There are a number of different types of trusts that are used in the field of estate planning, and they serve different purposes. There are trusts that can provide asset protection, and there are other trusts that would not be used for asset protection purposes
Let’s look at some of the details.
Some trusts are irrevocable. The name is somewhat self-explanatory on one level: once you create an irrevocable trust, you cannot revoke or rescind it. You are surrendering direct personal ownership of the assets that you convey into the trust.
Because you are surrendering incidents of ownership, generally speaking, assets that have been conveyed into an irrevocable trust would be protected. There are some types of irrevocable trusts that are commonly used to protect assets. It is important to note that irrevocable trusts will not provide asset protection in all circumstances. There is a body of laws designed to prevent fraudulent conveyances that can be used to set aside irrevocable trusts.
The best time to establish irrevocable trusts for asset protection purposes is BEFORE you are in legal trouble, e.g., you are being sued or threatened with a lawsuit.
Revocable Living Trusts
Assets that have been conveyed into a revocable living trust are not protected from creditors and claimants. This is because of the fact that you are retaining full control of the assets when you create and fund a revocable living trust.
The person who is creating the trust is called the grantor. There is a beneficiary who receives monetary distributions from the trust, and a trustee who administers the trust. With a revocable living trust, the grantor will typically act as both the trustee and the beneficiary at first.
As a result, you can retain total control of the assets if you create a revocable living trust. In addition to your ability to serve as both the trustee and the beneficiary, you can in fact revoke the trust if you choose to do so. The assets that had been conveyed into the trust would once again become your direct personal property.
Since you can access the resources at any time, they are not protected from attachment.
Value of Revocable Living Trusts
You may wonder why you would want a revocable living trust if the assets in the trust are not protected. For the most part, these trusts are used by people who want to facilitate asset transfers outside of the legal process of probate and to allow management of assets by a trusted person and not the courts should the grantor become incapacitated.
Probate is the legal process of estate administration. If you draw up a will as a vehicle of asset transfer, the executor that you choose cannot distribute assets to the heirs right away. The will must be admitted to probate first, and there are various drawbacks that go along with the probate process.
Probate can be time-consuming, and the heirs do not receive their inheritances until after the estate has been probated and closed. It is also a public proceeding, so records can be accessed by anyone who is interested. Thirdly, there are some significant expenses that can go along with the probate process.
When you have a revocable living trust, you name a successor trustee and a successor beneficiary to assume these roles after you die. The successor trustee can distribute assets to the successor beneficiary according to your wishes outside of probate.