As the grantor of a living trust, you set up the living trust and place your assets in it. You also appoint an entity to be the trustee of the living trust to manage your assets. Depending on the type of living trust, your assets may then have some protection from lawsuits.
Lawsuit Against Assets
Because assets are not legal entities, nobody can sue the assets, whether or not they are in a living trust. For example, if you owe money to a creditor, the creditor can't sue your house or car to get payment. Instead, the creditor has to sue you as the debtor and the owner of these assets. Similarly, no entity can sue assets in a living trust. Instead, anyone who wishes to obtain these assets through a lawsuit has to sue the owner and controller of the assets.
Lawsuit Against the Grantor
When you place your assets in the trust, you change the titles of these assets so they are listed as belonging to the living trust. This gives the trustee control over these assets. Depending on the type of living trust you have, you may be able to appoint yourself as the trustee, which means that you retain control over the assets. If you as the grantor also act as the trustee, you remain in control of the assets and the trust does not protect the assets if you are sued.
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Lawsuit Against the Beneficiary
When you set up a living trust, you also name one or more entities as the beneficiary. The trust manages the assets in the trust for the benefit of the beneficiary. For example, you may name yourself, your spouse and your children as beneficiaries. Someone who is only a beneficiary of the living trust can't lose the assets in the trust through a lawsuit. However, once the asset has been distributed to a beneficiary, he can lose it to creditors through lawsuits.
Protecting Your Assets
To protect your assets from lawsuits, set up an irrevocable living trust instead of a revocable living trust. Because you don't control the assets in an irrevocable living trust, you can't lose them through lawsuits. Alternatively, you can protect your assets by placing them in limited partnerships or limited liability companies (LLCs). These structures limit the assets you can lose through lawsuits to minimize the amount of losses you risk in lawsuits.
- Kiplinger; Living Trust FAQs; Ronaleen Roha; August 2001
- Financial Education Services: Learn More About a Living Trust
- Phillips Estate Planning; The Difference Between Revocable and Irrevocable Trust Properties; Lee Phillips; January 2011
- Gibbs Law Office; Why Your Revocable Living Trust Does Not Protect Your Assets; Steve Gibbs
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