When you establish a trust inter vivos, it means that you are declaring by legal instrument to grant, or transfer, your property to a trustee while you are still living. In other words, it is a legal contract that becomes effective immediately. This contrasts with a last will and testament that directs an executor to possess and distribute your property after your death. One of the primary reasons for creating a living trust is to avoid probate proceedings, even when there is property existing in different states.
It is a common misconception that a living trust automatically protects assets from a judgment or lien. Generally, all of the property transferred in a living trust is still the property of the person making the declaration of trust unless the transfer constitutes a sale. Most people appoint themselves as trustee to retain control of the trust assets during their lifetime. This means the trust is revocable and can be changed at the discretion of the grantor as trustee at any time. As such, the property is subject to seizure as the result of a lien if a court awards a judgment against the grantor of the trust. However, the lien only attaches to the grantor’s share.
Liens against Beneficiaries
Assets placed in a living trust are not protected from a lien placed against a beneficiary of that trust. However, the trustee is not obliged to make a premature distribution of assets to the beneficiary to satisfy a judgment. In addition, a creditor can only attach a lien against the beneficiary’s interest in the trust.
Sale of Assets
It may be possible to protect certain assets in a trust from a lien if they are sold to or placed in a limited liability corporation, or LLC, that is owned by the trust and not the grantor or trustee. Depending on the type of property, however, this may not be advantageous. For example, the sale or transfer of real property that is subject to a mortgage will usually accelerate demand to satisfy full payment of the note at the time of the sale.
Despite attempts to introduce legal consistency between states regarding trust law under the Uniform Trust Code, or UTC, not all states have adopted it and those that have continue to incorporate their own statues. In short, trust laws may vary between states. If you have questions or concerns about how a lien might affect a living trust, consult a qualified attorney experienced in estate planning.