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Do All Trusts Protect Property from Creditors?

Posted by Maria N. Jonsson | Jul 25, 2022 | 0 Comments

While certain types of trusts can protect assets from creditors, they don't all have this feature. This is why it's important to consider your estate planning options beyond a revocable living trust if you wish to safeguard assets for your loved ones.

Revocable vs. Irrevocable Trusts

There are many different kinds of trusts out there, but most will fall into one of two categories: revocable and irrevocable. Many differences lay between these two categories, but the key difference is your ability to change the terms of the trust after its creation.This usually determines whether or not the trust will have creditor protection.

You might correctly guess that a revocable trust is the more flexible of the two because its creator can revoke its terms, changing – almost at will – who the trustee is, what property belongs to the trust, who the trust beneficiaries are, and the instructions for trust distribution. The trust creator has complete and unrestricted control over all the trust property.

By contrast, the terms of an irrevocable trust aren't so easily altered. Once an irrevocable trust is formed, the trust creator (known as the “grantor”) cannot unilaterally make changes without court order, and in some instances, is at a minimum required the obtain consent from all beneficiaries and/or the court to do so.

However, while revocable trusts cannot be used for “asset protection” of their creators (grantors), they CAN and do contain asset protections provisions for the residual beneficiaries – often, the trust creators' children. This is because Revocable Trusts BECOME Irrevocable upon the death of their creator(s), at which time all the asset protections of an irrevocable trust apply to the people named in the trust to inherit after the grantor's death. This is why Revocable Trusts are so popular – they ensure probate avoidance as well as asset protection – for the residual beneficiaries of the trust (often, the children of the grantors).

How Do Irrevocable Trusts Protect Assets?

Irrevocable trusts protect assets from a grantor's creditors because the grantor neither owns nor controls that property. Unless a judge finds that an irrevocable trust was established for the purpose of shielding assets from expected legal action, creditors usually have no claim to these assets.

Examples of Irrevocable Trusts

There are many different kinds of irrevocable trusts that fulfill different purposes, such as these:

  • Medicaid Trusts: These irrevocable trusts allow senior citizens to meet the restrictive asset and income requirements to qualify for Medicaid nursing home benefits.
  • Qualified Personal Residence Trusts: These trusts reduce gift tax liability by holding a grantor's primary or secondary residence. Grantors can live in their homes rent-free for the duration of the trust term. When the term ends, the home transfers to the beneficiaries or remains in the trust for the beneficiaries' benefit.
  • Spendthrift Trusts: These trusts limit a beneficiary's access to property within them. If you intend to leave an inheritance to a relative you know isn't good with money, a spendthrift trust can help you ensure that they won't spend it all in one place. The irrevocable variant of this trust can help you make important decisions and set them in stone.
  • Special Needs Trusts: These important trusts allow you to protect assets for the benefit of a loved one with special needs while also protecting their eligibility for important government benefits, such as Supplemental Security Income.

These are just a few of the many different types of irrevocable trusts that fulfill specific purposes while protecting assets and reducing certain tax liabilities. There are also dedicated asset protection trusts, which are irrevocable trusts specifically designed with this purpose in mind.

Consult with an Attorney to Learn More

Estate planning can be complicated, especially if you're concerned about asset protection. Rest assured that our attorney at the Law Offices of Maria N. Jonsson, PC can provide the experienced guidance you need to make the decisions that feel best for you and your loved ones.

Learn more about how our legal support can help when you contact us online.

About the Author

Maria N. Jonsson

Founding Attorney and a Certified Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization


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Attorney Maria N. Jonsson, Esq. is a Certified Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization. The Law Offices of Maria N. Jonsson, PC is committed to providing a comprehensive and holistic analysis of your specific circumstances as they relate to Estate Planning, Probate and Trust Administration issues in California. Schedule a one-on-one discussion of your case with Attorney Jonsson directly.