Protection from Creditors Under a Trust?
We often hear the claim that creating a Family Trust will shield one’s assets from creditor claims.
While we might wish that were the case, it’s not. Here’s why:
The type of trust that is created 99% of the time is a revocable trust. That just means that the person who created the trust reserves the right to change its terms and put new assets into the trust or take old ones out. It’s an appropriately flexible entity.
But that flexibility is the Achilles heel in terms of creditor claims.
Imagine a person who has placed his assets into a trust that is under his control. Now imagine that he causes an auto accident and the injured party obtains a judgement against that person. The injured party – now a judgment creditor of the person who created the trust – will go looking for assets that can be sold to satisfy the judgment.
Those who suggest that a trust will shield those assets do so based on the premise that the assets are now owned by the trust, rather than by the person who created the trust.
But the catch is that the judge who entered the judgment confirming the debt from the accident can also turn around and order the person who created and controls the trust to move assets out of the name of the trust and put them back into his personal name. That, of course, then makes those assets available for the creditor to have sold.
So, while the existence of a trust may slow down the process of a creditor gaining satisfaction, it will not frustrate the creditor for more than a very short while. In the final analysis, the existence of the trust will do little to protect assets.