One of the most popular tools that people utilize to protect their assets is putting them into a trust for a beneficiary. People create trusts for their beneficiaries for many different reasons, but one important reason is to provide protection and limit the access that creditors have to their assets.
When creating a trust, many people wonder whether a creditor will be able to access or take over the property listed in the arrangement. If you are wondering whether the creditors of a trust beneficiary can reach trust assets, do not hesitate to meet with one of our skilled estate planning lawyers.
When Could a Creditor Make a Claim Against a Beneficiary?
Generally speaking, the type of trust in question determines whether a creditor or collector could attempt to access the assets inside. In most situations, the less control a beneficiary has over their trust, the less likely it is that a creditor could seize the assets.
For instance, one option that many people use to prevent creditor access is an arrangement known as an irrevocable trust. This document requires the grantor to give up complete control and ownership of the property in question and, usually, prevents them from changing the arrangement in the future. These trusts can only be changed under certain circ*mstances, which makes them a powerful and secure method of keeping valuable assets safe.
On the other hand, creditors might be able to reach assets that are placed into an arrangement known as a revocable living trust. This type of trust, which centers around the grantor having complete ownership over their assets until they pass away, is generally not protected from creditors. If a lender is looking to sue the grantor, this person who authored the document might need to hand over any funds or assets if they lose the claim.
If you are interested in creating a trust that is safe from creditors, then please meet and speak with one of our dedicated estate planning attorneys.
Does the Process Change if the Grantor is Deceased?
Once the grantor of an irrevocable trust passes away, assets left in a trust for a beneficiary are distributed and free from any creditor claims because the grantor essentially relinquished his or her control over the arrangement when the irrevocable trust was established. Revocable trusts are not free from creditors, but the process does change when the grantor is deceased because a revocable trust then becomes irrevocable.
However, there are exceptions to this norm. For instance, if a revocable trust has two grantors, it may still remain revocable until all these people have passed away. However, the deceased person’s outstanding debts from the revocable trust do not go away, and creditors will still be entitled to the assets listed in the document.
If you recently lost a family member who authored an irrevocable trust with two grantors, our knowledgeable lawyers could inform you whether the assets inside would be protected or subject to creditor seizure.
Contact a Trusts Attorney Today to Learn More
When it comes to planning and finding a trust that fits your needs and protects your assets from the reach of creditors, our knowledge and experience could help you avoid mistakes. Amity Law Group offers attorneys that could answer your questions, assess your situation, and help make the process go as smooth as possible. Contact us today for a free consultation.
FAQs
In most situations, the less control a beneficiary has over their trust, the less likely it is that a creditor could seize the assets. For instance, one option that many people use to prevent creditor access is an arrangement known as an irrevocable trust.
Are trust assets protected from creditors? ›
Because the assets within the trust are no longer the property of the trustor, a creditor cannot come after them to satisfy debts of the trustor. Still, it is crucial to know your state law regarding irrevocable trusts to understand exactly how well your assets are protected from creditors.
Can creditors go after assets in a revocable trust after death? ›
Irrevocable living trusts are almost always completely protected from creditors, as they were entirely out of your loved one's ownership and control. Other types of trusts that do not go through probate, such as revocable trusts or charitable trusts, can still be claimed by creditors, at the court's discretion.
Can creditors go after beneficiaries? ›
When a person dies, creditors can hold their estate and/or trust responsible for paying their outstanding debts. Similarly, creditors may be able to collect payment for the outstanding debts of beneficiaries from the distributions they receive from the trustee or executor/administrator.
Is a trust liable for the debts of a beneficiary? ›
It helps to remember that a Trust is a separate legal entity. The Trustees and beneficiaries are not personally liable for debts owed by the Trust. The Trustee is acting in a fiduciary capacity. The Trustee is required to gather the assets and pay the Trust debts.
Can a trustee be sued by creditors? ›
Generally, no you cannot sue a trust directly. Again, that's because a trust is a legal entity, not a person. It's possible, however, to sue the trustee of a trust whether that trust is revocable or irrevocable. As mentioned, in the case of a creditor lawsuit the trustee of a revocable living trust could be sued.
Can creditors touch inheritance? ›
The inheritances of heirs and beneficiaries are not beyond reach for creditors. If a beneficiary or heir owes a debt, their creditors can take steps to obtain a judgment.
What assets are protected from creditors after death? ›
Retirement Accounts, Insurance, Trusts
Retirement account assets and insurance proceeds with designated beneficiaries are treated differently than other assets and provide more protection from creditors.
Can debt get passed down through a beneficiary? ›
Most debt isn't inherited by someone else — instead, it passes to the estate. During probate, the executor of the estate typically pays off debts using the estate's assets first, and then they distribute leftover funds according to the deceased's will. However, some states may require that survivors be paid first.
Do beneficiaries own trust assets? ›
In legal jargon, trust and will attorneys refer to Trust beneficiaries as the “equitable owners” of the Trust. Beneficiaries will receive money and other assets from the Trust either outright (meaning being paid all at once) or in smaller amounts over time, based on the provisions in the Trust document.
Can Creditors Garnish a Trust? Yes, judgment creditors may be able to garnish assets in some situations. However, the amount they can collect in California is limited to the distributions the debtor/beneficiary is entitled to receive from the trust.
Who holds the real power in a trust, the trustee or the beneficiary? ›
A trustee has all the powers listed in the trust document, unless they conflict with California law or unless a court order says otherwise. The trustee must collect, preserve and protect the trust assets.
Is money in a trust protected from bankruptcies? ›
The outcome of your bankruptcy case depends on the type of bankruptcy you file. If you are concerned about your estate plan and/or trust, the kind of bankruptcy and the category of trust you have may make a difference. In general, revocable trusts will not protect your assets during bankruptcy.
How are assets protected in a trust? ›
An asset protection trust is a self-settled trust in which the grantor can be designated as a permissible beneficiary and allowed access to the funds in the trust account. If the APT is properly structured, its goal is that creditors won't be able to reach the trust's assets.
What clause protects trust assets from creditors? ›
A spendthrift clause refers to a clause creating a spendthrift trust which limits the ability of assets to be reached by the beneficiary or their creditors.
Can a trustee be liable for debts? ›
To begin, trustees are not personally responsible for the debts of a trust such as a mortgage on a trust property, outstanding loan from a promissory note or even medical and utility bills. You, as trustee, do not have to pay these bills personally.
