Speedbumps and Firewalls and Bears, Oh My

 Recently, a lady called to inquire about estate planning. She had a house, a rental condo, some money in the bank, a pension, a car and some “stuff”.
She also had a lawsuit pending against her, the result of an auto accident. Although her insurer was defending the action, she feared that the plaintiff might win a judgment in excess of her policy limits.
She asked, would a living trust protect assets from her possible creditor?
I had to tell her, the revocable living trust is not a firewall against creditors.
The first job of the living trust is to avoid probate, an expensive, time-consuming legal procedure. (In California, if I die leaving gross assets in my name, alone, in excess of $150,000.00, there will be a probate, a Superior Court matter in which my will is approved by the Judge, my personal representative appointed, my creditors notified and my assets evaluated. Later, the creditors and costs of administration will be paid, and an order entered for the distribution of whatever is left to my beneficiaries or heirs. The whole process takes at least a year, and costs thousands of dollars.) Assets vested in my name, as Trustee of my trust, are not subject to probate.
The second job of a living trust, for some married couples, is to avoid Federal Estate Tax on an amount equal to double the personal exemption, which is currently $5.49 million.
Because the revocable living trust is controlled by the grantor, its assets are not protected from the grantor’s creditors. However, here’s where the speedbump comes in: Before the creditor can seize trust assets, the creditor must apply to the courts for an order permitting the seizure. Thus, the law affords some limited comfort for the creditor/grantor – – a speedbump, but not a firewall.
As to the bears, I had some more bad news for the lady: Once the client had a reasonably ascertainable creditor, she couldn’t simply give her assets away to a relative or friend. If she transferred her assets now, that would be deemed a “fraud on creditors”.  Upon application by the creditor, the courts would set aside the transfer and require that the assets revert to the client for seizure by the creditor. From the creditor’s viewpoint, that might be un –bearable.
Jerry Kessler practices law in Santa Clarita. He can be reached at 661-255-1001.