Trusts are a perennially popular form of estate planning that many people find quite useful. They can be structured in various ways to provide an ongoing source of income over time or a lump-sum disbursement when beneficiaries reach a certain age or achieve specific life milestones.
But while trusts have many legitimate financial advantages and protections, not all are judgment-proof. That could have certain unfortunate consequences for your beneficiaries’ future.
Revocable trusts are not judgment-proof
Because the trust grantor (the person placing assets into the trust and establishing its terms) can revoke the trust during their lifetime, change its beneficiaries and make many other alterations to the original instrument, the assets in revocable trusts are subject to seizure from creditors or litigants with court judgments against them.
In some cases, even ex-spouses could seize some (or even all) of the assets in trust if you don’t honor your debt obligations to them.
Irrevocable living trusts offer more protection
Once the trust grantor enacts the transfer of assets into an irrevocable trust, the assets are immovable. The trust grantor can’t even act as trustee over the trust. Assets shall not be transferred, nor the terms changed.
While this could potentially become an inconvenience should the trust grantor need easy access to resources, they will have peace of mind that their beneficiaries will still receive their intended disbursements.
This applies even if the trustmaker:
- Files for bankruptcy
- Has a judgment issued against them by a court
- Divorces a spouse and must divide marital property
There is one other benefit for the beneficiaries of irrevocable trusts. They are exempt from estate taxes and not subject to probate.
There is no single right solution to estate planning. Everyone’s circumstances are unique – and their estate plans should be as well. Learning about all the estate planning options you have will help you make the best choices.