Tag: Creditor Protection

Video

Hi folks, it’s Andy Stautz at Stautz Law. I’m here for a quick chat today about revocable trusts and creditor protection.  

Creditor Protection as an Estate Planning Concern

Oftentimes we’ve got clients who have business interests, right? They run a business or they own, you know, some sort of some sort of partnership interest, LLC membership, that sort of thing. And when we’re doing estate planning for those clients, the question is OK, you know, can the estate planning accomplish any creditor protection?  

Especially if it’s a high risk business: [e.g.] logistics, medicine. Pretty much every business has its own risk. But the question is, OK, let’s say we’re doing a trust based plan, a revocable trust plan. That works well for a lot of reasons, and one of those reasons is that the settlor, (the person who makes the revocable trust) has–the way I write them–retains a ton of control to revoke, amend, you know, distribute trust assets.  

Revocable Trusts and Creditors

Key Concept: You Control the Living Trust so Your Creditors Treat it as Yours

So that’s great from an estate planning side of things, but what it means is you don’t get any creditor shield from the Revocable Trust itself. Right? Because if you make the revocable trust and you grant yourself all the powers to control what’s in it, it’s still your property. I mean, it’s not [your property] to a probate court, but in the real world it is. It is!  

You can still do what you want with it. And so that’s what happens… if there’s a judgment against you, creditors can reach assets in a revocable trust because the law says, yeah, it’s basically yours.

Retained Control in Other Contexts

And that’s how the tax law treats it too, right? You can’t use a revocable trust to move assets out of your taxable estate because yeah, the IRS takes a look and says, well, you still control it. Still yours.  

So the pithy take away is a revocable trust has no creditor protection benefits. It doesn’t.  

The pithy take away is a revocable trust has no creditor protection benefits.  

Other Ways to Get Creditor Protection

You know, there are great reasons to do a revocable trust still– it’s just creditor protection is not one of them. So you need to accomplish creditor protection in other ways. You know insurance is a big one. Business entity structure. You know, in LLCs, limited liability. So that’s the way to protect yourself. 

 But the the trust isn’t going to do. 

(Obviously a Will won’t [get you creditor protection] because a Will, you know, isn’t a transfer of property at all.) 

So with those things in mind, you know that’s it’s just two separate things you need to think about 

Irrevocable Trusts DO Protect You from Creditors . . . at a Cost

If you do want a trust with creditor protection characteristics, you’re looking at an irrevocable trust. Basically. I mean, big topic. There are exceptions.  

But for a lot of people, that’s not an appropriate choice, because then you are like… to get the creditor protection, you need to actually give away the property. So that’s kind of the tension there.  

Anyway, you need specific advice based on your risk profile. You know, the nature of your interest, what your goals are, but in general creditor protection issues are going to be part of a holistic plan, probably going to involve your financial advisor. If you’ve got one, your insurance broker, if you’ve got one.  

And it’s not going to happen in a will or a revocable trust based plan. So those are some things to think about. Call me if you want to talk about your situation. I love talking about these things. You’re on my website, so there’s information everywhere. Hope to hear from you soon. Bye now.