How And Why Irrevocable Trusts Avoid Creditors

Although estate planning is not, by itself, an asset protection tool, creditors can and do come after property that is let to others in wills and trusts. That means that when creating an estate plan, you want to do whatever you can, to make sure that your estate and the property you are leaving to others, is safe and protected from potential creditors.

One good way to do that is through the use of trusts. But contrary to popular belief, just shoving property into a trust doesn’t automatically shield that property from creditors, whether they be your creditors or your beneficiaries’ creditors.

Lack of Control is a Good Thing

As a general rule, any type of trust that you set up, but that you no longer have power to alter or control or access, will have greater creditor protection. That makes sense—if you can’t access the property put into trust, neither can your creditors.

That’s why irrevocable trusts are so good if you have property or assets that you don’t need to access regularly (or ever), but you want to put that property somewhere that your creditors can’t get them. Sitting in a bank account, one of your creditors could reach that property, and take it from you, before your children or other beneficiaries even get it. The irrevocable trust avoids that problem.

You can even “half half” it, by setting up a revocable trust that will become irrevocable once it is passed to beneficiaries. This won’t protect any of the property from your creditors,  while you are still alive, because the trust is revocable. But once your beneficiaries inherit the trust, it becomes irrevocable, and thus shielded from your creditors.

Types of Irrevocable Trusts

There are different kinds of irrevocable trusts. Yes you can just create a general irrevocable trust to hold your property, but the law also has many specialized ones as well.

For example, many people put money in a Medicaid trust, which allows them or their beneficiaries to continue to meet the needs-based requirements of receiving Medicaid. Spendthrift trusts limit how the beneficiary can access the property in the trust, and often put conditions on how and when the property in the trust can be reached.

There are other types of educational and special needs trusts that cannot be touched by the person setting up the trust, because they are especially for the special needs of the beneficiary.

Don’t Wait to Set Them Up

You should establish any kind of irrevocable trust as soon as possible, for the primary reason that if a court were to find that you put property in an irrevocable trust specifically to avoid creditors or a specific creditor, the trust assets can be reached.

Many people make the mistake of waiting until there is a claim or judgment against them. At that point, it could be too late to protect property by putting it into a trust.

Properly value your estate and the property you are leaving to loved ones. Call the Torrance probate will and estate attorneys at Samuel Ford Law today.

Sources:

estateplanning.com/which-type-of-trust-protect-against-creditors

investopedia.com/terms/a/asset-protection-trust.asp