Living Trust Protection From Creditors

By Maggie Lourdes

A living trust is an estate planning tool that can save time and money by bypassing the probate process after the trust maker dies. Unlike a will, a trust does not require a probate court's approval or administration. Living trusts are so called because they take effect during the maker's lifetime and can be changed or revoked at any time before his death. Besides skipping probate, living trusts can protect beneficiaries from creditors. Spendthrift clauses, as the name suggests, protect beneficiaries who spend money irresponsibly and face bill collectors. Spendthrift clauses also protect beneficiaries who accumulate bills for unavoidable reasons like medical problems or job loss.

A living trust is an estate planning tool that can save time and money by bypassing the probate process after the trust maker dies. Unlike a will, a trust does not require a probate court's approval or administration. Living trusts are so called because they take effect during the maker's lifetime and can be changed or revoked at any time before his death. Besides skipping probate, living trusts can protect beneficiaries from creditors. Spendthrift clauses, as the name suggests, protect beneficiaries who spend money irresponsibly and face bill collectors. Spendthrift clauses also protect beneficiaries who accumulate bills for unavoidable reasons like medical problems or job loss.

Spendthrifts Protect Beneficiaries

A spendthrift clause can prevent a beneficiary's creditors from reaching her living trust interests. Spendthrift clauses do not protect assets once they are released from trust and paid to beneficiaries. For example, Bob leaves a house in his living trust for Jane. Jane's bill collectors generally cannot attach the house while it remains in the trust's name. However, if the house is sold and the proceeds deposited into Jane's personal bank account, bill collectors may reach them.

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Spendthrifts Prevent Assignments

Spendthrift clauses generally prohibit a beneficiary from assigning his interests in trust assets. For example, Mary leaves her summer cabin in her living trust to Bob. Bob cannot use the cabin as collateral to buy a new car by pledging, assigning or granting a lien against it. Preventing a beneficiary's control over trust assets prevents his creditors from seizing them to satisfy his debts.

Trustees Have Discretion

A trustee must follow a living trust's directions. However, spendthrift clauses generally give a trustee discretion to shield assets from creditors. For example, John's living trust states $1,000 should be paid to Sue each month. The payments are attachable by Sue's creditors once they are paid to her. The trustee may suspend payments, protecting the money by keeping it in the trust, while Sue negotiates a settlement with her creditors.

Spendthrifts Have Limitations

Spendthrift clauses do have limitations. For example, they generally do not protect a beneficiary's trust assets from overdue child support, alimony or delinquent tax bills. Spendthrift clauses typically do not protect the person who makes the living trust from his creditors. Each state has its own laws relating to the legalities of spendthrift clauses. Carefully research the law of your state or consult a trust expert with specific questions about trust protection options.

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The Difference Between a New Hampshire and a Florida Living Trust

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Related articles

Can an Irrevocable Trust Be Pierced?

When you create an irrevocable trust, you surrenders ownership over the trust assets; you cannot unilaterally regain control of the property. As a result, your creditors cannot get to the assets to satisfy the your debts. Irrevocable trusts are also generally structured to prevent a beneficiary’s creditors from gaining the trust’s assets to settle his debts. Although laws vary among states, there are cases in which a creditor can “pierce” the trust shield to obtain trust assets as a means of settling outstanding debts.

Failure to Pay Living Trust Debt

A living trust is created while the person who created the trust was alive. The trust allows the trust creator to hold property for the benefit of one or more people. Upon the death of the trust creator, the property held in trust is distributed to those people specified in the trust document, who are called beneficiaries. Before the trust property is distributed, however, any remaining debts the trust creator had must be paid. Failing to pay these debts can result in serious consequences.

Can an Heir Sell Property When the Title Is in a Revocable Living Trust?

Revocable living trust property generally cannot be sold outright by a beneficiary; the property must be first transferred to the beneficiary and placed in his name. However, if under the terms of the trust, the beneficiary has the right to claim trust assets for personal use, this is a simple issue of transfer. The key issue is the trust's restrictions on distributions. The trust creator's intent, whether there are multiple beneficiaries or the existence of a spendthrift clause can limit a beneficiary's ability to sell trust assets. Trust law varies by state so consider consulting an attorney if you wish to sell trust property.

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