Only certain trusts provide full asset protection from creditors.

Building generational wealth for a family requires strategic planning and action.

Although it can take thrift and wisdom to build wealth, it can take just one foolish action to endanger it.

While trusts can be a beneficial estate planning tool for shielding assets from creditors, not all trusts provide such protections at all stages.

Revocable living trusts are ideal for avoiding probate and facilitating a smooth transfer of wealth, but they do not keep assets insulated from creditor claims.

An irrevocable trust is an effective means of shielding assets from creditors.

What Is a Revocable Living Trust and How Does It Work?

A revocable living trusts is a legal document used to hold assets for the trustmaker.

Assets can be managed by the trustee and distributed according to the terms of the trust after the trustmaker has died.

With a revocable living trust, the trustmaker typically serves as the trustee during his or her lifetime.

Because a revocable living trusts allows the trustmaker to retain control of assets, you can transfer assets in or out, amend the terms of the trust, or even revoke the trust.

After you have died, the trust will become irrevocable.

Changes at this point are limited and asset protection increases.

Because the trustmaker retains control over assets with a revocable trust, these trusts cannot protect assets from creditors while the trustmaker is alive.

If you need to protect assets from your own creditors, you may need to consider other estate planning options.

Why Do Revocable Living Trusts Not Provide Asset Protection?

According to a recent Forbes article, the key reason revocable living trusts do not provide full asset protection while the trustmaker is alive is control.

Because the trustmaker can access the assets in the trust and make changes to the trust terms, creditors still consider these assets to be under control of the owner for lawsuits or debts.

Essentially, the assets of a revocable living trust are considered to be a part of your estate until you die.

What are Better Trust Options for Asset Protection from Creditors?

When protecting inheritances from creditors while you are alive is a top estate planning priority, then alternative tools should be chosen over a revocable living trust.

Irrevocable Trusts: Are They the Solution to Creditors?

Irrevocable trusts provide strong asset protections.

After the trustmaker has created the trust and funded it with assets, these assets are no longer under the control of the trustmaker.

They are governed by the terms of the trust you created and are managed by a third-party trustee.

Because control is important to many adults, this solution can feel deeply unnerving.

Even so, this relinquishing of authority is the sole reason the asset are removed from your estate and shielded from creditors.

What about Asset Protection Trusts?

Domestic Asset Protections Trusts (DPATs) are available in some states.

These trusts are designed to protect assets from creditors under state laws but are not equally effective in all jurisdictions.

These trusts must be created prior to any creditor claims being filed.

An experienced estate planning attorney in your state should be able to tell you whether a DPAT would be effective where you live.

Can Insurance and Retirement Accounts Help Protect Assets?

Certain insurance policies and retirement accounts like IRAs and 401(k)s have protections against creditors.

State and federal laws often protect these accounts as well.

For example, regarding life insurance, it is 100% protected in Kansas, but only once you have had the policy in force for at least one year.

Although these accounts are beneficial tools for estate planning, your estate plan should not rely solely on these for protecting assets.

How Can a Comprehensive Estate Plan Protect Your Heirs?

Trusts work best when they are a part of a comprehensive estate plan.

You should combine these with other strategies like retirement accounts and insurance.

Working with an experienced estate planning attorney will enable to you implement an appropriate mix of tools to protect and preserve your inheritance for your heirs.

Take the Next Step Toward Protecting the Future of Your Family

Although revocable living trusts are an unsatisfactory solution for protecting assets from creditors while you are alive, other trusts can help address this goal.

If you need help creating a comprehensive estate plan to protect everyone you love and everything you have, reach out to our Overland Park estate planning law firm.

What are Key Takeaways for Protecting Assets from Creditors?

Irrevocable trusts offer greater asset protections than revocable living trusts.

Although not available in all states, Domestic Asset Protection Trusts can shield assets from creditors to varying degrees.

Certain financial products have protections granted by the government against creditors.

Ultimately, estate planning should involve the use of various tools and strategies to meet your goals and the needs of your loved ones.

This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.

Reference: Forbes (Aug. 13, 2024) “The Misconception Of Asset Protection With Revocable Living Trusts”