An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
If you are the beneficiary of an irrevocable trust, judgment creditors will not typically be able to take money directly from the trust. However, they usually can access distributions you receive from the trust.
A beneficiary's inheritance can be protected from lawsuits and creditors by receiving it in trust (as opposed to outright). This can make it extremely difficult for creditors to go after this money, even if insurance becomes insufficient to satisfy a judgement obtained by a lawsuit.
Irrevocable trusts
This can give you greater protection from creditors and estate taxes. As stated above, you can set up your will or revocable trust to automatically create irrevocable trusts at the time of your death. When you use your will to create irrevocable trusts, it's called a testamentary trust.
You can amend or revoke the trust (hence, the name “revocable” trust) and withdraw assets from the trust, at will. Thus, since you have the same degree of control over your property, creditors may access the trust's assets almost as easily as they can access your assets which are not in such a trust.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
California law does allow creditors to pursue a decedent's potentially inheritable assets. In the event an estate does not possess or contain adequate assets to fulfill a valid creditor claim, creditors can look to assets in which heirs might possess interest, if: The assets are joint accounts.
For example, retirement accounts, IRAs, both qualified and depending on state laws, and some estate plans. Those are generally exempt, although there's special rules for those. Life insurance, that's another exemption. Creditors in many circumstances can't reach assets.
Contrary to popular belief, there are some cases where a trust can be subject to the claims of creditors. If the probate estate does not have enough assets to cover its debts, the creditors will petition the court and can then gain access to the funds in the trust.
The beneficiary is not required to pay the rest of the debt from her own assets. The same is true of Trustees. If there is not enough money (or other assets that can be sold to raise money) in the Trust, then the debt will remain unpaid.
A living trust does not protect your assets from a lawsuit. Living trusts are revocable, meaning you remain in control of the assets and you are the legal owner until your death. Because you legally still own these assets, someone who wins a verdict against you can likely gain access to these assets.
After a trust settlor's death, creditors may have a limited time to make claims against the estate. This period varies by state law but typically ranges from a few months to a year. It's crucial for trustees to be aware of these timelines.
Asset protection trusts offer the strongest protection you can find from creditors, lawsuits, or any judgments against your estate. An APT can even help deter costly litigation before it begins, or it can influence the outcomes of settlement negotiations favorably.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust.
Instead of leaving assets to your heir outright, you can leave the assets to a spendthrift trust. Your heir's creditors won't be able to reach the assets inside of the trust. The trustee of a spendthrift trust will typically make regular payments to the beneficiary (your heir).
If the estate goes through probate
The tricky part of this process is how any outstanding debts that need to get paid will be settled. While the creditors can't claim the house itself, they can make claims in an amount that might require you to sell the house.
When you put money in an irrevocable trust—one you don't control and can't revoke—then the money probably won't be considered yours anymore, and it won't be available to creditors. You would typically name other beneficiaries (such as your spouse, children, or other loved ones) to receive the money in the trust.
With the right language in the trust document, the assets will not become part of your estate. The credit card companies will not have a claim against the assets to pay off the credit card debts after your death.
Can a lien be placed on an inheritance? It is more accurate to say that, in these cases, inheriting the real estate means inheriting the debt. If there is a tax lien on your inherited property or a judgement lean on the property, it can make the transfer of the property more of a burden.
Creditors have a right to go after non-probated assets if the estate runs out of money. They could collect payments from payable-on-death assets, trust fund distributions, or transfer-on-death assets.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Trust is preferable over a Will because the assets that are in the Trust are non-public assets. Example: If you take your house and you transfer it into the Trust and your parents passed away, then you don't have to open an estate to transfer the asset, and it remains confidential.
A dynasty trust is an irrevocable trust created to pass wealth from generation to generation without incurring estate taxes. It avoids the generation-skipping transfer tax, enabling long-term wealth growth for multiple generations.