Does a Revocable Living Trust offer Lawsuit Protection?

The Revocable Living Trust is very popular in America. A living trust helps you avoid the cost and delay of probate. You can also avoid the dangers from jointly owning assets.

But here’s the downside: a revocable living trust won’t protect you from lawsuits. Though a revocable trust doesn’t offer lawsuit protection, you have the comfort of knowing that you can change or revoke your living trust as often as you can revise your will.

Rebroadcast - September 2018 Estate Planning Webinar: Revocable Trusts

But can a living trust can cause you to lose lawsuit protection? Several states have ruled that a homesteaded home transferred to a living trust loses homestead protection. Similarly, assets owned between spouses as tenants-by-the-entirety may lose creditor protection from this type of co-ownership when those same assets are instead titled to a living trust.

There are trade-offs between the different ways to title assets. Without a revocable living trust, the court will distribute your assets under your will. This can be expensive, time-consuming, and cumbersome. (Probate costs can consume as much as 4% of an estate and delay estate distributions.) If you bequeath $1 million through your will, your heirs may pay $40,000 in probate costs, and wait years for their inheritances. A living trust circumvents the probate process. Your assets immediately transfer to your beneficiaries.

Have the best of both worlds

  • Title your assets to a Limited Partnership (to lawsuit-proof these assets)

  • Have your living trust (which avoids probate) own your limited partnership

When you die, your ownership in the limited partnership immediately transfers through the living trust to your heirs and avoids probate. During your lifetime, your assets would be creditor-protected by the limited partnership.

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