A major appeal of a trust is that it allows you greater control over how you distribute funds and property to heirs. You may also have heard that a trust offers greater protection from creditors who might contest your estate to claim its assets to repay debts.
While a trust can ward off attempts by parties to claim your money for debt compensation, it is not always an infallible method of protection. There are reasons why a creditor could be successful in securing trust money to fulfill a debt.
Revocable trusts and creditor access
Revocable trusts do not protect assets from creditors. You maintain full control over the assets in a revocable trust, including the ability to modify or dissolve the trust at any time. This control means the law views you as the owner of the assets contained in the trust.
Consequently, creditors can claim these assets to settle your debts. For example, if you have a revocable trust and face a lawsuit for unpaid debts, a court can order the seizure of trust assets to satisfy those obligations.
Irrevocable trusts and asset protection
Irrevocable trusts offer a higher degree of protection from creditors. When you transfer assets into an irrevocable trust, you relinquish control over them. The assets no longer legally belong to you. Instead, they belong to the trust.
This separation generally shields the assets from your creditors because the law does not consider them part of your estate. However, if the court finds that you created the irrevocable trust specifically to defraud creditors, it can nullify this protection and allow creditors to access your trust.
Contested trusts
There are times when individuals may contest a trust, challenging its validity or terms. Common reasons include allegations of undue influence, forgery, or coercion in creating the trust. Contesting a trust typically involves legal battles that can indirectly affect the distribution of trust assets and might expose them to claims.
It is possible for creditors to claim assets from trusts, particularly revocable ones. However, irrevocable trusts provide stronger protection, though not in every case. The terms of your trust and even the timing of when you fund it can make important differences in ensuring creditors do not claim your property.
