach.

Work with qualified professionals to ensure proper setup and funding. Mistakes in trust creation can invalidate the entire arrangement.