A common estate planning concern is whether creating a trust can shield assets from creditors or lawsuits. The answer is not a simple âyesâ or âno.â A trust can offer various levels of protection, including some shielding against lawsuits; however, it is important to understand that a trust it is not a foolproof solution for safeguarding your assets from all legal challenges. To help you better understand, an Essex Junction attorney at Unsworth LaPlante, PLLC explains how a trust works and provides some basic information about the ability of a trust to protect your assets from creditors and lawsuits.
Understanding How a Trust Works
A trust is a legal arrangement in which the Grantor transfers assets to a Trustee to hold and manage for the benefit of designated beneficiaries. The Grantor specifies how the assets are to be managed and distributed in the trust agreement. Trusts fall into two primary categories: living and testamentary. A living trust is created and administered while the Grantor (trust creator) is alive while a testamentary trust is activated through a provision in the Grantorâs Last Will and Testament and only administered after the death of the Grantor. A living trust can also be revocable or irrevocable, and the distinction is important when discussing protection from lawsuits.
With a revocable trust the Grantor can modify or revoke the trust at any time and the assets remain part of the Grantorâs estate. A revocable trust offers benefits such as probate avoidance and incapacity planning; however, a revocable trust does not protect assets from creditors and lawsuits. Because the Grantor effectively maintains control over the assets, creditors and legal judgments can still attach to the trust assets.
An irrevocable trust, on the other hand, removes the assets from the Grantorâs control once they are transferred into the trust and the trust cannot be altered or revoked without the consent of the beneficiaries. Therefore, the assets are no longer considered part of the Grantorâs estate, and they are generally protected from lawsuits and creditors. There are, however, exceptions to this protection. For example, an irrevocable trust cannot be used to shield assets from lawsuits or creditors if the trust was established with the intent to defraud creditors. If a court determines that the Grantor transferred assets into the trust to avoid paying debts or legal judgments, the court can unwind the transfer, making the assets available to satisfy legal claims. Additionally, not all types of legal claims can be avoided by transferring assets into a trust. For example, lawsuits related to child support, alimony, or tax evasion are generally not protected by asset protection trusts.
Specialized Asset Protection Trusts
Certain types of irrevocable trusts are specifically designed to provide protection from lawsuits. These asset protection tools can shield the Grantorâs assets from creditors, lawsuits, and other legal claims and include:
- Asset Protection Trust: Typically, these trusts are set up in jurisdictions with strong asset protection laws, such as certain U.S. states (like Nevada, South Dakota, and Delaware) or offshore locations (like the Cook Islands). When structured properly, an asset protection trust can protect the Grantorâs assets from creditors while still allowing them to benefit from those assets.
- Domestic Asset Protection Trust (DAPT): In certain U.S. states (not including Vermont) individuals can create domestic asset protection trusts. These irrevocable trusts offer some protection from lawsuits, particularly when established in states with favorable trust laws. A DAPT allows the Grantor to be both the Trustee and the beneficiary, which provides flexibility while still offering a degree of protection from lawsuits.
- Spendthrift Trust: A spendthrift trust is designed to protect a beneficiaryâs interest in the trust from creditors of the beneficiary. If you create a trust for a beneficiary who may have legal or financial troubles, a spendthrift provision can prevent creditors from accessing the trustâs assets before they are distributed to the beneficiary. While this type of trust protects the assets from the beneficiaryâs creditors, it does not shield the Grantorâs assets from lawsuits.
Do You Have Specific Questions about How a Trust Can Protect Assets from Lawsuits?
For more information, please attend one of our upcoming FREE webinars. If you have specific questions about how a trust might be able to protect your assets from creditors or lawsuits, contact an experienced Essex Junction estate planning attorney at Unsworth LaPlante, PLLC by calling 802-879-7133 to schedule your appointment today.
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