Can Your Trust Protect You From Creditors

Becky Cholewka: I get asked a lot, “Becky, I want to make sure that I have the trust that protects me from creditors.” The problem with that is there are very few trusts that actually have creditor protection for you when you are alive.

Talking about different types of trusts, there is actually 30 or 40 different types of trusts, but they mainly fall into two categories, revocable trusts, and irrevocable trusts.

Irrevocable trusts are the type of trusts where you get your money away right now to your trust. Your trustee manages it. Your trustee is typically not you in an irrevocable trust.

You are also not the beneficiary of your trust. That is how we were able to get asset protection through irrevocable plans. Most people don’t want to give away their money or lose control over their money while they’re alive.

We really only do irrevocable planning in very, very specific circumstances. For most people, especially with our current tax laws, most people don’t need to go down the road of an irrevocable trust.

We’re going to have some type of asset protection for you while you’re alive. You have a couple of other things that you can look at. For example, you can get an umbrella insurance policy through your insurance person.

That type of policy can cover, for example, if you’re in a car accident and you get sued and those bills are more than your car insurance, your umbrella insurance policy can also kick in as well, so when people are suing, they’re going to go after that insurance policy, instead of the other assets that you may own. That is one of the most economic ways of adding in some layers of asset protection for yourself while you’re alive.

Another way of doing some asset protection is if you have a business, you can always put your business in an LLC. LLCs, limited liability companies offer asset protection if you do everything correctly. For example, if you have a rental property and you want to make sure if there’s some type of accident on that rental property that they can’t sue you for all of your other assets that you own.

What you want to do is create an LLC and have your rental property be titled in the name of that LLC. You’re going to make sure that your renter is paying you that you’re opening up a new business bank account for that LLC, depositing those monies into that business banking account. You want to make sure you are treating that rental property now as a business.

If you do all of that properly, if something happens and there is a slip and fall on that rental property and you get sued, they can only sue for what’s inside the LLC itself, so only the assets that you have placed within that LLC.

For example, they still may be able to get to the rental property asset itself, but not your checking or savings accounts or brokerage money or any of your other types of assets.

There are different ways of layering in asset protection. Irrevocable trust is one of those layers, but for most people, it doesn’t make sense.

If you’d like to have a consultation to see whether a revocable or irrevocable plan makes sense for you, please feel free to call me at the office at 480‑497‑3770.