Is It Possible to Obtain Trust Protection From Creditors?

The line between estate planning and asset protection is often very narrow. Many people chose to place property in trust to assure the financial well-being of future generations. The protection of assets from creditors through the use of a trust is a much-discussed area, but the facts are often different from the claims made by some trying to sell these living trusts.



Living trusts are a great vehicle for helping to keep assets out of probate courts upon death and for often doubling the tax-free size of an estate when utilized by married couples. Simply because assets are held in a trust does not mean however that those assets are protected from the claims of creditors. Creditors often have a variety of judicial remedies at their fingertips for satisfying claims against property that is held in trust.

Asset protection trusts are legal in select Unites States Jurisdictions, but it is important to know how the law effects trust property to get a real understand of whether or not the trust protects against the claims of creditors. For an asset trust to work, the settlor (person creating the trust) cannot serve as trustee, this would defeat the purpose of the trust. The trust must also be irrevocable. If the settlor establishes a revocable trust, he essentially has the same rights in the property as he had before and can distribute the property in the trust as he sees fit. A trust that is revocable by the settlor is also revocable by a creditor.

Even when an asset protection trust has been properly established in a jurisdiction that allows them, that does not guarantee that the assets placed in the trust will be protected from creditor claims in other states. If the property making up the corpus of the trust is located in a different state that property is often still subject to the laws of the jurisdiction it is located in. Frequently other states will invalidate an asset protection trust for violation of state policy and allow a creditor to reach the income or corpus of the trust to satisfy their claims.

By virtue of the Full Faith and Credit Clause of the US Constitution, sister states are required to uphold a judgment against a trust in another state. One thing to keep in mind in the field of asset protection is that true asset protection occurs before an event that may subject your property to the claims of a creditor. In California, any assets placed in trust to protect them from the claims of a creditor after the event leading to the creditor's claim is considered a fraudulent transfer and subject to reversal. To complicate the matter even further California does not begin running the statute of limitations on fraudulent transfers until the transfer is discovered.

The use of a trust to protect assets from the claims of a creditor can be a very complicated matter. If done improperly, the assets placed in trust can still be subject to the claims of creditors and liquidation by courts. The general rule for protecting assets from the claims of creditors is that anything transfers made after the events that give rise to the claims of the credit will be invalidated. For further information on the protection of assets from the claims of creditors contact Cheadle Law at 949.553.1066. The experts at Cheadle Law specialize in estate and asset planning including trusts and wills, tax issues, beneficiary rights, and more.