Frequently, clients call me to set up a Living Trust.  When I ask about their goals, they mention that they would like to protect their assets from potential creditors. At that point, I explain in the nicest possible way so as not to insult their level of knowledge, that unfortunately Living Trusts do not offer any Asset Protection features. I go on to say that the reason people set up a Living Trust is to leave assets to their loved ones without having to worry about Probate.

Although Living Trusts do not offer Asset Protection benefits, there are other types of Trusts that do in fact allow people to insulate their assets from creditors claims.  In order for a Trust to serve this person, generally the Trust must be irrevocable and have a Trustee other than yourself have complete control to manage the assets according to the terms of the Trust.  The Trustee in his discretion can distribute income to you but it must be at his discretion and according to the terms of the Trust.  Generally people set up an irrevocable Trust, appoint another person as the Trustee and make themselves or their loved ones the Beneficiary. Under the scenario described above, this sort of Trust would probably offer Asset Protection features. There are even Trusts along the lines of the ones described above that are referred to as "Asset Protection Trusts".

If you would like to set up an Asset Protection Trust, there are a few things to keep in mind. First, it is imperative that  you transfer assets into the Trust before litigation is on the horizon and especially before a judgment has been entered. If you transfer assets into an Asset Protection Trust after a judgment is entered, it is highly probable that the Creditors will successfully be able to void the transfer through the Trust as a "Fraudulent Conveyance" and attach the asset.  Second, I want to reiterate that is important that the Trust have a Trustee other than yourself who has some discretion to distribute income and manage the Trust according to the terms of the Trust. Finally, keep in mind that Asset Protection Trusts are entirely different from Living Trusts and often more complicated and costly to set up.

So, Alas, Living Trusts do not offer Asset Protection. But the good news is that there are other types of Trusts that do in fact serve as Asset Protection tools. 

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