You need an irrevocable intervivos trust to shelter your assets from your
creditors. Any trust that includes the right protective provisions can
lawsuit-proof the trust assets from your beneficiaries' creditors.
A trust is either intervivos or testamentary. A living trust is created
and funded during your lifetime. It is an intervivos trust. Trusts that
you fund upon your death are testamentary. You would usually create it
in your last will or living trust. During your lifetime, your assets remain
in your name and would be unprotected against your creditors, unless they
have otherwise been sheltered.
Trusts are also revocable or irrevocable. You can change or revoke a revocable
trust. You cannot revoke or modify an irrevocable trust. Every testamentary
trust is irrevocable once you die because you obviously cannot spring
back to life to unwind it.
It is important to distinguish a revocable from an irrevocable trust because
a revocable trust won't protect you. For protection you need an irrevocable
trust. You also need an irrevocable trust that you presently fund −
an intervivos trust.
One serious disadvantage from using an irrevocable intervivos trust for
protection is that once you establish and fund the trust, you cannot cancel
or modify it and reclaim property you transferred to it. You thus lose
both ownership and control over the trust assets. That's why an irrevocable
intervivos trust is seldom used for protection − though such trusts
can be useful for estate planning.
A revocable trust will not protect your assets because your creditors can
step into your shoes and revoke your trust. For example, assets titled
to your revocable living trust are vulnerable to your present and future
lawsuits. Nevertheless, a living trust will help you avoid probate. For
lawsuit-proof wealth, you need an irrevocable trust or another protective
entity. Since you cannot revoke or change an irrevocable trust, your creditors
have no greater power to unwind your trust and reclaim its assets. But
for an irrevocable trust to protect you, it must be presently
funded. Until you transfer assets to your trust, they are your assets, and can
be claimed by your creditors.
There are other limitations with trusts to shield assets. One limitation
is that you cannot settle your trust for your sole benefit. For lawsuit
protection, you should have no beneficial interest in the trust. You can,
however, retain income rights based on some ascertainable standard (health
needs, etc.). Some states disallow self-settled trusts for asset protection.
The grantor can neither control the trust nor have any beneficial rights.
Another limitation is that assets fraudulently transferred to the trust
can be recovered by present creditors. An irrevocable trust can protect
only against future creditors. You should only transfer assets to an irrevocable
trust when you are confident that you have no present creditors. But how
can you ever be absolutely certain of this? It's more accurate to
say that you shouldn't transfer assets to an irrevocable trust if
you have the likelihood of a present creditor. A present creditor can
recover assets from the trust because the transfer was without consideration.
In other words, you received nothing in exchange from the trust.
You can see the limitations with trusts. For protection, you must use an
irrevocable trust, relinquish control, and beneficial interest, and still
your trust assets may be seized as a fraudulent transfer. Trusts are also
set aside when a court concludes that a trust is a sham or that the grantor retained
de facto control over the trust.
The irrevocable trust for asset protection imposes a heavy price that most
people want to avoid. They want less draconian ways to become lawsuit-proof.
An irrevocable trust can make sense when:
- You would soon gift the assets to your beneficiaries anyway
- You do not foresee needing the assets for your future financial security.
Your price, then, is not particularly heavy, if you do not foreseeably
need the assets, and the trust will now accomplish what you would eventually
do − distribute your assets to your beneficiaries (usually your
children) at some future time. Only then, should you consider an irrevocable
intervivos trust for wealth preservation.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to