Are Living Trusts Exempt From Lawsuits?

By Heather Frances J.D.

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation to the next. However, not every trust protects assets from creditors or lawsuits. Testamentary trusts, which only become active after your death, can protect assets from your beneficiaries' creditors. However, living trusts, created during your lifetime, only provide protection from lawsuits against you if the trust is irrevocable.

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation to the next. However, not every trust protects assets from creditors or lawsuits. Testamentary trusts, which only become active after your death, can protect assets from your beneficiaries' creditors. However, living trusts, created during your lifetime, only provide protection from lawsuits against you if the trust is irrevocable.

Revocable versus Irrevocable

A living trust can be revocable, meaning you can amend or revoke it at any time, or it can be irrevocable, which means that the trust is permanent and cannot be evoked, altered or amended. With an irrevocable trust, you lose your ability to control your assets and can't take them back, although you can still benefit by receiving some of the income from the trust's assets, depending on state law. To protect your assets from lawsuits, your living trust must be irrevocable. Since you lose control over assets in an irrevocable trust such that they are no longer in your actual possession, they are generally not subject to lawsuits against you. Assets placed in a revocable living trust are subject to lawsuits and creditors just as if you owned them in your name.

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How Does a Living Trust Protect Assets?

References

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