The revocable living trust is a flexible and useful estate planning tool with many benefits to offer; however, it has its limits. For instance, did you know that – contrary to a popular myth – simply establishing a revocable living trust does not protect you and your assets from creditors, or from a divorcing spouse?
Trust Property is Treated Like It’s Yours
Since the trust is revocable, meaning that you retain the power to change or eliminate the trust in its entirety at any time, the assets held in the trust are treated as if they belong to you. If you lose a lawsuit and are hit with a money judgment, the plaintiff entitled to collect on that judgment will have every right to take your trust assets in satisfaction of the judgment. The same is true when it comes to divorce. All things being equal, simply placing property in a revocable living trust during your marriage doesn’t mean the divorce court won’t view that property as subject to division between you and your spouse.
Other Solutions Exist
The fact that a revocable living trust doesn’t protect your property from your creditors doesn’t mean you can’t make sure your assets are protected. In fact, your estate planning attorney has an arsenal full of asset protection tools and methods. For instance, money and other property that’s vulnerable to creditors can be used to purchase life insurance or contribute to a qualified retirement plan, you may be able to establish a family limited partnership or limited liability company, or the assets in question can be funded into an irrevocable living trust.
When it comes to protecting your assets, timing is everything. Wait too late to get started, and even the best asset protection tools won’t be able to help you. Once a lawsuit is looming, it’s usually too late to effectively rearrange your property.