One of the most popular tools that people utilize to protect their assets is putting them into a trust for a beneficiary. People create trusts for their beneficiaries for many different reasons, but one important reason is to provide protection and limit the access that creditors have to their assets.
When creating a trust, many people wonder whether a creditor will be able to access or take over the property listed in the arrangement. If you are wondering whether the creditors of a trust beneficiary can reach trust assets, do not hesitate to meet with one of our skilled estate planning lawyers.
When Could a Creditor Make a Claim Against a Beneficiary?
Generally speaking, the type of trust in question determines whether a creditor or collector could attempt to access the assets inside. In most situations, the less control a beneficiary has over their trust, the less likely it is that a creditor could seize the assets.
For instance, one option that many people use to prevent creditor access is an arrangement known as an irrevocable trust. This document requires the grantor to give up complete control and ownership of the property in question and, usually, prevents them from changing the arrangement in the future. These trusts can only be changed under certain circ*mstances, which makes them a powerful and secure method of keeping valuable assets safe.
On the other hand, creditors might be able to reach assets that are placed into an arrangement known as a revocable living trust. This type of trust, which centers around the grantor having complete ownership over their assets until they pass away, is generally not protected from creditors. If a lender is looking to sue the grantor, this person who authored the document might need to hand over any funds or assets if they lose the claim.
If you are interested in creating a trust that is safe from creditors, then please meet and speak with one of our dedicated estate planning attorneys.
Does the Process Change if the Grantor is Deceased?
Once the grantor of an irrevocable trust passes away, assets left in a trust for a beneficiary are distributed and free from any creditor claims because the grantor essentially relinquished his or her control over the arrangement when the irrevocable trust was established. Revocable trusts are not free from creditors, but the process does change when the grantor is deceased because a revocable trust then becomes irrevocable.
However, there are exceptions to this norm. For instance, if a revocable trust has two grantors, it may still remain revocable until all these people have passed away. However, the deceased person’s outstanding debts from the revocable trust do not go away, and creditors will still be entitled to the assets listed in the document.
If you recently lost a family member who authored an irrevocable trust with two grantors, our knowledgeable lawyers could inform you whether the assets inside would be protected or subject to creditor seizure.
Contact a Trusts Attorney Today to Learn More
When it comes to planning and finding a trust that fits your needs and protects your assets from the reach of creditors, our knowledge and experience could help you avoid mistakes. Amity Law Group offers attorneys that could answer your questions, assess your situation, and help make the process go as smooth as possible. Contact us today for a free consultation.
FAQs
If you are the beneficiary of an irrevocable trust, judgment creditors will not typically be able to take money directly from the trust. However, they usually can access distributions you receive from the trust.
Can creditors touch a trust? ›
Creditors can reach the property in a revocable trust to satisfy your debts because you have access to that property. In contrast, you give up all control over property you place in an “irrevocable” trust. Creditors cannot reach that property to satisfy your debts because you no longer own the property.
Can creditors go after a beneficiary of a trust? ›
Once the grantor of an irrevocable trust passes away, assets left in a trust for a beneficiary are distributed and free from any creditor claims because the grantor essentially relinquished his or her control over the arrangement when the irrevocable trust was established.
What clause placed in a trust protects assets from beneficiaries creditors? ›
A spendthrift clause refers to a clause creating a spendthrift trust which limits the ability of assets to be reached by the beneficiary or their creditors.
Who holds legal control of the assets in a trust account? ›
The trustee is responsible for managing the property according to the rules outlined in the trust document, and must do so in the best interest of the beneficiary. This person may be the grantor, the spouse, or adult child of the trust or a third party.
Can creditors touch inheritance? ›
The inheritances of heirs and beneficiaries are not beyond reach for creditors. If a beneficiary or heir owes a debt, their creditors can take steps to obtain a judgment.
Can a trustee be sued by creditors? ›
As mentioned, in the case of a creditor lawsuit the trustee of a revocable living trust could be sued. If you named yourself as the trustee of your revocable living trust, then you could face a lawsuit for debt collection. You could also be sued as the trustee in connection with other types of civil lawsuits.
How long can creditors go after beneficiaries? ›
After your loved one dies, you will need to inform creditors of their death. From there, creditors have a time limit to submit claims and you will have to respond within a certain time frame. Overall in California, creditors have only one year to collect on a debt. In general, you cannot inherit someone else's debt.
What assets are protected from creditors after death? ›
Living trusts allow you to pass on property to your heirs and avoid probate. Assets held in a living trust are protected from creditors. Brokerage accounts, which are taxable investment accounts held with an investment firm or brokerage, can't be taken by creditors.
Are beneficiaries liable for trust debts? ›
It helps to remember that a Trust is a separate legal entity. The Trustees and beneficiaries are not personally liable for debts owed by the Trust. The Trustee is acting in a fiduciary capacity. The Trustee is required to gather the assets and pay the Trust debts.
A trustee's liability isn't limited to the extent of the trust's assets if the value of the third-party claim exceeds them. Trustees have a liability to the creditors of any bankrupt beneficiary who has been paid sums of money that aren't recoverable.
What is the beneficiary protection clause? ›
This clause is crucial for beneficiaries who may face financial instability, have outstanding debts, or exhibit spendthrift tendencies. It ensures that creditors cannot lay claim to the trust assets, preserving the principal for the intended purposes outlined by the grantor.
What are the beneficiary's rights for breach of trust by a trustee? ›
If a trustee violates their fiduciary duty or breaches the terms of the trust, beneficiaries have the right to take legal action. This includes instances where a trustee mismanages trust assets, shows favoritism towards certain beneficiaries, or fails to provide required information or accounting.
Who holds the real power in a trust, the trustee or the beneficiary? ›
A trustee has all the powers listed in the trust document, unless they conflict with California law or unless a court order says otherwise. The trustee must collect, preserve and protect the trust assets.
Who monitors the trustee of a trust? ›
The truth is that there is no governmental authority that oversees that acts of individual Trustees. There is some oversight of corporate Trustees, and private professional Trustees, but not individuals who are named to act as Trustee.
What is the biggest mistake parents make when setting up a trust fund? ›
If you don't put the right protections in place upfront, your children's inheritance could evaporate, get wasted, or be tied up in legal battles. Of all the mistakes we see parents make when creating trusts, none wreaks more havoc than appointing an unqualified trustee to manage the fund.
Is money in a trust protected from bankruptcies? ›
The outcome of your bankruptcy case depends on the type of bankruptcy you file. If you are concerned about your estate plan and/or trust, the kind of bankruptcy and the category of trust you have may make a difference. In general, revocable trusts will not protect your assets during bankruptcy.
Can you inherit debt from a trust? ›
However, if their estate can't cover it or if you jointly held the debt, it's possible to inherit debt. Laws on inheriting debt vary by state, and assets may be protected from creditors if certain measures have been taken, such as the creation of a living trust.
Can money be pulled from a trust? ›
Ultimately, trustees can only withdraw money from a trust account for specific expenses within certain limitations. Their duties require them to comply with the grantor's wishes. If they breach their fiduciary duties, they will be removed as the trustee and face a surcharge for compensatory damages.
