Will a Living Trust Protect Me From My Creditors?

Some have promoted Living Trusts and Family Trusts as a way to keep creditors at bay here in Idaho. Is that really an additional benefit afforded by such trusts?

In my opinion, it is not.  While a trust may slow your creditors down, it will not thwart them entirely if they are persistent.

The rationale usually behind suggesting that creditors will be frustrated by the creation of a Living Trust is as follows:  When you create a trust and place all your property into that trust, you no longer own that property.  Your trust owns it instead.  So when a creditor takes you to court and gets a judgment against you and then goes looking for assets in your name, he will find none.  So there’s nothing for the creditor to seize or have sold to pay off the judgment.  Hence they cannot touch your assets because legally they aren’t yours.  Or so the theory goes.

The problem with this analysis is that it overlooks one aspect of most Living Trusts.  In almost every case, when you set up the Living Trust, you reserve the right to amend or revise the trust.  This provision is intended to permit you to keep the trust up to date and to make ongoing determinations about who will receive the remaining trust property when you pass away.

But the judge in the case that resulted in a judgment against you will look at that power a little differently.  He or she will recognize that this right gives you continuing power to reach back into the trust and take your property back out.  And so the judge will effectively order you to do just that.

If you placed your home into the trust, for example, the judge has the authority to order you to deed it back out of the trust into your own name so that the creditor can have the home sold at a sheriff’s sale to satisfy the debt.  Same with cars, bank accounts, stocks and bonds, and essentially all other assets that you originally moved into the trust.

And while having to go through that process will certainly slow a creditor down (and might even be frustrating enough to a creditor for them to throw up their hands and walk away from the case), it would be unwise to rely on the trust to protect your assets.

In the final analysis, there are really just two things you can do to protect your assets.  The first is to pay your bills in full and on time.  The second is to obtain insurance policies – auto, homeowners, and umbrella – to protect you from claims based on injury or death.  In our system of justice where debtors are expected to pay their legitimate debts, there’s really no other alternative.

It should also be noted that a few states (14 as of this writing) do have specific laws that permit the creation of a living trust to protect assets.  However, Idaho is not one of those states.  But those states that do expressly permit the protection of trust assets impose significant restrictions, including most notably that the trust may not be amended or revoked after it has been created.  And make no mistake, almost everyone who creates an irrevocable trust wants to amend it or revoke it at some later date.

Furthermore, the cost to create such a trust is substantial.  Typically, the cost to set them up will be in the $5,000 to $10,000 range.  After that set up fee has been paid, annual maintenance costs will often be in the $3,000 to $5,000 range.

In comparison, the cost to maintain a full range of insurance policies will be far, far less.  So for most people, maintaining suitable insurance policies (at least homeowners, auto, and umbrella) is a much more economical way to protect one’s assets from creditor claims.


 

Wit & Wisdom

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