The Trust Protection Myth: A Revocable Trust Doesn't Shield Against Lawsuits
Many people assume that by establishing a revocable living trust and transferring ownership of their property and accounts into the trust, they are automatically protecting these assets from lawsuits. However, this is a misconception.
While trusts are effective in safeguarding a beneficiary's inheritance, they generally do not protect assets (such as property or accounts) owned by the trustmaker from the trustmaker’s creditors. Since the trustmaker can revoke the trust and may also serve as the trustee, courts may allow creditors access to the trust’s assets, as the trustmaker retains significant control over them.
No Immediate Asset Protection? Why Create a Revocable Living Trust Then?
Despite this, a fully funded revocable living trust remains an excellent estate planning tool for several reasons:
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You can safeguard assets passed on to your spouse, children, or other loved ones by imposing conditions on inheritances, ensuring that your beneficiaries can benefit without exposing their inheritance to creditors, predators, or divorcing spouses.
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Your trust can outline how your assets should be managed if you become incapacitated, avoiding the need for court intervention and ensuring your wishes are honored while saving your loved ones time, money, and unnecessary stress.
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A properly funded trust enables your assets to be transferred to beneficiaries without the need for probate, minimizing the time, hassle, and costs associated with settling your estate.
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By bypassing the public probate process, your asset distribution remains private, protecting the confidentiality of your affairs.
Alternatives for Asset Protection Beyond a Living Trust
Comprehensive estate planning can be enhanced with various forms of insurance, such as homeowners, renters, personal property, umbrella, auto, business, life, and disability coverage. For business owners and real estate investors, forming business entities like limited liability companies (LLCs) can further shield assets. Additionally, depending on your situation, domestic asset protection trusts may offer additional protection.
While your revocable living trust is a valuable tool for protecting your loved ones, it’s important to have a well-rounded plan in place for asset protection. If you have questions about your current plan, contact us. We can review your strategy and suggest the necessary steps to ensure both you and your family have a secure financial future.