Do Living Trusts Protect Against Creditors’ Claims?
As living trusts become a more and more popular tool for those making estate arrangements, people occasionally get misinformation as to how they function. One common misconception is that living trusts are a legal way for you to leave assets to your family without worrying about creditors’ claims. On the contrary, while living trusts remain excellent tools to distribute your assets after you die, they do not function as a shield against creditors.
Garden-variety revocable living trusts, which is what most people use when setting up a trust, doe not protect your assets against legal claims. When you set up a trust, you appoint yourself as the trustee. As a trust is a legal entity, while you are alive, you are treated as the owner of these assets. The law does not differentiate between trustee and owner when it comes to legal claims. This is so because you have complete control over the trust and can take assets from it at any time as well as revoke it at will.
Additionally, any income the trust generates is treated as your personal income and taxed to you. This merely underscores the fact that trusts operate as your own assets and not as a separate tax-paying entity over which you have no control. It would be counterintuitive to treat these assets as not belonging to you for the sake of creditors when you are able to enjoy access to them and are taxed on them as personal income.
If a creditor has a legal claim against you, that company has the right to puncture your trust and sue for these assets. There are many reasons to set up a living trust, but protecting against creditor claims is not one of them. To learn more, meet with an experienced estate planning attorney at BaumannKangas Estate Law. in Florida.