Will a Trust Protect My Assets if I Am Sued?

A trust provides a varying degree of protection for your assets in life and in death. How much protection your assets receive depends on the type of trust you choose to create. Creating a trust for the purpose of limiting your liability in a lawsuit may restrict your ability to make changes to the trust over your lifetime.

Revocable Trusts

A revocable trust allows you to transfer assets to your beneficiaries upon your death while avoiding state probate requirements and estate taxes. A revocable trust is considered a living trust, meaning you create the trust during your lifetime and may make changes to the trust up until your death. Because you can make changes to a revocable living trust, it provides no asset protection if you are sued by creditors to force payment of your debts. This means creditors may obtain judgments to seize property contained within the trust.

Revocable Trusts in Death

Your revocable trust converts to an irrevocable trust upon your death. This provides additional protection for assets and guarantees the beneficiaries in your will receive bequeathed property. Creditors cannot legally seize assets contained in a living trust once the creator of the trust dies. This is because no one may make changes to the trust after this time. Creditors suing your estate to obtain payment for debts can only attempt to seize or place liens on assets held outside the trust.

Irrevocable Trust in Life

You also have the option of creating an irrevocable trust during your lifetime. You cannot alter the assets held in an irrevocable trust once you set up the trust. Creditors are unable to sue you to attempt to seize assets held in an irrevocable trust because you cannot change the assets held in the trust. This protects your assets during your lifetime and ensures the assets will remain in your possession so you can leave them to your beneficiaries at your death.

Exceptions to the Rules

Beneficiaries or the trustee in charge of an irrevocable trust may make changes to the trust at the death of the creator in a limited number of circumstances. For example, beneficiaries may choose to appoint an attorney to review the trust documents to ensure the trust is legal and no problems exist. An attorney can assist in making changes to the irrevocable trust. Additionally, if the owner sells assets contained in an irrevocable trust, the trust breaks and any remaining assets are vulnerable to the collection actions of creditors.