Can a living trust lawsuit-proof my assets?

No. The living trust is a good way to avoid the cost and delay of probate and it can also avoid the problems of joint ownership. However, living trusts are usually revocable, and therefore they give you, as the grantor, no asset protection because they are revocable. If you can revoke your trust, your creditors can ‘step into your shoes’ and also unwind the trust. If you have a living trust or any other revocable trust your creditors can claim its assets. Moreover, living trusts can cause you to lose your lawsuit protection in those few states that don’t extend their homestead protection to homes that are titled to a living trust. Similarly, assets that are protectively owned as tenants-by-the-entirety lose this form of protection when those same assets are titled to a living trust.

The most common trust is the living trust, which is also known as the Family Trust, Loving Trust, or Revocable Inter Vivos Trust. As mentioned previously, the living trust’s primary goal is to avoid probate of the grantor’s assets when he or she dies, as well as provide for a means of managing the grantor’s assets if the grantor becomes incapacitated. Avoiding the time and hassle of the court supervised process of distributing a deceased person’s (decedent’s) assets to their heirs may sound desirable, but are living trusts for everyone? The answer depends on the decedent’s state of residence and the size of their estate. Some states, such as California, Delaware, Florida, and New York, have a relatively long and expensive probate process. However, other states, such as North Carolina, have a streamlined process. A small, simple estate in a state such as North Carolina may be inexpensively settled in as little as two to four weeks. However, probate of a more complex, large estate in a state such as California could drag out for a couple years, and legal and other costs could reach into the hundreds of thousands of dollars. Perhaps, one drawback of probate that’s universal to all states is the fact that anyone who wants to may access the probate records (including a list of estate assets) during probate.

If an individual has had multiple marriages (especially if there are different children from different marriages), an estate over $500,000 in value, property located in multiple states, or a desire for privacy, then a living trust is probably a good idea.

As mentioned previously, living trusts are created during the grantor’s lifetime, and the trust may be amended or revoked by the grantor anytime before he dies. The grantor thus retains complete control over trust assets during his lifetime, as well as the ability to receive as much income from the trust as he wishes. Oftentimes the grantor is the trust’s trustee.

Because the grantor retains complete control over the trust assets, any gifts made to the trust are gift tax-free. However, there is a downside to retaining such control over a trust. First, any assets held in a living trust are included in the grantor’s estate for the purposes of calculating the estate tax liability even though the assets are not included in the estate for probate purposes. Furthermore, living trusts provide very little asset protection, as it is standard procedure for a judge to order the grantor to revoke the trust so that all assets revert back to his ownership, thus becoming subject to creditor attachment. Remember: a creditor of a grantor can control or access trust assets to the same extent the grantor can.

Upon the grantor’s death the trust becomes irrevocable, and if the grantor was the trustee then a new trustee is appointed in accordance with the trust. Usually a living trust includes a list of successor trustees for this very occasion. Upon the grantor’s death, trust assets are normally distributed to heirs according to the provisions of the trust. However, this is not always the case. Some assets may be held in trust if the beneficiaries are still minors. Perhaps the assets are not distributed until the heirs are even older, or perhaps certain beneficiaries only receive income from the trust while it remains in force. Because trusts can be drafted in any manner to meet the grantor’s needs, there will usually be some variation between trusts, even if they are the same type of trust. This flexibility is what gives trusts much of their power. If an heir is mentally challenged or otherwise disabled, for example, the trust could make sure that the heir’s needs are met even after the grantor dies. Some living trusts contain provisions that will cause the creation of other trusts, or sub-trusts, upon some triggering event – usually the grantor’s death. Credit shelter trusts are often created in such a manner.