Does A Living Trust Provide Asset Protection?

 In my law practice, I get asked this question quite often. And my answer is always no: You do not get any creditor protection from a revocable living trust. This can upset people sometimes because they really want that protection and they have “heard” they can get it with a trust.
I believe people are confused because sometimes asset (i.e., creditor) protection is available with trusts, even with a revocable living trust. That protection is not available to the person who set up the revocable living trust, however.
Which really brings up how asset protection might be achieved. That is, asset protection might be obtained by giving up (or not having in the first place) direct control over trust assets. This occurs when a revocable living trust becomes irrevocable – for example, at the time when the person who set up the trust passes away, or other triggering events occur. Asset protection might also be obtained during life when a person voluntarily gives up control of his or her assets – for example, people sometimes set up an irrevocable trust and then “give away” certain assets to that trust.
In other words, the beneficiaries of your revocable living trust (usually children) might obtain creditor protection for assets left to them, so long as they do not have direct access to the trust’s assets and certain other formalities are put in place. Similarly, during life, an irrevocable trust can be established by you, where you give up the direct control and benefit of certain assets that are transferred to that trust. Most of the time this is not appealing to people. Sometimes however, it is necessary to preserve a person’s lifestyle and stave off bankruptcy. Common examples of such are for a Veteran who needs Veterans Pension Benefits to help pay for long-term care, or for a senior who needs Medi-Cal to pay for skilled nursing care.
It’s important to note that if a parent or other loved one wants to provide concrete asset protection for their beneficiaries – no matter what kind of trust is established – that trust ought to have a “spendthrift clause,” “trust protector” and also a “distribution trustee,” for starters. These provisions might sound like complicated legalese, but in reality, it is not too difficult to implement such safeguards.
Experienced estate planning and elder law attorneys use these provisions in special needs trusts, retirement trusts, dynasty trusts, as well as with Medi-Cal and Veterans Asset Protection Trusts.
The take away: if you want to obtain asset protection for yourself or for your loved ones, it can be done with a deftly drafted trust, where control is tailored to suit your particular circumstances and the needs of your loved ones.
For help with California asset protection planning, contact Randall F. Kaiden, Esq., of Kaiden Elder Law Group, at 661-247-8433, or via our website: www.kaidenelderlaw.com.