Estate planning often focuses on what will happen in the future, but it can raise questions about how to protect one’s assets in the present. In a world where lawsuits or accidents can crop up at any time, many people wonder, “Will my trust provide asset protection?” There are a variety of trust types, each designed to accomplish different goals, so the key to answering this question lies in understanding the type you hold.
The Revocable Living Trust
The revocable living trust remains one of the most widely used estate planning tools. Its popularity stems from its flexibility; you retain complete control over the assets you place into the trust, may amend or revoke it freely during your lifetime, and can help your loved ones avoid the time and expense of probate after your death. A carefully drafted revocable living trust can:
- Hold a wide variety of assets, including real estate, bank accounts, investment accounts, and business interests.
- Direct the trustee to use trust assets to pay for your medical expenses and everyday costs of living if you become incapacitated.
- Direct the trustee to continue supporting your loved ones if you become incapacitated and after your death.
- Keep the administration of your estate private, unlike probate proceedings, which are generally matters of public record.
- Provide clear instructions for how and when your assets should be distributed to your beneficiaries at your death.
A Revocable Living Trust Generally Does Not Provide Asset Protection During a Settlor’s Lifetime
One of the most common misconceptions in estate planning is that a revocable living trust protects the assets of the person who creates it (the settlor) from creditors. In reality, it generally does not. This is because in most cases, the settlor also serves as the initial trustee and beneficiary, retaining the unrestricted right to amend, revoke, or terminate the trust at any time. Since the settlor continues to exercise complete control over the trust assets, California law generally treats those assets as though they are still personally owned by the settlor.
As a result, simply transferring assets into a revocable living trust does not place them beyond the reach of creditors. If a creditor could have reached an asset before it was transferred into the trust, the creditor can generally reach that same asset afterward because the settlor remains free to reclaim the property at any time. For this reason, a revocable living trust is an excellent estate planning tool, but it is not an asset protection tool during the settlor’s lifetime.
A Revocable Living Trust Can Be Drafted to Protect Beneficiaries After the Settlor’s Death
While a revocable living trust generally does not protect the settlor’s assets during his or her lifetime, it can provide asset protection to a beneficiary after the settlor’s death. At that point, the trust typically becomes irrevocable, and if carefully drafted, it may continue to hold assets for the benefit of a surviving spouse, children, or other beneficiaries rather than distributing those assets outright.
One of the key benefits of keeping a beneficiary’s inheritance in trust is that the trust may provide an additional layer of protection from the beneficiary’s creditors, lawsuits, or claims arising from a future divorce. For example, imagine a parent leaves an inheritance to a child who later faces a divorce or is sued after a car accident. If the inheritance was distributed directly to the child, those assets may become exposed to those claims. If, instead, the inheritance remains in a properly drafted trust, the assets can be better protected while still being available to support the child’s needs.
The key takeaway is that a revocable living trust is not designed to protect your assets during your lifetime. Rather, its primary purpose is to help manage your assets during life, avoid probate after death, and, when properly drafted, help protect the assets you leave behind for your loved ones. If you are ready to create an estate plan tailored to your family’s goals, the attorneys at Deka Law Group are here to help. Contact us today to discuss the planning strategies that are right for you.
Author: Michelle Nguyen
The information contained in this blog post is not, nor is it intended to be, legal advice. You should consult an attorney regarding your individual situation.
