Can a Living Trust Protect a Home From a Lawsuit?

By Belle Wong

Can a Living Trust Protect a Home From a Lawsuit?

By Belle Wong

Your home is likely one of your most significant assets. As you embark on the estate planning process, one of the main issues you're probably facing is how to best protect and maintain this asset for the future benefit of your loved ones.

During your research into estate planning, you may have come across the concept of the living trust, and wondered if a living trust would be a good vehicle to help keep your property safe for your beneficiaries.

Read on to learn about the advantages of a living trust and guidelines for using it as an estate planning tool.

The Benefits of a Living Trust

A living trust is a legal entity that is created to hold ownership of your property, such as your home. It can be a valuable estate planning tool, as it provides you with the following advantages:

  • No probate. Any property held by a living trust can pass on to your beneficiaries after your death without the need to go through probate.
  • Enhanced privacy. Because your beneficiaries won't have to go through probate, which is a public court process, any financial information related to the living trust, such as the assets it holds and who inherits those assets, stays private.
  • Protection if incapacitated. There is no need to worry about the assets held by a living trust if you become ill or are otherwise unable to manage your financial affairs, as you will have appointed a trustee of the living trust who will take care of the assets according to your wishes.

Protecting Your Home From Creditors and Lawsuits

Despite its advantages, a living trust may not be the right vehicle to protect your home. You should consider the following guidelines when assessing the appropriateness of the living trust as a method of protecting your home from creditors and lawsuits:

  • Irrevocable vs. revocable living trust. In order to judgment-proof your home, you must use an irrevocable living trust. Unlike a revocable living trust, which you can terminate at any time, an irrevocable trust requires you to permanently hand over control of the assets to be held by the trust. This means you pass on all authority to manage the assets owned by the trust to the living trust's trustee.
  • Your beneficiaries' creditors. The living trust can keep your home safe from your creditors and from any lawsuits that might be brought against you, but you need to make sure the legal document creating the trust is properly drafted so that your home is also protected from any lawsuits that might be brought against your beneficiaries. The best way to do this is to include a "spendthrift clause" in the living trust documents that prevent the trustee from transferring the title of the living trust's assets to anyone other than the beneficiaries.
  • No fraudulent transfers. You should also keep in mind that the living trust can only protect your home from future creditors and lawsuits. If you transfer your home to the trust after you've lost a lawsuit, your judgment creditor can claim that you fraudulently transferred your home to the trust for the purpose of avoiding the judgment against you. Additionally, certain states have laws that make such transfers fraudulent if the transfer will make you bankrupt or insolvent, or if you're bankrupt or insolvent at the time of the transfer.

Keeping a major asset, like a home safe for your loved ones, is often one of the primary goals of estate planning. In the proper circumstances, an irrevocable living trust can be the ideal legal instrument for accomplishing this very important goal.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.