How Judgments Affect Assets in a Trust

amendment to a last will and revocable trust
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Does a revocable living trust provide asset protection? When you transfer assets into this type of trust, does it protect them from creditors, lawsuits, and divorce? The answer is a resounding NO! A revocable living trust has several advantages, but it offers absolutely nothing in the way of asset protection. Here's why: 

A Revocable Trust Doesn't Offer Asset Protection Because It's Revocable

A creditor, judgment holder or even your ex-spouse can grab property owned by your revocable living trust because the trust is not necessarily permanent. Unlike with an irrevocable trust, you can change the terms of a revocable trust agreement at any time. You can put assets into the trust and take them out.

A creditor, judgment holder or a divorce court can force you to take property out of your trust to pay off judgments and other types of debts and obligations. The money and/or assets there are still legally available to you. Only an irrevocable trust takes them out of your reach permanently.

There's No Asset Protection Because You Still Own the Property 

For all intents and purposes, you still personally own the assets titled in the name of your revocable living trust because you created the trust and you funded it with your property. You did so for your own benefit as the trust's beneficiary and trustee. What you own, a creditor can take. 

Other Options for Asset Protection Planning

Asset protection can be a complicated process because it involves an analysis of your long-term financial needs and your estate planning goals. You must strategically position or reposition your property to ensure that it's exempt from creditors' claims. Depending on the laws of your state, other options for asset protection planning might include: 

  • Investing in your primary residence -- some states provide homestead exemptions prohibiting creditors from forcing the sale of your home to satisfy your debts
  • Buying life insurance that accumulates a cash value
  • Funding retirement accounts, including IRAs and 401ks -- ERISA-qualified retirement accounts are typically safe from creditors
  • Purchasing annuities
  • Setting up a family limited liability company or family limited partnership and transferring ownership of assets into these legal entities
  • Titling assets in your spouse's sole name or as tenants by the entirety, but this will not protect property from creditors of jointly-owned debts or in the event of divorce
  • Creating one or more irrevocable trusts -- these trusts do provide asset protection. No law says you must place all your assets in a trust when you form one, so you can place critical assets in one or more of these trusts, leaving the balance of your property in the revocable trust 

Even though a revocable living trust offers your property no asset protection whatsoever and can't shield your property from the claims of your creditors or a divorcing spouse, you're not without options. You'll have to go quite a few steps beyond your basic revocable living trust to create an ​advanced estate plan that will provide comprehensive asset protection planning. ​​